Friday, October 15, 2010

NJ-NY underground tunnel, Demosclerosis and MGNREGA in India- is there a light at the end of the tunnel?

The fact that New Jersey governor, Chris Christie, has not favoured construction of a new tunnel between his state and New York on the grounds that a state that is currently facing multibillion-dollar annual deficits cannot afford a huge new spending project that is already looking to be $5 billion overbudget. His critics however argue that this tunnel is exactly the sort of infrastructure project that New Jersey needs if it’s to prosper in the decades ahead. I was in Princeton for an year (2006-07) and while the NJ transit (the suburban train from NY to Trenton- the District headquarter of New Jersey) could bring you t0 New York in 50 minutes from Princeton junction, the bus journey could take more than an hour and a half with most of the delay occurring as one approaches NY.
While both sides have an argument to support their claim, we must wonder why important infrastructure projects have now become unaffordable. Decades ago, when the federal and state governments were much smaller, they had the means to undertake gigantic new projects, like the Interstate Highway System. But now, when governments are bigger, they don’t.
It is primarily because Governments over the past few decades have become entwined in a series of arrangements that drain money from productive uses and direct it toward unproductive ones. For instance , New Jersey can’t afford to build its tunnel, but benefits packages for the state’s employees are 41 percent more expensive than those offered by the average Fortune 500 company. These benefits costs are rising by 16 percent a year. Likewise, New York City has to strain to finance its schools but must support 10,000 former cops who have retired before age 50.
This phenomenon can be explained by what Jonathan Rauch defines as "demosclerosis" . It means "government's progressive loss of the ability to adapt." Rauch describes it as a side-effect of the postwar style of politics that emphasizes interest-group activism and redistributive programs. The dramatic rise of interest-groups coupled with the public's increasing demands on government, he says, have produced in "an escalating game of beggar-thy-neighbor that damages the economy and chokes the government." Today demosclerosis represents the most serious threat to the long-term vitality of American government in his opinion.
Rauch's principal argument is based on the work of economist Mancur Olson who argued that rational individuals acting in their own best interests fail to achieve their common or group interests. The sum of all the group interests in a pluralist system, he argued, does not equal the general interest. Moreover, the larger the group of people to benefit from some collective action, the weaker the incentive for any particular beneficiary to join or organize the effort. "In other words," Olson wrote, "the larger the group, the less it will further its common interests."
In a stable, democratic society, pressure groups inevitably form to persuade government to redistribute resources their way, Olson argued. Taken one at a time, these benefits have practically no effect on society as a whole, so no countervailing group arises to stop the waste. But, taken as a whole, group demands gradually sap the effectiveness and flexibility of government to the point where no program can be cut and no subsidy eliminated without arousing vehement opposition from some group or another. As the number of interest- groups in a society increases, and as the benefits secured by groups accumulate, the economy rigidifies. By locking out competition and locking in subsidies, interest-groups capture resources that could be put to better use elsewhere. Furthermore, as interest-groups and their perks and deals add up, so do laws and regulations and, by extension, the number of people who administer the laws and regulations.
The problem of interest-groups has little to do with conventional rhetoric about "special interests," according to Rauch. While most Americans feel that they are the victims of interest-group politics, he contends that the public at large has to bear responsibility for the problem. Today seven out of ten Americans belong to at least one organization, and one in four belongs to four or more. As he says, special-interest politics is no longer "special" — it is a mass movement.
"Demosclerosis isn't a problem you solve," Rauch observes. "It's a problem you manage." Moving beyond diagnosis, he offers a number of strategies for cure. For instance, he recommends a zero-sum rule to force Congress to eliminate an old program for every new one it adopts. He also advocates the deregulation of large areas of the economy, like agriculture and communications, to force government supplicants to compete strictly on their own merits.
In the process, it becomes a sort of self indulgence by the Government where they get caught in their own web of perceived popularity and this way future prosperity is compromised. The end result is sclerotic government. The ideal situation is to have a Government that ran surpluses and was dexterous enough to tackle long-term problems as they arose. But we are in a situation where present day Governments are desperately overcommitted in all the wrong ways. Liberal activism has become paralyzed by its own special interests.
Unfortunately, this is becoming a trend of the day and India is no different. About couple of years ago, on the eve of general elections, the Government waived off farmers loans worth 15.5 billion US $ (Rs 70000 crore ) benefitting 130 million farmers. While most of the small and marginal farmers who were on the verge of subsistence cultivation got benefitted, the fact remains that almost all the ‘well to do farmers’ who were otherwise perfectly capable of repaying the loans too availed the benefits of waiver.
Government of India launched a very ambitious scheme of employment generation at the village level under Mahatma Gandhi Rural Employment Guarantee Programme (MGNREGA) aims at enhancing the livelihood security of people in rural areas by guaranteeing hundred days of wage-employment in a financial year to a rural household who volunteer to do unskilled manual work. During 2010-11, about 35 million families have been provided employment under the scheme. It has an annual budget of Rs 11 billion US $. While the scheme is noble in its intentions and creating an employment for 35 million families is certainly credit worthy, what is worrisome is the type of assets created at the village level most of which are non durable and not exactly infrastructure in nature. Construction of kutcha drains or desilting of tanks are not permanent asset creation. The implication of Solow model is that higher levels of investment are required to maintain the required capital-output ratio and creating too much consumption ( by increasing the income without concomitant assets will ultimately slow down the growth over a period of time apart from leading to rising and higher levels of inflation. The Harrod-Domar model also implies that a country with low capital base will gain more by adding capital than consumption. In addition, there are serious constraints in running of MGNREGA. An average of only 33 days employment is generated so far. The CAG reports points out that “The main deficiency was the lack of adequate administrative and technical manpower at the Block and GP levels, especially the Programme Officer, Technical Assistants, and Employment Guarantee Assistants. The lack of manpower adversely affected the preparation of plans, scrutiny, approval, monitoring and measurement of works, and maintenance of the stipulated records at the block and GP level. Besides affecting the implementation of the scheme and the provision of employment, this also impacted adversely on transparency, and made it difficult to verify the provision of the legal guarantee of 100 days of employment on demand." Then, there is the problem of corruption and leakages.
Likewise, the fertilizer subsidy in the country is nearing US $ 13 billion per annum. These are allocations which, however noble, are mainly knocked off by segment that is otherwise fully capable of paying. The poor and marginal farmers are often deprived of the real benefits. However, the rich farmers, through their interest groups and financial power do wield enough clout to ensure that such policies aimed at subsidization are not diluted. The compulsion of politics implies that Government is helpless watching precious resources going in not so much productive uses, a typical case of sclerotic government and something must be done to ensure that infrastructure and capital development is not squeezed out to support current consumption in the name of welfare economics. It is not a sustainable model.

1 comment:

  1. Liked your blog... specially your analysis of MGNREGA.. keep it up