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Efficiency of the markets (contd.)

    Sorry, my earlier message was interrupted.
    As I was saying, we should achieve our objective in a democratic
since we are not prepared to sacrifice human liberties; nor are we
that any alternative framework would take us to our goal faster. This does
not mean that we can make dogmatic statements like 'human rights and
are more precious than wealth'. Tell this to someone who has actually
suffered hunger and deprivation! Man does not live by liberty alone. Also,
due motivation to acquire wealth no society can prosper. Moreover, the
glorious Indian tradition is integrated pursuit of Dharma, Artha, Kama, and
Moksha. Contentious statements are best avoided. We can possibly say that
human rights and liberty are as precious as wealth.
    Our purpose in drafting the Indiapolicy is to build the widest
possible consensus in its favour so that its implementation could be taken
up in right earnest.  Sweeping statements condemning socialism (now part of
the preamble of the Constitution) will not help us much.
    Back to the debate on efficiency of the markets. One thing, as I said,
movement towards free market system does is to widen inequalities. Let us
remember that the share of the bottom 20% of the population in India and
other South Asian countries is  8 to 9%, comparable to the ratios in Japan
and the former Second World countries, while it is hardly 5 or 6% in the
developed capitalist countries. In the U.S. this has declined to less than
4% in recent years. At the least, we have to assure the people of India
the ratio will not be allowed to regress.
    I am aware of the growth theories that justify inequalities because of
contribution to growth via accumulation of larger savings in the hands of
richer people. There is no empirical evidence to support these theories.
Contrary is, perhaps, the case. In the U.S. the share of top 5% went up
16.3% to 20% during the period 1980-95 but savings rate fell from 18.6% to
15.1%, almost entirely due to fall in ratio of savings to after-tax
disposable income. Morover, research staff in the World Bank have done
considerable empirical work and established that the goal of reduction of
inequlaities is not incompatible with economic growth.
    Thus, we cannot talk of a growth target in a free market system
the question of distributuion. We just cannot sell such a policy.
    That said, we must acknowledge the stupendous problems that a
quantitative target for reducing inequailities will throw up. For one
monitoring as an aid to real time economic management will be almost
impossible. Secondly, since markets have a tendency to widen the
inequalities countervailing measures have to be taken up by the state. We
are agreed that the role of state should not be enlarged.
    Moreover, received wisdom in public finance on containing inequalites
has been found wanting. On the tax side, tax structures based on 'rob Peter
to pay Paul' have failed misearbly to achieve the objective. They have also
destroyed the ethical basis of society where even top political leaders
no qualms in telling lies to the tax authorities because of what is
considered as unjust taxation. On the expenditure side too, targetting of
subsidies have not yielded demonstrably good results except where
self-selection is possibe. For example, nutritional programmes to feed
children have generally succeeded. Again, ethics are undermined where
everyone is anxiuos to be included in the target group. In addition, in
cases, there is considerable administrative cost, as much as 20 to 30% of
the amount of tax revenue or expenditure outlay involved.
    How to resolve this dilemma has been the subject matter of my study. My
own inclination is to leave aside the question of inequalities but think of
some minimum for everyone. This will be more in tune with the Indian
tradition as well the political thought from pre-Independence days. From
theoretical point of view, in a situation where the initial distribution of
economic resources is considered unsatisfactory, the second fundamental
theorem of welfare economics can be made to work through lump sum taxes and
transfers. These wiil not impair the efficiency of the free market system.
    Research in public finance has thus far proceeded on the assumption
lumpsum taxes and transfers are not feasible. I am canvassing the idea that
they are feasible. Of this, more later


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