The first lesson of development economics is that economic policies matter. Even if a country has everything going for it, lack of good policies condemn it to poverty. So it is easy to believe that if only good policies were known to those in power, economic development would necessarily follow. My good friend, the globe-trotting adventurer and consultant to capitalists, Utsav Mitra, brought that lesson to mind in a recent twitter exchange on my timeline. As a student of development, I have written a bit over the years on the matter and Utsav refers to it in a tweet which is embedded below.
I responded to Utsav’s generous compliment with a flat contradiction. I said he was wrong. Here’s why.
Economic prosperity is a consequence of good economic policies. It is a matter of choice, and if chosen wisely, the outcome is predictably obtained. It is something akin to good health. Generally speaking, if you have reasonable nutrition, adequate exercise, avoid the bad stuff, have sufficient rest, don’t suffer chronic stress, and are not burdened with inherited diseases, you are likely to be healthy. For most of us not born in dire poverty or living in a state of war, good health is a matter of choice. To be more precise, it is a matter of informed choice.
Maybe in the ancient times, the masses were ignorant of what constitutes a healthy lifestyle or were incapable of living that life. But things have improved. Today, most of us know what we need to do to enjoy good health. Yet merely knowing is not sufficient. The guidelines for healthy living are simple enough but following them is another matter altogether. That depends on our motivation. Motivation arises from our objectives. Our objectives determine our actions.
Knowledge is necessary but not sufficient. What matters is the objective. If your objective is to be healthy, then it is almost a trivial matter (in today’s age of abundant information) to find out what you should be doing. Then it is up to you if you want to do it or not. In short, for most of us, we could be healthy if we want to be. If we are unhealthy, most likely it is not because of our ignorance but rather our objective and the resulting motivation.
Getting back to economic prosperity, India’s lack of prosperity is a matter of choice. More specifically, it is the result of choices made by the policymakers — the politicians and bureaucrats who determine economic policies. These choices derive from their objectives. Do they know what are good policies? Yes because good policies are known. It is not as if nobody knows what the necessary conditions are for development. Thousands of very smart people have shed copious amounts of blood, sweat and tears over long years in the empirical and analytical investigation of the nature and causes of the wealth of nations. Luckily for us, the results are easily available to anyone who is interested in knowing what has been discovered.
Not just that, the prescriptions of the worldly philosophers — including mine — are not complicated either. The broad outlines of what causes and what hinders economic progress is easy for anyone with even average intelligence to comprehend and appreciate, provided of course that the person really wants to know. Let me repeat that: if you are interested in knowing what is necessary for prosperity, you can easily find out with only a little bit of effort and comprehend it with a little more effort.
So it is hard to argue that good policies are not chosen because the policymakers don’t know about them. Even if they did not know, it is easy enough to become informed. So why don’t they choose good policies? That part of the story is also simple: because economic prosperity of the nation is not their objective. They can choose to adopt policies that promote prosperity — but they don’t. Through their choices they reveal that they prefer alternate policies, policies that don’t lead to prosperity. Their choice reveals their preference; their choices indicate that their objectives are different from the objective of economic development.
That brings me to the second lesson I have learned about development: the objectives of the policymakers matter in the choice of economic policies.
If the policymaker wants his own economic welfare, he chooses say Policy Set#1, and if he wants the economic welfare of the country, he chooses Policy Set#2. It is possible that Set#1 and Set#2 are not mutually exclusive, as there may be some overlap. But the disjoint elements of the two sets probably matter more than the common elements. Just to take an example, let’s consider the policy related to economic freedom.
Economic freedom belongs to Set#2 (good for the economy) as it leads to economic prosperity. Why doesn’t economic freedom belong to Set#1 (good for the policymaker)? Because under that policy, the policymaker has little or no control over economic activity and therefore is unable to enrich himself.
Government ownership of businesses and industries is a policy that belongs to Set#1. It helps the policymaker to reap the benefits of power. That policy does not belong to Set#2 since it does not benefit the economy.
The government owned Air India is an instance of the government ownership of a business that should rightfully be in the private sector. It costs the country billions (losses that are paid for by all the people) and the benefits accrue to the politicians: they get to use it as their own private airline to enjoy.
Now back to Utsav’s tweet. His sentiments are excellent. He wants Indian politicians to read my writing (like the book “Transforming India“, I suppose) so that they will know what needs to be done. But as I have argued, it is not the not knowing that is the problem. If you know what you want to get done, you can always find out the how. If the horses are not thirsty, even dragging them to the water will do no good.
This is not a counsel of despair. I think there’s hope, naturally since otherwise I would not be doing this. The fact is that it is not that the policymakers don’t know. They can find out the answers any day of the week since there are smart economists galore. The problem is that the general population does not know the basics of good economic policies. That’s the great challenge we face.
People need to know because if they did know, the policymakers would know that they cannot fool the public any more of their self-serving policies. That would bring about the conditions for the policymakers to choose good policies.
That’s the third lesson of development economics: the public determines what policies the politicians choose.
In other words, it is all politics, neh?