Comments on: The REGS Guarantees Poverty http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/ Issues & insights Thu, 11 Mar 2010 14:39:33 -0600 http://wordpress.org/?v=2.8.2 hourly 1 By: Rahul Menon http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/comment-page-1/#comment-268449 Rahul Menon Wed, 20 Aug 2008 09:39:11 +0000 http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/#comment-268449 I know that I am quite the late entrant to this discussion (nearly two years late!) but I am a new reader of this blog and I happened to chance upon this post. I have some points I would like to raise on the issue, and I do hope that others will respond to some of my points. 1."poverty is lack of income, and income is stuff that you get to consume" You are equating income with current consumption here, which is wrong, because it leaves no room for savings. People might save to consume in the future, (savings and hence incomes might thus become a form of consumption) but people might also save simply to hoard or simply because their current consumption needs are met and they have nothing else to do with the excess incomes. In saying that incomes equal consumption, it implies that a miserly crorepati and a spendthrift lakhpati who both have the same consumption patterns have the same incomes. Because you have confused the two issues of income and consumption together, you reach a conclusion to solve poverty that I am opposed to. Incomes = consumption, and therefore we reduce poverty by increasing the stock of consumable goods by boosting growth and industrial production. Income must be thought of as an empowering concept, wherein a person with increased incomes has greater security and a chance to develop a better way of life, and not necessarily simply a proxy for consumption. Basically you argue a "trickle-down" approach to solving poverty where I advocate a "bottom-up" approach. What if, in increasing growth and production, we employ larger amounts of capital as opposed to labour? The increased value of production (which let us say finds a fulfilled market in the richer middle and upper classes) and the rewards to owners of capital might serve to increase per capita income, but the rewards to the poorer labouring class might not increase in the same proportion. Which brings me to another criticism: you have neglected distributional aspects of the problem. I do not have the links on me right now, but I have read reports which say that inequality in Inida has increased along with increasing per capita incomes. To me, this is definitely not a desirable goal. 2. The NREGA defnitely does not advocate digging empty holes. Its aims are to develop rural infrastructure through the use of labour-intensive technology, simultaneously fulfilling the aims of infrastructure development in the rural sector where private investment has been lacking and allowing maximum number of labourers to receive some form of employment. Whether it is properly achieved is a different matter, a matter for another debate. 3. It is harsh to say it will encourage dependency, because the NREGA allows for employment for only 100 days in a year, during the off-season when rural labourers would otherwise not have any employment. Putting greater purchasing power in the hands of rural labourers would greatly benefit the expansion of markets, because it is quite obvious that markets would not function when consumers have no real purchasing power. 4. Therefore, it is wrong to say that the opportunity cost of the NREGA is high, because we have no idea of what the future benefits are going to be from better infrastructure in the rural area and better purchasing power of rural households. These must be taken into account before you can make such sweeping generalizations regarding the opportuntiy cost. 5. I do not agree with your generalization that it would decrease aggregate income. That would be true if it diverts resources that are already being put in use. The NREGA is funded by the funds of the Central and State Governments, funds which are already captive and are not available to the private sector. Where does the question arise of decreasing aggregate income? OK, if these funds are used for productive activites in the industrial sector, then we can say that the rise in national income would be more than in the case of the NREGA. But it definitely would not decrease. 6. "Indians are poor because India’s aggregate production is inadequate and therefore the solution has to begin with increasing production." A dangerously reductive statement. This would be true of an economy characterized by a larger proportion of the employed (or employable) workforce dependent on the industrial sector. This is not the case in India. The NREGA takes the rural route because majority of our workforce is concentrated in that sector, from wage-labourers to marginal farmers whose lands are too unproductive to guarantee adequate incomes in the off-season. Sorry for the long-winded (and late) submission on the issue. I would definitely love to hear what other readers have to say on the matter and the points I raised! I know that I am quite the late entrant to this discussion (nearly two years late!) but I am a new reader of this blog and I happened to chance upon this post. I have some points I would like to raise on the issue, and I do hope that others will respond to some of my points.
1.”poverty is lack of income, and income is stuff that you get to consume”
You are equating income with current consumption here, which is wrong, because it leaves no room for savings. People might save to consume in the future, (savings and hence incomes might thus become a form of consumption) but people might also save simply to hoard or simply because their current consumption needs are met and they have nothing else to do with the excess incomes. In saying that incomes equal consumption, it implies that a miserly crorepati and a spendthrift lakhpati who both have the same consumption patterns have the same incomes.
Because you have confused the two issues of income and consumption together, you reach a conclusion to solve poverty that I am opposed to. Incomes = consumption, and therefore we reduce poverty by increasing the stock of consumable goods by boosting growth and industrial production. Income must be thought of as an empowering concept, wherein a person with increased incomes has greater security and a chance to develop a better way of life, and not necessarily simply a proxy for consumption.
Basically you argue a “trickle-down” approach to solving poverty where I advocate a “bottom-up” approach. What if, in increasing growth and production, we employ larger amounts of capital as opposed to labour? The increased value of production (which let us say finds a fulfilled market in the richer middle and upper classes) and the rewards to owners of capital might serve to increase per capita income, but the rewards to the poorer labouring class might not increase in the same proportion. Which brings me to another criticism: you have neglected distributional aspects of the problem. I do not have the links on me right now, but I have read reports which say that inequality in Inida has increased along with increasing per capita incomes. To me, this is definitely not a desirable goal.
2. The NREGA defnitely does not advocate digging empty holes. Its aims are to develop rural infrastructure through the use of labour-intensive technology, simultaneously fulfilling the aims of infrastructure development in the rural sector where private investment has been lacking and allowing maximum number of labourers to receive some form of employment. Whether it is properly achieved is a different matter, a matter for another debate.
3. It is harsh to say it will encourage dependency, because the NREGA allows for employment for only 100 days in a year, during the off-season when rural labourers would otherwise not have any employment. Putting greater purchasing power in the hands of rural labourers would greatly benefit the expansion of markets, because it is quite obvious that markets would not function when consumers have no real purchasing power.
4. Therefore, it is wrong to say that the opportunity cost of the NREGA is high, because we have no idea of what the future benefits are going to be from better infrastructure in the rural area and better purchasing power of rural households. These must be taken into account before you can make such sweeping generalizations regarding the opportuntiy cost.
5. I do not agree with your generalization that it would decrease aggregate income. That would be true if it diverts resources that are already being put in use. The NREGA is funded by the funds of the Central and State Governments, funds which are already captive and are not available to the private sector. Where does the question arise of decreasing aggregate income? OK, if these funds are used for productive activites in the industrial sector, then we can say that the rise in national income would be more than in the case of the NREGA. But it definitely would not decrease.
6. “Indians are poor because India’s aggregate production is inadequate and therefore the solution has to begin with increasing production.”
A dangerously reductive statement. This would be true of an economy characterized by a larger proportion of the employed (or employable) workforce dependent on the industrial sector. This is not the case in India. The NREGA takes the rural route because majority of our workforce is concentrated in that sector, from wage-labourers to marginal farmers whose lands are too unproductive to guarantee adequate incomes in the off-season.

Sorry for the long-winded (and late) submission on the issue. I would definitely love to hear what other readers have to say on the matter and the points I raised!

]]> By: Alex http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/comment-page-1/#comment-6373 Alex Fri, 28 Jul 2006 16:48:28 +0000 http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/#comment-6373 Well, there is a glitch in your views. increasing employment is crucial. You talk about digging a hole, but i would talk about constructing a road to enhance rural connectivity. Whe these workers are employed to improve the rural infrastucture, it is increasing the productive capacity of that particular village. When the workers start earning wages, their demand increases, which acts as an incentive for producers/sellers to start up stores there. But, employement creation cannot solely reduce poverty. It needs to be supported by educational programmes and health programmes. No programme will be a success without the help of supporting programmes. Well, there is a glitch in your views.
increasing employment is crucial. You talk about digging a hole, but i would talk about constructing a road to enhance rural connectivity. Whe these workers are employed to improve the rural infrastucture, it is increasing the productive capacity of that particular village. When the workers start earning wages, their demand increases, which acts as an incentive for producers/sellers to start up stores there.
But, employement creation cannot solely reduce poverty. It needs to be supported by educational programmes and health programmes. No programme will be a success without the help of supporting programmes.

]]> By: Stephen Stohs http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/comment-page-1/#comment-317 Stephen Stohs Fri, 23 Sep 2005 18:30:23 +0000 http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/#comment-317 Nu, I have little or nothing to add to what you say—you have explained the problem with employment guarantees better than any other source I have seen on the subject. Unfortuntately, governments appear to have little incentive to adopt policies to increase productivity by letting people internalize risk, as they capture rents from opportunities for bureaucratic and political corruption. (Check out the US govt bailout of New Orleans to the tune of $200b if you want an example of the problems w/free govt insurance from this side of the world). You clearly explain how this employment guarantee kills initiative and drive, thereby strangling the “goose that lays golden eggs” and ensuring these guaranteed jobs will pay little real income. Unfortunately, that which seems an obvious folly to you looks like a politically popular free lunch to the average citizen, while the policy of internalizing risk and reward, which might provide the incentives for increased real income, sounds hard-hearted. Best, Steve Nu,

I have little or nothing to add to what you say—you have explained the problem with employment guarantees better than any other source I have seen on the subject.

Unfortuntately, governments appear to have little incentive to adopt policies to increase productivity by letting people internalize risk, as they capture rents from opportunities for bureaucratic and political corruption. (Check out the US govt bailout of New Orleans to the tune of $200b if you want an example of the problems w/free govt insurance from this side of the world).

You clearly explain how this employment guarantee kills initiative and drive, thereby strangling the “goose that lays golden eggs” and ensuring these guaranteed jobs will pay little real income. Unfortunately, that which seems an obvious folly to you looks like a politically popular free lunch to the average citizen, while the policy of internalizing risk and reward, which might provide the incentives for increased real income, sounds hard-hearted.

Best,

Steve

]]> By: Mani Pulimood http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/comment-page-1/#comment-316 Mani Pulimood Fri, 23 Sep 2005 16:09:48 +0000 http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/#comment-316 Bureaucracy and Corruptions Maharashtra Employment Guarantee Scheme has been in existence for 30-years. Have we learn't our lesson from that?? Or is this something else?? I hope the Social Auditors also falls under the REGS umbrella. Bureaucracy and Corruptions

Maharashtra Employment Guarantee Scheme has been in existence for 30-years.

Have we learn’t our lesson from that?? Or is this something else??

I hope the Social Auditors also falls under the REGS umbrella.

]]> By: Arjun http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/comment-page-1/#comment-314 Arjun Fri, 23 Sep 2005 15:05:42 +0000 http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/#comment-314 Atanu, I’m not sure I understand or agree with all of your arguments: To wit: 1. Employing people is not productive (in the sense of increasing the output of goods and services)? “Let me repeat that: we don’t need increased employment; we need increased production” I am not sure how you can argue that. Remember, it’s not an income scheme, it’s an employment scheme. As long as unused resources are being used, we can move closer towards a production possibilities frontier (another story from intro to econ). There is a caveat: if resources taxed by the government to pay for the employment guarantee scheme were going to be more efficient or productive, there could be a loss in output. But you haven’t shown any proof that the $10 billion would have been used more efficiently. What are the kinds of things that REGS will be used for- irrigation projects, infrastructural projects and so on- these could be genuinely productive. Even if it is the case that there is a net loss of output, using your Robinson Crusoe example, what is happening in that case is that Robinson Crusoe is giving up some of his surplus so that Man Friday (almost always forgotten in RC stories) can work, produce some output (perhaps not as much as RC could) and help his family survive. Maybe Man Friday cannot wait till RC has enough before redistributing. 2. The REGS is not efficient (because no labor savings devices are allowed). Ok. We can discuss the production technology, but it’s certainly unlikely that this will be implemented in force. Do you think that the bill really prevents the use of, say, spades? If so, yes, it’s a bad scheme, but I simply don’t think this will be the case in practice. 3. Government creates dependency. I’ve been educated in a public institution. That means someone somewhere has paid for me to get my education. I am not sure that it has created in me a sense of dependency on the state, but rather it has helped me engage more fully with the potentials open to me. I hope that we can grant that the same could be true of jobless farmers. Perhaps at an even more fundamental level, the opportunity to work in a dignified manner and have some security will allow there to be greater ability to undertake other activities. BTW, lest it not be said, we are all dependent (usually) on some institution or another (firms, governments, NGOs), and so on. Losing an opportunity for employment is usually calamitous, but especially so if you are really on the margin. 4. Corruption etc. Yes, true, and something that needs to be monitored. But there is the potential for corruption anywhere, even in the private sector and in other things as pointed out by Ludwig. 5. You make a perhaps inaccurate argument- providing rural folks with income will only make them produce more babies. There is a literature, of course, that children can be seen as social insurance (yes, I know its contested). If that is the case, having other forms of social insurance can, in fact, reduce population. Not that I want to get into social engineering of demographics at the moment. Best Regards, Arjun Atanu,

I’m not sure I understand or agree with all of your arguments:

To wit:

1. Employing people is not productive (in the sense of increasing the output of goods and services)? “Let me repeat that: we don’t need increased employment; we need increased production” I am not sure how you can argue that. Remember, it’s not an income scheme, it’s an employment scheme. As long as unused resources are being used, we can move closer towards a production possibilities frontier (another story from intro to econ). There is a caveat: if resources taxed by the government to pay for the employment guarantee scheme were going to be more efficient or productive, there could be a loss in output. But you haven’t shown any proof that the $10 billion would have been used more efficiently. What are the kinds of things that REGS will be used for- irrigation projects, infrastructural projects and so on- these could be genuinely productive. Even if it is the case that there is a net loss of output, using your Robinson Crusoe example, what is happening in that case is that Robinson Crusoe is giving up some of his surplus so that Man Friday (almost always forgotten in RC stories) can work, produce some output (perhaps not as much as RC could) and help his family survive. Maybe Man Friday cannot wait till RC has enough before redistributing.

2. The REGS is not efficient (because no labor savings devices are allowed). Ok. We can discuss the production technology, but it’s certainly unlikely that this will be implemented in force. Do you think that the bill really prevents the use of, say, spades? If so, yes, it’s a bad scheme, but I simply don’t think this will be the case in practice.

3. Government creates dependency. I’ve been educated in a public institution. That means someone somewhere has paid for me to get my education. I am not sure that it has created in me a sense of dependency on the state, but rather it has helped me engage more fully with the potentials open to me. I hope that we can grant that the same could be true of jobless farmers. Perhaps at an even more fundamental level, the opportunity to work in a dignified manner and have some security will allow there to be greater ability to undertake other activities. BTW, lest it not be said, we are all dependent (usually) on some institution or another (firms, governments, NGOs), and so on. Losing an opportunity for employment is usually calamitous, but especially so if you are really on the margin.

4. Corruption etc. Yes, true, and something that needs to be monitored. But there is the potential for corruption anywhere, even in the private sector and in other things as pointed out by Ludwig.

5. You make a perhaps inaccurate argument- providing rural folks with income will only make them produce more babies. There is a literature, of course, that children can be seen as social insurance (yes, I know its contested). If that is the case, having other forms of social insurance can, in fact, reduce population. Not that I want to get into social engineering of demographics at the moment.

Best Regards,

Arjun

]]> By: Ludwig http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/comment-page-1/#comment-313 Ludwig Fri, 23 Sep 2005 12:58:55 +0000 http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/#comment-313 Atanu Thought-provoking piece. One pro-REGS argument could be that this is one way of jump-starting the economy, to some extent. As in, if this money lands up in the hands of these rural types, they will use it to buy food, soap, 5-Star bars and so on and in some sense stimulate overall production. Or would you argue that since this is an income transfer from one segment to another, the aggregate demand would be the same, and so there really wouldn't be any net increase in production, because there would be a fall in demand in some other sector of the economy? Here is another thought: How about just printing the money and giving it to the people eligible for REGS? The standard argument is that this is a nuts idea, because it will lead to inflation, but that is when there are supply side bottlenecks (are there?). Wouldn't that work as well, to some extent, if managed correctly? Of course, this would appear to be like walking on economic eggshells. This has apparently happened at a microcosmic, and tragic/farcical level already in Bhopal. For some period, after the gas leak victims received compensation, the retail market in consumer durables boomed. Things are more moribund now, I think. Finally, I'm not sure if the "REGS leads to corruption" argument holds. Wouldn't that be true of _any_ spending on this scale? Why wouldn't the same hold for building IT parks, a flyover, an aircraft carrier, something as stupendously useless as a metro system for Delhi or Bombay, an airport and so on? This was brought up in an article I read recently, not sure where. It appears that corruption is OK in some cases, and not acceptable in others. Anyway, just random thoughts. I am not an economist, so pardon the insanity :) Cheers Ludwig Atanu

Thought-provoking piece. One pro-REGS argument could be that this is one way of jump-starting the economy, to some extent. As in, if this money lands up in the hands of these rural types, they will use it to buy food, soap, 5-Star bars and so on and in some sense stimulate overall production. Or would you argue that since this is an income transfer from one segment to another, the aggregate demand would be the same, and so there really wouldn’t be any net increase in production, because there would be a fall in demand in some other sector of the economy?

Here is another thought: How about just printing the money and giving it to the people eligible for REGS? The standard argument is that this is a nuts idea, because it will lead to inflation, but that is when there are supply side bottlenecks (are there?). Wouldn’t that work as well, to some extent, if managed correctly? Of course, this would appear to be like walking on economic eggshells. This has apparently happened at a microcosmic, and tragic/farcical level already in Bhopal. For some period, after the gas leak victims received compensation, the retail market in consumer durables boomed. Things are more moribund now, I think.

Finally, I’m not sure if the “REGS leads to corruption” argument holds. Wouldn’t that be true of _any_ spending on this scale? Why wouldn’t the same hold for building IT parks, a flyover, an aircraft carrier, something as stupendously useless as a metro system for Delhi or Bombay, an airport and so on? This was brought up in an article I read recently, not sure where. It appears that corruption is OK in some cases, and not acceptable in others.

Anyway, just random thoughts. I am not an economist, so pardon the insanity :)

Cheers
Ludwig

]]> By: Ameya http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/comment-page-1/#comment-312 Ameya Fri, 23 Sep 2005 11:27:26 +0000 http://indianeconomy.org/2005/09/23/the-regs-guarantees-poverty/#comment-312 I more or less agree with your reasoning. But what if the REGS is used to build infrastructure - in rural areas - I believe that is the intention of the government. The REGS says that work has to be done on housing, irrigation, rural connectivity. I agree that production capacity has to be given priority - not employment. Employment increase will be natural result of production increase. But in rural areas - private sector is reluctant to invest due to lack of infrastructure. More so is the case of rural infrastructure - the private sector avoids getting into infrastructure build-up in rural areas due to the supposedly 'low returns'. Is it not possible that the REGS will ensure that infrastructure is built - thereby attracting investment in production capacities and thereby generating sustainable employment. Free markets are good but in areas where free market fail - someone has to interfere. Otherwise the social costs of waiting for the so-called 'long-run adjustment' are too high. Just a thought! I more or less agree with your reasoning. But what if the REGS is used to build infrastructure – in rural areas – I believe that is the intention of the government.

The REGS says that work has to be done on housing, irrigation, rural connectivity. I agree that production capacity has to be given priority – not employment. Employment increase will be natural result of production increase.

But in rural areas – private sector is reluctant to invest due to lack of infrastructure. More so is the case of rural infrastructure – the private sector avoids getting into infrastructure build-up in rural areas due to the supposedly ‘low returns’.

Is it not possible that the REGS will ensure that infrastructure is built – thereby attracting investment in production capacities and thereby generating sustainable employment.

Free markets are good but in areas where free market fail – someone has to interfere. Otherwise the social costs of waiting for the so-called ‘long-run adjustment’ are too high.

Just a thought!

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