The new Congress Government is working on a two-point agenda of pushing economic reforms and expanding pro-poor welfare programmes. The developed countries have implemented precisely such a policy in the last 50 years. But this model has not proven to be sustainable. In his book ‘Community without Politics: A Market Approach to Welfare Reform’, David G. Green says: “It seems that thirty years after the introduction of the Great Society programmes of the 1960s, it is finally being accepted that a fundamental mistake was made.
Rather than eliminating poverty, reviving neighborhoods and communities, and raising up those who seemingly were left at the periphery of society, the welfare state has perpetuated poverty, destroyed families and neighbourhoods, and created an underclass of unemployables.” Nobel Laureate Prof Edmund Phelps explains: “Although such programmes have been substantial in Europe and the US, the working poor remain as marginalised as ever. Indeed, social spending has worsened the problem, because it reduces work incentives and thus creates a culture of dependency and alienation from the commercial economy, undermining labour force participation, employability, and employee loyalty.”
This was the result of the economic reforms-plus-welfare in the developed countries before globalisation. The developed countries were imposing high rates of taxes on their businesses in order to raise revenues for giving out unemployment compensation, for example. This policy hit at the businesses twice. They had to pay high taxes. Additionally they had to pay higher wages to the workers who had less inclination to look for jobs because they were assured of nominal income through unemployment compensation.
Businesses had to offer higher wages to the workers in order to wean them away from the unemployment benefits. The cost of production of companies in the developed countries increased because of these two costs. They continued to survive nevertheless because developing countries were not able to produce goods of required quality. For example, India was producing only Ambassador and Fiat cars in the early eighties. Our companies could not provide competition to General Motors and Ford in the United States because our quality was poor. Additionally, many developed countries had imposed indirect restrictions on imports from the developing countries. For example, Indian skirts were banned due to alleged inflammability. Workers from the developing countries were also denied entry into the developed countries due to visa restrictions. In consequence American automakers could sell their products at a high price. The American economy was like an island in the huge sea. High prices of goods and high wages could be sustained there because there was no competition from the developing countries. The negative impacts of welfare programmes told by David Green and Edmund Phelps were present but not visible because of these protectionist barriers.
Globalisation has rendered this model unsustainable. Low-priced goods produced by the developing countries are now allowed entry. The quality of goods produced by the developing countries has also improved. Cars produced in India are being sold in many countries across the world. The island of the developed countries is subsiding and the sea waters are entering forcefully. It is no longer possible for the companies like General Motors to sell their products at a high price or to pay high wages to their workers and they are going bankrupt. Main point is that the model of free market economy and welfare programmes was not successful in the developed countries earlier but this was not visible due to the protection provided from imports. It is now not possible for the governments of the developed countries to impose high taxes or for the companies to pay high wages because cheap goods from developing countries are providing tough competition.
Question before us is this: How will this policy succeed in India when it has failed in the developed countries? Indications of failure of this policy are already available. Our businesses undertake production in No 2 to evade taxes and lower their cost of production. They have to pay high wages due to the Employment Guarantee Programme. It is reported that farmers of Punjab and factories of Ghaziabad are finding it difficult to attract workers from Bihar nowadays because the latter have some employment available through the Employment Guarantee Programme nearer home. An unemployed worker is getting employment at Rs 100 a day under the Scheme even though only for 100 days. He will be willing to forego this benefit and take up a commercial employment only if commercial wages are sufficiently much higher than those offered under Employment Guarantee Scheme.
Furthermore, our companies are under stress due to imports from China where wages are low just as developed countries are under stress due to imports from India. For example, Deepavali lights and cooler pumps made in China have wholly captured our markets. It is clear that the Congress policy of free market plus welfare programmes is doomed to fail just as it has happened in the developed countries. A possible solution is to give a productive orientation to expenditures made under welfare programmes.
Prof Edmund Phelps suggests, “The best remedy is a subsidy for low-wage employment, paid to employers for every full-time low-wage worker they hire and calibrated to the employee’s wage cost to the firm. The higher the wage cost, the lower the subsidy, until it has tapered off to zero. With such wage subsidies, competitive forces would cause employers to hire more workers, and the resulting fall in unemployment would cause most of the subsidy to be paid out as direct or indirect labour compensation. People could benefit from the subsidy only by engaging in productive work.” Such a policy will compensate our companies for the high burden of taxes and wages in part, at least. The taxes paid by businesses for running welfare programmes will be recouped by them through receipt of wage subsidies. The opposition must support economic reforms. But it must demand that the many welfare programmes running presently be dismantled and be replaced with a single wage subsidy programme. The programmes are presently providing more benefits to the bureaucracy than to the people. Businesses and workers are both on the losing end. This must change if we have remained competitive in the global market in the long run.
(The writer can be contacted at bharatj@sancharnet.in)
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