Development as Freedom
Page 16
The effects of misconduct are often the same as those of prodigality. Every injudicious and unsuccessful project in agriculture, mines, fisheries, trade, or manufactures, tends in the same manner to diminish the funds destined for the maintenance of productive labour. In every such project, … there must always be some diminution in what would otherwise have been the productive funds of the society.30
It is not particularly important to assess these specific arguments of Smith, but it is important to see what his general concerns are. What he is considering is the possibility of social loss in the narrowly motivated pursuit of private gains. This is the opposite case to the more famous remark of Smith: “It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest. We address ourselves, not to their humanity but to their self-love.…”31 If the butcher-brewer-baker example draws our attention to the mutually beneficial role of trade based on self-interest, the prodigal-projector argument points to the possibility that under certain circumstances private profit motives may indeed run counter to social interests. It is this general concern that remains relevant today (not just the particular example of prodigals and projectors).32 This is very much the central apprehension in considering the social loss involved, for example, in environmentally wasteful or polluting private productions, which fit well with Smith’s description of the possibility of “some diminution in what would otherwise have been the productive funds of the society.”
The lesson to draw from Smith’s analysis of the market mechanism is not any massive strategy of jumping to policy conclusions from some general “pro” or “anti” attitude to markets. After acknowledging the role of trade and exchange in human living, we still have to examine what the other consequences of market transactions actually are. We have to evaluate the actual possibilities critically, with adequate attention being paid to the contingent circumstances that may be relevant in assessing all the results of encouraging markets, or of restraining their operation. If the butcher-brewer-baker example points to a very common circumstance in which our complementary interests are mutually promoted by exchange, the prodigal-projector example illustrates the possibility that this may not work in quite that way in every case. There is no escape from the necessity of critical scrutiny.
NEED FOR A MANY-SIDED APPROACH
The case for taking a broad and many-sided approach to development has become clearer in recent years, partly as a result of the difficulties faced as well as successes achieved by different countries over the recent decades.33 These issues relate closely to the need for balancing the role of the government—and of other political and social institutions—with the functioning of markets.
They also suggest the relevance of a “comprehensive development framework” of the kind discussed by James Wolfensohn, the president of the World Bank.34 This type of framework involves rejecting a compartmentalized view of the process of development (for example, going just for “liberalization” or some other single, overarching process). The search for a single all-purpose remedy (such as “open the markets” or “get the prices right”) has had much hold on professional thinking in the past, not least in the World Bank itself. Instead, an integrated and multifaceted approach is needed, with the object of making simultaneous progress on different fronts, including different institutions, which reinforce each other.35
Broader approaches are often harder to “sell” than narrowly focused reforms that try to achieve “one thing at a time.” This may help to explain why the powerful intellectual leadership of Manmohan Singh in bringing about the needed economic reforms in India in 1991 was so concentrated on “liberalization” only, without a corresponding focus on the much-needed broadening of social opportunities. There is, however, quite a deep complementarity between reducing, on the one hand, the overactivity of the state in running a “license Raj,” and, on the other, removing the underactivity of the state in the continuing neglect of elementary education and other social opportunities (with close to half the adult Indians still illiterate and quite unable to participate in an increasingly globalized economy).36 In the event, Manmohan Singh did initiate some essential reforms, and this is a rightly admired success.37 And yet that success could have been even greater if the reforms were combined with a commitment to expand the development of social opportunities that had been neglected so persistently in India.
Combining extensive use of markets with the development of social opportunities must be seen as a part of a still broader comprehensive approach that also emphasizes freedoms of other kinds (democratic rights, security guarantees, opportunities of cooperation and so on). In this book, the identification of different instrumental freedoms (such as economic entitlements, democratic freedoms, social opportunities, transparency guarantees and protective security) is based on the recognition of their respective roles as well as their complementarities. Depending on the country considered, the focus of a critique may vary, in light of the particular experience in that country. For example, in India the neglect of social opportunities may be a focus of criticism in a way it may not be in China, whereas the absence of democratic liberties may be more appropriately a focus of a critique of China than it could be of India.
INTERDEPENDENCE AND PUBLIC GOODS
Those who have tended to take the market mechanism to be the best solution of every economic problem may want to inquire what the limits of that mechanism may be. I have already commented on issues of equity and the need to go beyond efficiency considerations, and in that context, I have tried to discuss why this may call for supplementing the market mechanism by other institutional activities. But even in achieving efficiency, the market mechanism may sometimes be less than effective, particularly in the presence of what are called “public goods.”
One of the assumptions standardly made to show the efficiency of the market mechanism is that every commodity—and more generally everything on which our welfares depend—can be bought and sold in the market. It can all be marketed (if we want to place it there), and there is no “nonmarketable” but significant influence on our welfare. In fact, however, some of the most important contributors to human capability may be hard to sell exclusively to one person at a time. This is especially so when we consider the so-called public goods, which people consume together rather than separately.38
This applies particularly in such fields as environmental preservation, and also epidemiology and public health care. I may be willing to pay my share in a social program of malaria eradication, but I cannot buy my part of that protection in the form of “private good” (like an apple or a shirt). It is a “public good”—malaria-free surroundings—which we have to consume together. Indeed, if I do manage somehow to organize a malaria-free environment where I live, my neighbor too will have that malaria-free environment, without having to “buy” it from anywhere.39
The rationale of the market mechanism is geared to private goods (like apples and shirts), rather than to public goods (like the malaria-free environment), and it can be shown that there may be a good case for the provisioning of public goods, going beyond what the private markets would foster.40 Exactly similar arguments regarding the limited reach of the market mechanism apply to several other important fields as well, where too the provision involved may take the form of a public good. Defense, policing and environmental protection are some of the fields in which this kind of reasoning applies.
There are also rather mixed cases. For example, given the shared communal benefits of basic education, which may transcend the gains of the person being educated, basic education may have a public-good component as well (and can be seen as a semipublic good). The persons receiving education do, of course, benefit from it, but in addition a general expansion of education and literacy in a region can facilitate social change (even the reduction of fertility and mortality, as will be discussed more fully in chapters 8 and 9) and also help to enhance economic progress from which o
thers too benefit. The effective reach of these services may require cooperative activities and provisioning by the state or the local authorities. Indeed, the state has typically played a major role in the expansion of basic education across the world. The rapid spread of literacy in the past history of the rich countries of today (both in the West and in Japan and the rest of East Asia) has drawn on the low cost of public education combined with its shared public benefits.
It is in this context rather remarkable that some market enthusiasts recommend now to the developing countries that they should rely fully on the free market even for basic education—thereby withholding from them the very process of educational expansion that was crucial in rapidly spreading literacy in Europe, North America, Japan, and East Asia in the past. The alleged followers of Adam Smith can learn something from his writings on this subject, including his frustration at the parsimony of public expenditure in the field of education:
For a very small expence the publick can facilitate, can encourage, and can even impose upon almost the whole body of the people, the necessity of acquiring those most essential parts of education.41
The “public goods” argument for going beyond the market mechanism supplements the case for social provisioning that arises from the need of basic capabilities, such as elementary health care and basic educational opportunities. Efficiency considerations thus supplement the argument for equity in supporting public assistance in providing basic education, health facilities and other public (or semipublic) goods.
PUBLIC PROVISIONING AND INCENTIVES
While these considerations provide good grounds for public expenditure in the areas crucial for economic development and social change, there are contrary arguments that must also be considered in the same context. One issue is that of the fiscal burden of public expenditure, which can be quite large, depending on how much is planned to be done. The fear of budget deficits and inflation (and generally of “macroeconomic instability”) tends to haunt contemporary discussions of economic policy, and this is indeed a momentous issue. Another issue is that of incentives, and the effects that a system of public support may have in discouraging initiative and distorting individual efforts. Both these issues—the need for fiscal prudence and the importance of incentives—deserve serious attention. I begin with the latter, and will come back thereafter to fiscal burden and its consequences.42
Any pure transfer—the redistribution of income or the free provision of a public service—can potentially have an effect on the incentive system of the economy. For example, it has been argued particularly strongly that generous unemployment insurance can weaken the resolve of the jobless to find employment, and that it has actually done so in Europe. Given the obvious equity argument for such insurance, there may be a difficult issue here if the potential conflict proves to be real and quantitatively substantial. However, since employment is sought for various reasons—not just to receive an income—the partial replacement of the lost wage by public support may not, in fact, be as much of a disincentive against seeking employment as it is sometimes presumed. Indeed, the reach and magnitude of the disincentive effects of unemployment insurance are far from clear. Nevertheless, it is a matter for empirical examination to ascertain how strong the adverse incentive effects may actually be, in order to facilitate informed public discussion of these important matters of public policy, including the choice of an appropriate balance between equity and efficiency.
In most of the developing countries there are few provisions for unemployment insurance in general. But the incentive problem is not absent for that reason. Even for free medical care and health services, or free educational facilities, questions can be raised regarding (1) the extent of the need for these services by the recipients and (2) the extent to which the person could have afforded to pay for these services himself (and might have done so in the absence of free public provisioning). Those who see entitlement to these basic social provisions (medical attention, education and so on) as an inalienable right of citizens would tend to see this kind of questioning as wrongheaded and even perhaps as a distressing denial of the normative principles of a contemporary “society.” That position is certainly defendable up to a point, but given the limitation of economic resources, there are serious choices involved here, which cannot be altogether neglected on grounds of some pre-economic “social” principle. At any rate, the incentive issue has to be addressed if only because the extent of social support that a society would be able to provide must depend in part on costs and incentives.
INCENTIVES, CAPABILITIES AND FUNCTIONINGS
The basic problem of incentives is hard to overcome completely. It is, in general, quite hopeless to look for some indicators that are both relevant for identifying deprivation and—when used as the basis of public support—would not lead to any incentive effects. However, the extent of the incentive effects can vary with the nature and form of the criteria used.
The informational focus of poverty analysis in this work has involved a shift in attention from low income to deprivation of basic capabilities. The central argument for this shift is fundamental rather than strategic. I have argued that capability deprivation is more important as a criterion of disadvantage than is the lowness of income, since income is only instrumentally important and its derivative value is contingent on many social and economic circumstances. That argument can now be supplemented by the suggestion that focusing on capability deprivation has some advantage in preventing incentive distortions compared with working with lowness of income as a criterion for transfer and subsidy. This instrumental argument only adds to the fundamental reason for focusing on capabilities.
The assessment of capabilities has to proceed primarily on the basis of observing a person’s actual functionings, to be supplemented by other information. There is a jump here (from functionings to capabilities), but it need not be a big jump, if only because the valuation of actual functionings is one way of assessing how a person values the options she has. If a person dies prematurely or suffers from a painful and threatening disease, it would be, in most cases, legitimate to conclude that she did have a capability problem.
Of course, in some cases, this will not be true. For example, a person may commit suicide. Or she may starve not out of necessity, but because of a decision to fast. But these are relatively rare occurrences, and can be analyzed on the basis of supplementary information, which would relate, in the case of fasting, to religious practices, or political strategies, or such other reasons for fasting. In principle, it is right to go beyond chosen functionings to assess a person’s capability, but how far one would be able to go would depend on circumstances. Public policy, like politics, is the art of the possible, and this is important to bear in mind in combining theoretical insights with realistic readings of practical feasibility. What is, however, important to emphasize is that even with the informational focus confined to functionings (longevity, health status, literacy and so on), we get a more instructive measure of deprivation than we can from income statistics alone.
There are, of course, problems even in observing functioning achievements of some kinds. But some of the more basic and elementary ones are more amenable to direct observation, and frequently enough provide useful informational bases for antideprivation policies. The informational bases for seeing the need for literacy campaigns, hospital services and nutritional supplementation need not be particularly obscure.43 Furthermore, these needs and handicaps may be less open to strategic distortion than the handicap of low income, since income is often easy to hide, especially in most developing countries. If governmental grants were to be given to people on the ground of their poverty alone (leaving them to pay for medical care, educational facilities and so on out of their own incomes), there is likely to be considerable information manipulation. The focus on functionings and capabilities (extensively used in this work) tends to reduce the difficulties of incentive compatibility. Why so?
First, people may typically be
reluctant to refuse education, foster illnesses or cultivate undernourishment on purely tactical grounds. The priorities of reasoning and choice tend to militate against deliberately promoting these elementary deprivations. There are, of course, exceptions. Among the most distressing accounts of famine relief experiences are occasional reports of some parents keeping one child in the family thoroughly famished so that the family qualifies to get nutritional support (e.g., in the form of take-home food rations)—treating the child, as it were, as a meal ticket.44 But in general such incentive effects in keeping people undernourished, or untreated, or illiterate are relatively rare, for reasons that are not altogether astonishing.
Second, the causal factors underlying some functional deprivations can go much deeper than income deprivation and may be very hard to adjust for purely tactical reasons. For example, physical disabilities, old age, gender characteristics and the like are particularly serious sources of capability handicap because they are beyond the control of the persons involved. And for much the same reason, they are not open to incentive distortions in the way that adjustable features are. This limits the incentive distortions of subsidies targeted on these features.
Third, there is also the somewhat larger issue that the recipients themselves tend to pay more attention to functionings and capabilities achieved (and the quality of life that goes with them) than to just earning more money, and in this way public policy assessment that is done in terms of variables closer to the decisional concerns of individuals may be able to use personal decisions as selection devices. This question relates to the use of self-selection in providing public assistance, with requirement of work and effort, as is frequently practiced in providing famine relief. Only those who are destitute and need money strongly enough to be willing to work reasonably hard for it will volunteer to take up the open opportunities of employment (often at a somewhat low wage), which constitute a widely used form of public relief.45 This type of targeting has been used very successfully in providing famine prevention, and can have a wider role in enhancing the economic opportunities of the able-bodied deprived population.46 The rationale of this approach lies in the fact that the potential recipients’ choices are governed by considerations that are broader than maximization of income earned. Since the individuals involved focus more on overall opportunities (including the human cost of effort as well as the benefit from extra income), public policy making can make intelligent use of this broader concern.