Accountable Governance, Pro-poor Markets[1]
- Anindo Banerjee
Markets and the Poor
The experiences of several African governments during the eighties and the nineties relating to policies aimed at overcoming acute fiscal imbalances are a good pointer to the potential impact of ungoverned market forces on critical sectors such as agriculture. Measures administered to this effect on the advice of international financial institutions like the World Bank included withdrawal of the public sector from sectors like agriculture, decontrol of prices, reduction of farm subsidies and increased privatization. The outcomes were equally radical: the drastic steps immediately affected over seventy percent of the poor in the region by drastically suppressing food production. A recently-concluded evaluation[ii] of World Bank’s role in African agriculture attributed the crisis to the inability of market forces to step in and jump-start agricultural growth. According to Professor Jeffery Sacks of Columbia University, “The whole thing was based on the idea that if you take away the government for the poorest of the poor, markets will somehow solve the problems, but markets can’t step in and won’t step in when people have nothing. And if you take away help, you leave them to die[iii].”
The example of sub-Saharan Africa clearly illustrates the criticality of the role of a pro-poor ‘welfare state’ in safeguarding the survival needs of the poorest of the poor, who do not offer any investment-incentives to profit-seeking market forces. According to the UN-MDG report of 2007, the share of the poorest fifth of populations in developing regions in national consumption decreased from 4.6 to 3.9 percent between 1990 and 2004. Widening income inequality is of particular concern in Eastern Asia, where the share of consumption among the poorest people declined dramatically during this period. Inequality is the highest in Latin America, the Caribbean and in sub-Saharan Africa, where the poorest fifth of the people account for only about 3 per cent of national income, despite increased involvement of market forces in local economies. Internationally, 46 countries of the world have become poorer today than they were in 1990, according to Human Development Report 2004.
Nearly 1300 million people live in absolute poverty, earning less than one dollar a day, while about 3000 million people, more than a half of the world’s population live on less than two dollars a day. According to the International Labour Organization, over 120 million people are officially registered as unemployed, besides an additional 700 million underemployed people.
Instances of poverty, which often are a complex interplay of social, political and economic factors, can be addressed only by interventions that hit hard at the root causes of inequalities, rather than by the quirks of unregulated markets that by design are tailored to suit the conditions of the rich and the powerful. Given the enormous amounts of power, influence and resources that the latter tend to have at their disposal, often catalyzed by increasing overlap of political and business interests in most modern economies, the only chance for the poorest people rests on systems of governance that can be held to account and at least be subjected to a floor test of popularity based on electoral performance of alternative political ideologies.
The message of the poorest people is loud and clear: governments must protect them from the vagaries of market! Their verdict has been communicated clearly on many an occasion, evident in the electoral defeat of the ‘India Shining’ campaign in India. The resurrection of the ‘Aam Aadmi’ (i.e. the ‘common man’) as a reference point of current development policies, at least rhetorically, has been compelled by lessons learnt from many of these recent trends. Yet, the poorest of the poor in countries like India continue to face unprecedented challenges to their existence. The markets are pushing them hard to extinction, by encroaching upon some of their commonest avenues of survival, notably retail trade, artisan-crafts, common property resources and most alarmingly, agriculture.
One needs to delve into the basic character and orientation of markets to assess their potential role in poverty reduction. Markets operate on the laws of supply and demand, and thereby play a role in fixation of prices and wages. Theoretically speaking, the price of a product or service is directly proportional to the rarity of its supply, its quality, the cost of production, and inversely proportional to the bargaining power of the buyer and degree of regulation of unfair practices. For markets to be favourable entities for the poor (when participating in markets as sellers), the latter ought to be able to vie with competing forces towards suppressing the cost of production, acquiring greater market-share to limit the range of suppliers and towards investing adequately in optimizing the quality of the product. Such possibilities are likely to be highly infeasible, given their limited economic abilities. Similarly, as buyers of products or users of services, their bargaining power is often limited on account of their limited ability to promise continuity as buyers or users, limited credit-worthiness and lack of effective mechanisms to hold sellers/service providers accountable. Profit-seeking markets are more likely to serve clients that can offer greater economic returns to producers and therefore are likely to exclude the poor. The only ways to offset this fundamental likelihood of exclusion is to either regulate the markets in order that the poor are compulsorily served on pro bono terms as a principle of policy, or to create alternative providers that by mandate serve the poor. This necessitates a role for a pro-poor welfare state or non-profit organizations in serving the needs and interests of the poor.
India was one of the fastest growing economies in the world during the nineties. The decade also witnessed an unprecedented scale of entry of market forces in various sectors of the economy. Yet, despite a significant spurt in macroeconomic growth, the rate of reduction of rural poverty in India was halted during the 1990s. Estimates show that the incidence of poverty, which between 1972-73 and 1989-90 fell from 55.4 per cent to 34.3 per cent in rural India, never went below the 1989-90 level in subsequent NSSO rounds undertaken up to 1997 [iv]. Though the rate of decline of rural poverty picked up again during the subsequent years between 1999 – 2004, the rate of GDP growth was in fact less during this phase than during 1993 – 99. The average per-capita expenditure in rural areas was not even ten per cent higher in 1999-2000 than in 1993-94, and rural poverty actually went up in some of the poorer states, such as Assam and Orissa. Also, foodgrain off-take through the public distribution system declined from 17 million tonnes per year in the early nineties to 12 million tonnes per year around the end of the decade[v], endangering the food security of millions of the poor in the country at the time when the GDP growth was unprecedented.
The State vis-à-vis the Poor
The eleventh Five-year Plan of India underscores the challenge of providing employment to 70 million additional people by 2011-12. It is also a well-established fact that the incidence of unemployment is substantially higher in the ‘below poverty line’ category, and particularly high amongst the scheduled castes and tribes therein (as indicated by successive National Sample Surveys). A critical question therefore is: what strategies and preparedness does the State have to meet this challenge, which is important to be addressed to prevent the nation’s slide into anarchy? Do markets provide a solution, or do they further endanger the chances of survival of the poor? Can democratic governments be allowed to forego their duties towards a majority of their trustees who vote them into power?
Of late, various governments in India have been offering unprecedented incentives to the private sector with an eye on macro-economic growth. For instance, policies relating to establishment of Special Economic Zones (SEZs) include significant supports to private entrepreneurs in the form of facilitation of land acquisition, tax rebates and friendlier administrative mechanisms, amongst others. However, many of the provisions jeopardize the long-term interests of the poor in many ways and the much-touted objective of inclusive growth hasn’t come into effect. For instance, one of the largest Special Economic Zones in India proposed to be set up by Reliance Industries Limited in Maharashtra across three tehsils of Raigad district threatens to displace nearly 35,000 farmers based over 25,000 hectares of agricultural land. The threat to the livelihoods of the farmers likely to lose ownership of land are sought to be offset merely by providing monetary compensation without any thoughts about the limited livelihood-choices available to them, consequent pressure on limited urban infrastructure, or the implications for a large number of non-owner dependents of farmland, e.g. sharecroppers or wage labourers.
In similar developments across the country, as many as 396 SEZs have been accorded formal clearance by the government (by October 2007), of which 149 have already been notified. When households displaced by SEZs or big projects migrate to cities, their survival becomes even more arduous, thanks to modern urban policies that increasingly shut out spaces from the reach of the poor. The commonest coping avenues for the poor, e.g. participation is retail trade, accessing state-run basic services, or opting for low-investment livelihoods (e.g. rag picking or plying rickshaws) are made increasingly inaccessible by policies that allow entry of big business houses in retail trade, enhance the cost of basic services by allowing their privatization, or block public spaces for the poor.
Another area of concern relates to increasing privatization of common property resources in the country, bearing life-threatening implications for a large number of poor communities. The operations of mining companies in various forest-rich areas of states like Chhattisgarh and Jharkhand have destroyed the age-old forest-based livelihoods of many tribal families. In Orissa, the state government has already committed several rivers and reservoirs for use by industry for water-intensive activities. In Chhattisgarh too, industries have been permitted to draw water from rivers like Kelo and Sheonath. Kelo, a tributary of Mahanadi river, happens to be an important source of livelihood for over sixty village communities settled alongside its 98 km long stretch across Raigarh district of Chhattisgarh, whose lives have been badly affected due to severe decline in the stock of river water.
During a People’s Tribunal held in Kolkata in January 2007, Santwana Dey – an elderly woman hailing from a farmer household based in Bejiberia village of Singur where the Government of West Bengal acquired land for handing over to Tata Motors in lieu of promises of jobs in a car factory and offers of monetary compensation, raised a fundamental issue: ‘no one can dictate what should my family do for a living; we have a right to pursue occupations that we are capable of and cannot be forced to work in a car factory, which we have no inkling about!’ Santwana’s straightforward assertion in the Tribunal underscored a legitimate contention of millions of marginalized citizens of the country – regarding their right to work, and particularly the right to avail of work of a suitable and gainful nature, in keeping with the directive of the constitution of India (Article 41; directive principles of state policy) calling upon the State to make effective provisions, within the limits of its economic capacity and development, for securing the right to work. In a country where the rate of growth of the size of labour force exceeds the rate of growth of employment, and where over ninety percent of the workforce is employed in the unorganized sector, the challenge of creating gainful employment opportunities for a large segment of socially and economically disadvantaged citizens remains the greatest trial of relevance of our welfare state.
The performance of the State with respect to its duties towards the poorest of the poor people might have been inadequate and often inefficient, but it has undoubtedly been critical. No other agency has the scale and depth of presence amongst the poor like agencies of the State. There are important policies favouring affirmative action for the socially marginalized, employment guarantees, relief from disasters, decentralized governance, right to information, provisions against atrocities, social security benefits for especially-challenged people and affordable basic services. However, bureaucracies managing a State’s performance have often failed to administer the pro-poor provisions effectively and have eluded any kind of accountability to the people. In many states, they have also undermined the status and potential of Panchayati Raj institutions by assuming sweeping powers over decisions relating to local development. Holding functionaries of the State accountable is the greatest need of the hour, not reducing the role of the State.
The Way Forward
For poverty reduction to be effective and viable in the long run, the State needs to play a far more efficient and accountable role than it is today, without withdrawing itself from the obligation of poverty reduction. Markets can be made a supportive channel towards creation of more development opportunities for the people, through regulations that bring about a level playing field. A two-pronged strategy, where the State assumes full responsibility for efficient and accountable delivery of crucial basic services and entitlements, and also enables poor communities to effectively engage with markets can significantly contribute to the wellbeing of the poor. Facilitating meaningful participation of the poor in contemporary markets would call for support towards value addition and sale of economic products of the poor; storage of goods; establishment of efficient institutions for managing procurements, forward movements and linkages; price control and equitable incentives, amongst other things. Local institutions of governance need to be freed from the control of bureaucracy and capacitated to play an effective regulatory role towards safeguarding the strategic needs of the poor, based on principles of equity and social justice.
Markets, unless regulated with a pro-poor orientation, can eliminate the poor rather than contributing to poverty reduction, given the inherent tendencies of supply-side domination and profit maximization. The poor have little say in the functioning of market forces, but have some stake and control in the governments they elect. The only way in which the poor can safeguard their interests in a market is by electing pro-poor governments that eliminate anti-poor market forces and regulate supplies of essential goods and services in order that they remain accessible and affordable to the poor. Good governance is the right of every citizen, and ensuring the same through effective mechanisms of accountability of government functionaries is the greatest need of the hour.
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[1] Published in India Economic Review (December 2007), a journal published by IIPM New Delhi
[i] ‘Dalit’ literally means ‘oppressed’ and refers to socially marginalized communities living in India.
[ii] Evaluation undertaken by The Independent Evaluation Group of the World Bank, titled “Assessment of the Bank's assistance to agricultural development in Sub-Saharan Africa during FY 1991-06”
[iii] Ref. report titled ‘World Bank Neglects African Farming, Study Says’, published in the New York Times, October 15 2007
[iv] Ref. ‘The Poverty Puzzle’ by C.P. Chandrasekhar and Jayati Ghosh, Macroscan, February 22, 2000
[v] Ref. ‘Hunger amidst Plenty’ by Jean Drèze, India Together, December 3, 2007
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