The Hindu Business Line : Golden Rule of <I>Gandhigiri</I>

Wages of rich and poor employees (including their perks) should be raised in such a manner that both multiply the economy by the same factor. Such a rule will combine economic justice with national interest. This, says P. V. INDIRESAN, should be one of the new Golden Rules.

Now that Prof Edmund Phelps has won the Economics Nobel, the expression "the Golden Rule" is bound to become a buzzword. His Nobel will give fresh impetus to the Washington Consensus — liberalisation of trade, privatisation/globalisation of productive enterprises, fiscal prudence.

Prof Phelps's theories are based on Western experience. How far are they valid in a poor country enmeshed in divisive politics the way India is? To word the question positively, what should India do to benefit from the findings of the Nobel Professor?

Touchstone for capitalism

Herman De Soto, the Peruvian economist, who too may get the Economics Nobel one day, addresses that question in his book The Mystery of Capital. He asks: "Why capitalism triumphs in the West and fails everywhere else?" As a matter of fact, most of South America has turned away from thoroughbred capitalism and is opting for rulers with a socialist bias. The much-touted Washington Consensus has become a dirty word in those countries. Then, will capitalism triumph in India the way it has in the West or will it fail the way it has repeatedly in South America?

Poverty in the West and in India are qualitatively different. Some years ago, an American Congressman wished to see a slum in Mumbai and was taken to Dharavi, reputedly the world's largest slum. He was amazed. He is reported to have remarked: "This is not a slum but a vibrant economy!" Dharavi's poor people work hard; in American slums, their poor stand for hours at street-corners doing nothing. In India, though the poor work hard, they are underfed. In the US, the poor are overfed and yet will not work (or cannot work).

Wages of poor

According to a Biblical exhortation, the labourer is worthy of his hire. Evidently, that does not apply in India. Wages of the poor in India are below subsistence levels. In India, if even that Biblical injunction has failed, how much better will the ideas of Prof Phelps succeed?

Let us face it: The West is West and the East is East; the twain are different. What the West needs is growth — better houses, bigger cars, longer holidays and so on; more of what it already has. In contrast, India needs development: basic amenities like running water, smokeless fuel, nutritious food, schools that teach children, dispensaries that attend to patients, buses that connect to markets — goods and services which it never had. The West wants luxuries; India's needs are basic.

Not long ago, we had a large surplus of foodgrains that rotted in godowns. Had there been economic justice (or wisdom), all of that rotting grain would have been stored in the stomachs of the poor. All that food had no takers because the poor did not have enough money to buy it. In other words, India's poverty will not necessarily be remedied by increasing supply but only by empowering the poor to demand more.

Bother of dual economy

Prof Phelps talks of inter-generational justice. In his country, retired people are prospering at the expense of younger working people. Burden of pensions of government officials is getting worrisome in India too, but it is not yet acute as it is in the US. What bothers India more is its dual economy: The sharp differentiation between the organised sector and the unorganised one. In the West, inter-generational justice is the pressing problem; in India, inter-sectoral justice is the problem.

According to theory, wages in a market economy will find a common level; the Invisible Hand of the forces of competition will automatically correct wage differentials. Unfortunately, India is subject to pulls from two opposite directions: Fear of losing talented staff to the West forces wages up in the export sector; competition from unemployed youth forces wages down in the domestic market. We are suffering simultaneously from both scarcity of labour and a surplus of it — scarcity of skilled labour and excess of unskilled labour.

In this situation, logic of the market compels employers to raise wages of the highly paid faster than for the underpaid. As a result, the rich-poor gap is widening. Just as Prof Phelps has a Golden Rule for savings and return on capital, we need a different Golden Rule linking wage and skill. Just as Prof Phelps talks of inter-generational justice, we should think of justice between the skilled and the unskilled.

Two sides of a coin

The money businessmen can earn is like a coin; it has two sides. It depends both on how much they sell and how much consumers buy. Forgetting that basic principle, Indian employers look at labourers as pure producers and not as consumers.

In the West, those with limited skills — sweepers, bus drivers, building labourers, waitresses are paid well enough to consume well even though their productivity is low; no more than that of their Indian counterparts.

That arch-capitalist, Henry Ford, priced his cars and paid his wages in such a manner that his labourers could buy the cars they made. There is a lesson which we have not learnt as yet.

Every extra rupee paid to an employee is not completely lost to the employer. It goes round the market several times depending on how much of it is spent on locally-produced goods and services. It multiplies demand and increases business opportunities for employers.

Most of the raise given to the poor will be spent on indigenous goods. A larger part of the raise offered to highly paid employees will be spent on imported goods and services — petrol-guzzling cars, foreign holidays and the like. Relatively, the poor circulate money within the country better than the rich do. (The standard expression for GNP, Y = C + I + G + X - M can be re-written tautologically as Y = Value added in exports divided by (1 - Swadeshi Spirit) where Swadeshi Spirit is the fraction of indigenous goods consumed to total consumption. Then, one per cent increase in value added in exports will increase the GNP by the same one per cent, but one per cent increase in the consumption of indigenous goods, say, from 90 to 90.9 per cent will increase GNP by nearly 10 per cent.)

Then, each additional rupee paid to the poor will multiply the Indian economy much more than the same rupee added to rich employees. Hence, it is not charity, it is in the national interest, to raise the wages of the poor faster than the salaries of the highly paid.

Our employers ask how little they can pay and get away with it. They should be asking instead how much more their employees can consume and how much of that extra consumption will benefit the economy and consequentially benefit their own business.

Then, consider a new Golden Rule: Wages of rich and poor employees (including their perks) should be raised in such a manner both multiply the economy by the same factor. Such a rule will combine economic justice with national interest. As Gandhigiri is the latest buzzword in India, considering its linkage to swadeshi, we may call this rule, the Golden Rule of Gandhigiri economics.

As advertisers are fond of inserting, conditions apply. More of that the next time when we will also look at another similar Golden Rule for correcting rural-urban disparity.

(This is 186th in the Vision 2020 series. The previous article was published on October 16)

(To be continued)

(The author is a former Director of IIT Madras. Response may be sent to indiresan@gmail.com)

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