The rescue of struggling banks and financial institutions by European and U.S. governments at the end of 2008 has reopened a hot debate over the role of the state in supposedly free markets. To what extent should government authorities intervene in the markets?
This is one of the questions that IESE Prof. Sanjay Peters discusses in his book, In Pursuit of Progress and Equilibrium, using various examples from India where the state has intervened heavily with mixed results.
The book recounts how the Indian economy has averaged an annual growth rate of 8 percent for the past 15 years, making it the second fastest growing economy in the world after China. Yet hundreds of millions of people still live in poverty.
Kerala, one of the least industrialized regions of India, has at the same time recorded one of the highest standards using various non-financial quality-of-life measures. How is it possible that social improvement is not accompanied by an economic upturn of equal magnitude? And what role does the state play in this?
The Paradox of Kerala
If Kerala were an independent country, it would occupy the ninth position among the poorest countries in the world. Even so, Kerala's social achievements fare well alongside those of developed countries with income levels 10 or 20 times higher.
In recent decades, the life expectancy of Kerala's 31.8 million inhabitants has increased to exceed that of African-Americans in the United States. The overall literacy rate is also very high and the rate for females, in particular, is higher than that recorded in all the provinces of China. Moreover, infant mortality and birth rates have decreased, and the poverty level has been reduced.
How has all this been achieved? With land reforms, which among other things have enabled 1.5 million former tenant farmers to become owners of their own land. Public services such as affordable public housing and improved basic education have also been crucial. Food distribution policies and fair-trade shops have given the poorest people access to basic goods such as wheat and kerosene for lamps.
Yet for all these achievements, Kerala still lags behind economically. Among the 14 major states of India, Kerala's income levels rank in the lower half. Achieving a relatively high standard of living while at the same time registering low levels of GDP per capita leaves many academics scratching their heads.
The weak performance of Kerala's economy is due mainly to the fact that both the agricultural and industrial sectors have grown very little in comparison with the Indian average. The only sector showing strong activity is the service industry and construction.
Other factors include excessive local government intervention in industrial development, high labor costs compared with other states, political corruption, outdated and inflexible labor laws, and electrical power supply failures.
Toward Balanced Development
Given this paradox, the author believes that the concept of progress must be reconsidered. When assessing the standard of living of a particular country or region, improvements in human developments such as life expectancy, infant mortality, birth rates and literacy levels might present a truer picture than simply measuring GDP. For example, you could have a high level of GDP but the wealth may be concentrated in a small percentage of the population, whereas life expectancy would not go up dramatically if only an elite minority of the population were living longer.
A critical analysis of the development experience of Kerala can provide other lessons about the ability of low-income agrarian economies to achieve high levels in terms of standard of living, insists Peters.
On the important role played by the government, the author notes that if the state is too intrusive, it can actually suppress the entrepreneurial spirit of the society and damage its business culture. Having said that, he warns that excessive dependence on the free market runs the risk of fostering inequality and unbalanced growth.
"The question the local government of Kerala must raise is not so much whether there is more or less short-term economic performance, but rather whether the number of jobs will continue to grow in the medium and long term, and above all, if the quality of employment is adequate in terms of sustainable development and in creating improvements in the lives of the poorest groups. If not, the admirable achievements of Kerala in terms of human development will always be called into question," says Peters.
In short, this book demonstrates the need to create balanced development models in which both institutions for social services and the productive sectors of the economy function together effectively.