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"Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries"

Speaker: Jagdish Bhagwati, Senior Fellow for International Economics, Council on Foreign Relations
Presider: Richard N. Haass, President, Council on Foreign Relations
November 5, 2013
Council on Foreign Relations

MODERATOR: Welcome, everyone. Just as a reminder to please turn off your cell phones and other electronic devices, and please note that this meeting is on the record and being live streamed on cfr.org.

MODERATOR: Why don't people take a seat? Unless they prefer not to, since sitting is (inaudible) smoking, so you'll all live longer if you stand throughout this -- this meeting.

Welcome to the Council on Foreign Relations. And tonight is one of those nights I like best because it's a chance to celebrate a book by a celebrated author and thinker.

The Council prides itself on being what I would call a -- a book culture but not a book-only culture. But books do fill an essential space in the -- and it's not simply (inaudible), but we like -- here we pride ourselves on policy-relevant research, but the length of a book, the amount of research and thinking that goes into it -- the kind of thinking you only do if you're actually forced to write something at length -- informs, then, a lot of other things. And there's a -- a depth and breadth of analysis that emerges from books that really, I don't care how good the op-ed is, it -- it -- it can't compete.

And so again, we're not a book-only culture. People write and disseminate ideas in all sorts of all forms and -- and all lengths, but again, books occupy a unique and, I believe, essential part of the intellectual real estate here at the Council on Foreign Relations. It's one of the things that distinguishes this organization from -- from many others.

And that's good because tonight we have Jagdish Bhagwati, who's been a senior fellow at the Council on Foreign Relations -- divides his life between here and this startup university up the road at about 115th Street, and Jagdish has produced no less, I believe, than at least a half dozen books in these years. Essentially, he writes them faster than we read them. But he really is somebody who has a -- an amazing way with words, and the ideas are big and the -- the style -- the style marches.

And I think the book over the years that had a tremendous effect in policy-relevant public debate was his book about globalization, which was an important work when -- when the idea was so under -- under attack, and now Jagdish has produced a new book with the title "Why Growth Matters." He's co-produced it, actually -- like most children, it has two parents -- in this case, with Arvind Panagariya, fellow colleague of his at the same university -- Columbia. And the subtitle is "How Economic Growth in India Reduced Poverty and the Lessons for other Developing Country -- Countries."

So let me ask the obvious first question, Jagdish: Why do you even have to write a book called "Why Growth Matters"? Who in the world wouldn't think that?

BHAGWATI: That's a question I'm frequently asked, but it's not just in India but around the world that people, in fact, do raise questions about growth, partly because there is an anti-growth movement, an anti-growth sentiment around the world. What I wanted to do in this book was basically bring out the notion that in the very large countries with a lot of poor people and very few rich people, even the 1 percent is rather small. You can put them all over the Florida sinkholes and cheer as they go down. There'll be another 1 percent, of course, pretty soon.

But that's not going to make any difference. The real problem is what to do about the large numbers of poor people.

And I think that is where India had comparative advantage in poverty, as you know, to too many exploited, as one of my Communist friends put it, and too few exploiters. So even if you expropriated the exploiters, you could not redistribute enough except to give everybody one chapatti or one burrito a day. It wouldn't go very far, and particularly with a growing population that gate would disappear, small as it was.

So the five countries which are in that position where you have to think of a different strategy to be able to get at the poor, and this is where the growth strategy came in. But there are five countries, I would say, which are relevant: India, China, Indonesia, Brazil, and to some extent South Africa. That's about three-fourths of the world in terms of population. Doesn't cover Saudi Arabia, which has money crawling out of its ears. They have a very different kind of problem, if you can call it a problem, all right?

So the issue is, how do you get at the poor? And that was my first job in India, actually, (inaudible) longstanding interest from the early 1960s. So the idea was that since you could not redistribute or have social spending, like schools and education, even guaranteed employment, which is what Indians are trying now, then what would we do?

So the idea was that we would have to grow. Growth would have two effects. One was it would pull people up into gainful employment, and people at the very bottom levels do use opportunity. That's pretty well established. They don't wait for doles frequently. They just want to be able to grow their way into the mainstream economy. That's one thing.

But the other thing is that also any given taxes, it would also draw in revenues. And once you have -- and this is something we know from here -- revenues will in turn be then be enable us who wanted to do some social spending to be able to do it. Because, you know, if God is asleep up there, USAID doesn't have any money, so we have to grow our own revenues.

MODERATOR: Let me go and interrupt for a second.

So in this country we'd all agree that we want to expand the pie, or the chapatti or whatever metaphor one wants to -- one wants to use, but you mentioned -- some of the countries you -- just take India and China, the two most populous countries -- 1.3 billion, plus or minus, each. Fundamentally different approaches to growth. So I assume implicit in this is not simply that growth matters, but somewhere along the idea that there's -- there's got to be some competing models. Indeed, India and China are often held out as, in some ways, the two iconic models of -- of development, not just for Asia but really for the world.

So it seems to me it's not just that growth matters but I assume a subset of this is -- is how you grow, or how you attempt to grow matters?

BHAGWATI: That is very important. Like many people ask me, "Does your book apply to United States?" I say, "Yes, but you have to think about how growth can be improved in this country."

Now, I'm a Cajun on the short run but a Republican on the medium run and the long run. So we walk on two legs to produce the growth in this country. This doesn't really apply in the same way to other parts of the world.

So I think it's a very good question you asked. How do you grow?

Now, you take China. China has a very different approach to -- to -- to growth. It went very fast on Wan Gan provinces; it absorbed a lot of foreign investment, unlike India, which remained, until the reforms, very much against foreign investment.

So we were trying to rely on very different model to grow, and of course we didn't grow as a result. But China did grow very fast, and so China, I think, had this advantage of being able to use a variety of techniques to be able to draw its underemployed people into gainful employment. And I think that's where they've succeeded.

I would say for the future China has a big question mark. We have a question mark ourselves, but China, you see, because it had a reserve army of labor it was able to -- this is what we call economic jargon, you know, elastic supply curve, or you can talk of Marx's reserve army of labor, so people coming in at a constant wage. So when you increase demand for labor through export performers then you are basically not having to -- I mean, you're adding to -- to employment and people's welfare by basically giving them more jobs at a constant wage.

But now China has rejoined the human race...

MODERATOR: There's only so much low-hanging fruit.

BHAGWATI: ... because now they've, as I said, rejoined the human race, they are now having to pay for their -- wages are rising and that's where they're getting into a problem now because that freebie is gone.

At the same time, because it's an authoritarian system, unlike the Indian one, that's another factor which (inaudible), and that is where the fact that people's aspirations are now being aroused, they have to worry about how to satisfy them. And in China you don't have elements of a liberal democracy, and that's where the politics -- politics of the difference comes in, because in China if you really want more you go out into the streets and beat on pots and pans and probably get packed off out to Mongolia or somewhere. I mean, that's the (inaudible).

In India you've got all the elements of what we call, you know, a functioning democracy -- a liberal -- you've got a relatively free press, a relatively -- you know, large numbers of NGOs, opposition parties, and independent judiciary.

MODERATOR: Can I interrupt? I'm going to be an interventionist. I don't believe in intervention in the economic marketplace but I do in a meeting.

You described India as a -- as a functioning democracy.

BHAGWATI: Right.

MODERATOR: Many people would challenge that. They would actually say India is a dysfunctioning, if you will, or non-functioning democracy. Indian growth has slowed in recent years dramatically after a couple -- after -- after a -- after a good run. India's got elections coming up in the -- in -- in early 2014. Do you believe that India can grow at -- at, say, 7, 8, 9 percent again, or is there something about politics in India that preclude it?

BHAGWATI: I think what happened was the corruption grew in a massive way. When we started out development, India was, when they, you know, were supposed to be the great gift of the gods to -- to -- to the world because we had a super civil service, super judiciary, leaders who came over from the independents movement who were not corrupt, and so on. That's not what you have today. That's what you're referring to.

All these institutions have come under heavy fire, and that, in my judgment -- I don't believe in single causes, but one important cause has been the license in permiterage, because what happened was the -- many of us economists actually recommended that to have said resources we have to have all kinds of controls and so on. It sounded intuitive but it is, in fact, exactly the wrong thing to do.

The result was that you had bureaucrats learning how to exercise power by handing out licenses, politicians learning you could make a lot of money, you know, even if you were raising it for the party, at some stage, you know, as the money is going past you out the window you're likely to (inaudible) yourself, and so on. So the system gradually collapsed; the institutions worsened .

And I think what we are facing now is a very important, I think, cusp of change, and that is that so many people are fed up now with the corruption that has been going on for quite a while that they're not willing to -- to -- to make any concessions to anyone. So the -- what you're having is street demonstrations on a massive scale.

The government -- the current government -- the UPA, United Progressive Alliance of the Gandhi Dynasty and the -- the Prime Minister Mongmon saying that has come under heavy fire, and it's been discredited. And I think that is creating a massive problem right now because that is causing the macroeconomic problem in turn, because whatever you do is going to be challenged by somebody in the streets and in the parliament as a source of corruption, that you -- if you -- you accept a tender, that that's because you must be -- have taken some money on the side.

That is what is slowing down decision-taking by the bureaucrats. And therefore, part of the reason when the growth rate has slowed down is precisely because people are trying to change the system in the streets and (inaudible) saying, we want to continue with corrupt -- but that means bureaucrats don't dare to take any decisions. And so many -- the investment is not taking place.

MODERATOR: I'm going to ask one last question, then I want to open it up to -- to our members and others. Last question, which is, you've written important books about trade. You've written books about migration and the movement of people.

You mentioned before that AID is out of money, but the United States still has tools. We have the Millennium Challenge account, we have trade negotiations. What can the United States -- what should the United States and others be doing, do you believe, to directly or indirectly promote higher levels of growth in India and other countries?

BHAGWATI: Oh, I -- I think we have to have conditionality. There's no question about it.

MODERATOR: On aid?

BHAGWATI: On aid. I mean, you can't just give money away.

Often economics and politics will not go in the same direction. I mean, in this case many people used to say, "You're giving only 1 percent of our resources and want to control our entire economy." Well, that's the politics, but the economics is that there are substitutions possibilities, so if you really want to influence the way money is spent you better look -- you know, put your nose into every -- every corner, and so on.

So I think in that sense people are going to resent it. On the other hand, because money is scarce people are going to come.

MODERATOR: So you're a fan of the Millennium Challenge Corporation?

BHAGWATI: Yes. Very much so. Very much so. And I think we do need that, and I think the -- I mean, one -- one other thing, although I'm from India, I would say the big countries like India, China, even Indonesia do not need the money. They should be able to raise it in the public domain.

I would want to reorder the priorities in USAID and in World Bank so that countries that really cannot do it, like many of them in Africa, are able to raise the money through these -- through these aid-giving sources. But when I say things like that in India I'm not considered with, you know, regard or with a great -- great sense of approbation.

MODERATOR: OK. Obviously a lot we touched on; even more we didn't touch on. And Jagdish is that rare person with breadth and depth and in space .

Just wait for a microphone and let us know who you are, where you're from, and please be succinct.

QUESTION: I'm Hall Dezeem with Morgan Stanley. My question is about India's growth has been, in recent past largely been based in the service sector where a lot of, you know, call centers and service-based technologies, I.T. services have been kind of the frontier. How does that compare to the more traditional export, investment-led model, which created much more employment and opportunities for sustained growth over a period of time? How would you compare those two models and what's the implication for poverty alleviation in India with India's model?

BHAGWATI: Well, I would say one thing which is that in our book we do explain how we haven't really used labor-intensive manufacturers. What we do point out is that our growth has been inclusive. There's a lot of evidence in the book that, in fact, growth has drawn in and benefitted the marginalized groups, including women and so on. There's not a single group including the untouchables which hasn't profited as a result of the growth strategy.

But we haven't made the same impact. We haven't had enough -- a much bang for the buck at reducing poverty as the far eastern economies, which use, actually, a lot of labor-intensive manufacturers.

We've been trying to protect the small guys, which is a big mistake. As a result they have not been able to grow into bigger ones with more scale efficiency, and so on. So I think it's been the wrong way to approach the problem of helping the small guys .

So I think we need to -- the next stage of reforms on that, so we should not knock manufacturers out. I think that is really -- we have the wrong kind of manufacturers (inaudible).

On the service sector, I -- I think if it's going to be important, I don't -- I don't think it can carry the full weight but I think there's one, again, contrast with China in the sense that you -- we -- we are a free-wheeling democracy, like the United States. So we have, actually, no -- no problem with people using software. In China for years the problem was the P.C. was, you know, was considered to be the enemy of the Communist -- of the C.P. And so they were very good at -- at hardware but nothing at software.

And so there's a huge contrast between the two countries. It will close over time, but I think this is where it seems to be that we've had a -- a pretty good run for our money on the services but I think we need to go further. In fact, I would say that one other thing which we haven't explored very much, which I think we can do with the Obama administration, is these things like, you know, transactions in medical services, where we can actually earn a lot of money and we can actually bring even universities and others on board here. And there's a lot of work going on on this but there's no response from either party, I should say.

But I think this is something where it's the guys that are going to benefit most, like -- like Indians, who should be actually pushing for services, trade, not just for (inaudible) and so on. That's already been -- you know, it's already going on. What we need to do is expand it on a massive scale to where we have competitive (inaudible) kinds of services, but the American consumer's still not responding.

MODERATOR: Let me get a couple more.

Could Byron Wien?

Got a microphone coming here, Byron.

QUESTION: Byron Wien, Blackstone Group.

China has been growing primarily because it's been borrowing money, or the various businesses have been borrowing money either from the banking system or the shadow banking system, and investment in infrastructure spending, or investment state-owned enterprises and infrastructure has fueled the growth.

The five-year plan they introduced in 2010 said they were going to reverse that. Investment spending was 45 percent of GDP; consumer spending was 35. A decade before, the numbers were reversed.

We're three years into the five-year plan and those numbers are still 45-35 in favor of investment spending. If China is going to grow it's got to get the consumer to spend more. Why haven't they done it? Why can't they do it? And will they ever do it?

MODERATOR: You give your answer and then I'll give mine even though it's your book.

BHAGWATI: We have a limited economy here to answer your question on China, but it seems to me that I think what you have -- I mean, they have been trying to move towards domestic spending. Why they have not been able to do it in a significant way so far I think relates, probably, in my judgment, to the scale of the problem. You see, infrastructure cannot just be mounted just like that. I mean, there's real risk when you expand infrastructure very rapidly that you will build roads that lead nowhere. There's lots of...

MODERATOR: They're doing that.

BHAGWATI: They're doing it already, you see? So I think the -- I mean, that's good for us if we worry about competition with them. On the other hand, you know, they don't do well it sort of spills over to us, you know, because I think there's mutual dependence, as well.

So I would say maybe it's wrong kind of investment in infrastructure, internal problems with the absorption of technology from outside.

MODERATOR: But Byron was asking a different question, which was why the transition to a more consumer demand-led economy wasn't happening, and I would assume one of the reasons a lot of Chinese people are sitting on those funds, they don't -- they don't trust the government. They don't trust the safety net so they're not going to spend; they still want to save. Saving rates remain fairly high.

BHAGWATI: And the one child policy, of course, that also helped in a very bad way, right? In the sense that if you...

MODERATOR: (OFF-MIC)

MODERATOR: (inaudible) Let's see. I saw a hand over here.

Yes, sir?

QUESTION: Hi. I'm Jan Svejnar. I teach at the upstart university uptown, as well, and my question is, you know, you have a terrific new governor of the Central Bank in India, Raghuram Rajan, right? Can he and the macro levers that he can influence actually influence growth, and will it?

BHAGWATI: Yes. That brings us right up to now, and I'm glad you asked that question because I think what's happening now is more of a macroeconomic issue which threatens the Indian economy.

And it's a very simple thing. If you grow less rapidly, for reasons some of which I talked about -- bureaucrats are not taking decisions, holding up investment projects, and so on -- but whatever the reason, if it is slowing down that means the revenue intake is also slowing down -- the thing which was very helpful to ask when fighting poverty as a -- you know, earlier, when growth was rapid.

When that is happening the forthcoming election means that the government at the same time wants to spend more on social spending, like on the food security bill. So you have a -- a -- a tension: less money coming in, more money being spent. You don't have to be a macroeconomist -- I'm not one -- to know that common sense tells you you're going to get inflation.

If you get inflation, you are in a position which is really dangerous (inaudible) there's a big question mark on the economy now. To relate it to the current situation in the United State, it's exactly the opposite of what we have here, because we have here a fiscal policy that cannot get off the ground. In India the fiscal policy is out of whack -- profligate spending.

What about the Central Bank governance, you ask? Bernanke, who narrowly missed being my student by a few -- otherwise the world is being run by my students, you know, in macroeconomics...

MODERATOR: That may not be a compliment you're giving...

(LAUGHTER)

BHAGWATI: For me it is because I know nothing about the subject and they're running the show: Mario Draghi, Olivia Blanchard, Paul Cuban . I mean, you name it and they're all my students, so I'm quite happy. Even the ones who fight with each other are my students.

So now what I'm saying is that what you have is a situation where Bernanke, faced with a -- with a fiscal policy which can't get off the ground, basically indulging in creating the money supply. It has helped the economy insofar as because the economy wasn't growing some of the money was spilled over to abroad. That led to a decline in the dollar, which has in turn led to export performance, which has meant a little more prosperity for us.

So that is very -- but when it comes to India, you said (inaudible) is brilliant, has to do the opposite of Bernanke. He's got to brake the economy. Not break it in the b-r-e-a-k sense, but, you know, literally apply the brakes. If he's doing that it's going to be a very unpopular kind of thing...

Secondly, he doesn't have the autonomy that the Federal Reserve enjoys. So ultimately he's got to take the orders from the finance minister, so I'm -- I'm really worried about the current situation unless the government somehow manages to put off the social spending by 18 months. But have you ever tried to put off social spending once it's been promised? It's very hard.

MODERATOR: Well, particularly in the run up to an election.

BHAGWATI: Exactly.

MODERATOR: It would be, shall we say, a precedent historically.

Just say Mr. Modi is elected, as some people think he will be. What scope does he have for changing the direction of Indian economic policy?

BHAGWATI: I would say very substantial, because for the last few years the -- the UPA government has not really undertaken any significant changes. It has also been stymied by the fact charges of corruption.

One great thing about Modi -- and I should confess that I'm from Gujarat so I have a maybe an ethnic bias in favor of the chief minister becoming the prime minister, but it's just a bias. I mean, I -- I don't have a vote and I don't write about the matter. But I think what he's utterly incorruptible. I mean, he's a man who has never been accused of any act of corruption, just like the prime minister was.

But today the prime minister is being accused because he has not been forceful. This guy is very forceful. He's a fantastic speaker and I -- you know, I didn't go in 2002 because there was still a cloud over there (inaudible), but I wouldn't go until the matter had been cleared. Now it's been cleared, he's completely -- there's nothing against him on -- on secularism and so on.

And so I went there and I found that he was really exactly like some of the best American politician. He had absolute command of the facts. I mean, there was nothing I could tell him where he couldn't tell me, you know, twenty minutes exactly what he had been doing. Astonishing man, absolutely.

MODERATOR: We may find out.

BHAGWATI: And I think -- I think -- I think you will find out that if he gets elected -- again, it depends on whether it's a coalition, if it's home he has to go, but if he does get a reasonably clear run for his money I think it would be a -- the country is waiting for leadership right now and I think that is what you -- you -- you don't see that in the newspapers too much, but the kinds of rallies that he is getting all over the country, apparently they're the kinds of rallies which Nehru used to get. And Nehru, there's a huge groundswell of support for him.

So I think if he is able to capitalize on that and really do -- you know, change the style of the government I think we have some hope.

MODERATOR: There's time probably for one more.

Yes, sir? In the second row here. We have a microphone heading your way; it will be your other shoulder.

QUESTION: Sir, could you...

MODERATOR: Will you introduce yourself?

QUESTION: Yes. Arvind Rajan, Prudential, and no -- no relation to Raghuram.

Could you comment on primary, secondary, and tertiary education and the role that the public sector should play in that, in terms of promoting growth?

BHAGWATI: Oh, I think education is absolutely essential but I think based on the recent debates that we've had some of the people on the other side who have been criticizing us say that, you know, education is more important than growth, and it seems to me -- and they cite countries like Singapore. But just having education but not a growing economy with all the right policies is like the -- you know, field of dreams approach. By itself it doesn't amount to a hill of beans. In fact, you would be more -- more productive or discontent, people might be burning down tram cars and so on, particularly if they are in the secondary sector, and so on.

So it seems to me that education is important but has to be dovetailed into a whole complex of changes which accelerate our growth even beyond what we've had. So I think, you know, just saying education is important is not enough, in my opinion.

And if you look at Singapore, they manage to export a lot. They turned outward while -- whereas we turned inward in India. They imported lots of machinery which had the latest embodiment of -- you know, latest technology.

They couldn't have used that effectively if they didn't have the education. But education by itself would have been irrelevant.

MODERATOR: This book is one of the very few, very rare economic books that essentially has a happy ending. This is a book about how economic policies, if done right, reduce poverty. And you've got some case studies that prove it.

So for those of you who, you know, think of economics as the old saw, the dismal science, here's your chance to see economics as the cheerful science. And again, we all owe a great debt to Jagdish Bhagwati not simply for tonight but really for years of sustained writing, talking, and thinking, as someone who has informed the policy debates in this country and around the world.

So thank you, sir, and congratulations.

(APPLAUSE)

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