The Fallacy of Inclusive Growth

Underneath the warm glow it evokes, is there more to the idea of “inclusive growth” than meets the eye? Can inclusive growth ever deliver on its promise of rapid growth with real, out-of-turn benefits for the poor, or is it another pie in the sky, in the way our fixation with the mixed economy turned out to be? Is it possible that an idea you just cannot say no to, is actually deeply flawed at the level of its very DNA?

Here’s an analogy that sheds some light.

Imagine a typical class in a typical school. The greater number of students, say, about 40 percent, falls into the category of the average, neither good nor particularly bad. About 20 percent are above average and some in this lot are truly brilliant students. Those in the bottom 20 percent are laggards and way behind the rest of the class.

If a strategy similar to that implied by inclusive growth were to be followed, it would mean that the teachers would devote a disproportionate share of their time, and the school would devote a disproportionate share of its resources, to focus on the bottom 20 percent, hoping to bring their performance up by a notch or two. The average students would perhaps suffer only marginally under this policy, but the top 20 percent comprising the above average and the brilliant, would suffer grievously.

They will suffer not because they find themselves falling back into the middling, mediocre lot, but in terms of that higher potential within them that would now go wasted. Their sophisticated questions and doubts in the mind about topics ahead of their class level will not be entertained. The library will not carry the advanced and higher level books that could whet their curiosity and sate their thirst for knowledge.

When this class graduates, there will be a far greater degree of equality in the grades of the students. However, this equality would have been achieved as much by pulling up the bottom 20 percent as by stifling the top 20 percent. In real life, it is extremely unlikely that with extra attention and focus, the under-achievers get transformed into over-achievers. It’s more likely that some, perhaps many, succeed in making the transition from laggards to the average category. In other words, where these students were originally destined for low level occupations not requiring academic competence—a factory worker, a cab-driver, a mason, a carpenter—they would now be pulled up to become book-keepers, shop assistants, bank-tellers, machine operators etc.

At this point, it’s easy to conclude that the policy has worked because it has brought about a much-needed improvement in the bottom-most layer. Isn’t this the very purpose of inclusion, and a key social objective?

Well, not so fast. Think as well of what we stand to lose.

Because of their innate talent and enterprise, the upper layer will continue to remain at the top. Students from this category will still go on to become qualified engineers, scientists, doctors, managers etc., but with a crucial difference. The scientists will now turn out to be run of the mill scientists, competent enough for routine experimentation but quite removed from that cutting edge of research that generates inventions and discoveries, or the advances that push back the frontiers of knowledge. There will be far fewer of those doctors and engineers who have the ability in them to blaze a new trail with new cures and new technologies. And, there will be fewer managers with skills to innovate, to think of new ways to improve efficiency and cut costs, and to make available to consumers more and more at lower prices.

How does it matter? Does it really add up to a significant loss to the economy? Consider this.

The wealth created, or the economic value added—a chunk of which, incidentally, ends up with the government as tax—when an ordinary scientist, engineer or doctor becomes a brilliant one is far more than when a plumber is pulled up to become a bank teller. This point is well recognised in free market economies where incremental talent is accordingly rewarded so extravagantly. Top managers, lawyers, doctors, sportspersons etc. earn so much more not because their talent is twice or thrice that of their lesser peers but because that edge, the extra something they bring to their profession, generates so much more value for their customers, their employers, and by extension, for the wider economy. When a scientist is competent, he can be trusted with the routine stuff. When he’s brilliant, he’s capable of inventions and discoveries.

He acquires the ability to re-write the rules of the game and becomes a game-changer. Over a period of time, game-changers go on to change for the better the lives of people around them.

That’s why a Sachin Tendulkar may not be twice the batsman that a Gautam Gambhir or Suresh Raina is, but he earns many, many times more. It’s also a pointer to why the U.S., one of the most dynamic free market economies in the world, is also its most technologically advanced, with an outsized share of the Nobel Prizes every year. It’s also—no surprise here—the richest and most powerful country in the world.

Remarkably, even as the talented have thrived in the U.S., its ordinary working people too have done very well for themselves. A revealing example is that of car ownership. If we reckon car ownership as a measure of inclusion, the U.S. is the most inclusive society in the world. The fact is, this country has almost as many cars as there are people. Here, you can be poor and broke, on the dole or surviving on food stamps, and chances are you would still have a car.

It was not always like this. Not until Henry Ford came along with his Model T car. Introduced in 1909, it first sold for about $850 when competing cars cost more than $2000. By 1915, the price had dropped to $440 and efficiency at the assembly line had increased so much that it took only 93 minutes to assemble one car. At the time of the launch in 1909, the cars were assembled by hand and each car took 12.5 hours to put together. By the time production of the Model T ceased in 1927, over 15 million of these had been made (a record that stood its ground until 1972 when it was overtaken by the Volkswagen Beetle) and life in America had changed for the better for so many of its ordinary working people. All because of one man who changed the rules of the game, and ended up changing millions of lives for the better.

Henry Ford succeeded in America because soon after he started with the Model T, he could discontinue assembly by hand and switchover to mass production techniques, redeploying and rationalising his operations and work-force the way he thought fit. Ironically, more than eighty years after the last of the Model T had rolled off the production line, when a leading Indian airline struggling with rising costs and losses wanted to retrench about 1900 of its work-force during a time of global recession, there was an outcry, and the whole country—the government, the opposition, the media and the wider public—came down upon it with such a heavy hand, it was forced to back down. Without exaggeration, a Henry Ford in India would have died a bitter, broken man.

Inclusive growth may (or may not) deliver on its promise of inclusion but, because it willy-nilly implies a lid on talent and enterprise, it will certainly extract an unreasonable cost from the economy. This cost is paid in the form of opportunities missed, and the life-changing experiences foregone.

Think of a long distance race where a few runners sprint ahead, others follow behind, and some at the back fall down in sheer exhaustion. The welfare state goes out of its way to care for those who collapse onto the tracks (the so-called safety net). But inclusive growth is about actively managing the outcome of the race; those who elbow their way ahead of the pack are imposed a handicap to slow them down, while all manner of extra advantages are given at great cost to those following behind. The grand idea is that as the race heads to a conclusion, all the runners would be bunched together at the finishing line in a heart-warming display of cohesion. Not surprisingly, it is a race that never sets records; it is a race of, and for, the also-rans; a race that ennobles performance below human potential, nothing but a feel-good name for mediocrity.

I began this essay with a mundane example of a typical class in a typical school. Here’s an example from the realm of fantasy to drive home the same point. Imagine that the process of evolution was under control of a government with overriding faith in “inclusive evolution”. Somewhere around the time that homo-sapiens evolved into hunter-gatherers, the mandarins in the bureaucracy suddenly wake up to the fact that this species has left behind others in the ape family and, what is more, was threatening to pull way ahead of the pack. The official machinery now kicks into overdrive.

The homo-sapiens is ordered to be held back at the level of the hunter-gatherer while resources get poured into training chimps and gorillas in the fashioning and use of tools. No, this is not all. The consequences can be truly horrifying where the government determines that the relevant yardstick is not just disparity within the ape family, but within all living organisms, and resources are diverted into enabling the amoebae and other protozoa to catch up.

Time and tide wait for no man. As we slow down in the cause of inclusion, we allow others around us to zip ahead of us. Before we even know it, we end up slowing down a lot more than what we had bargained for. And, when we push hard on the accelerator to make up for lost time, we discover the engine has little extra power in reserve.

It has happened before and, going by the evidence today, it is happening all over again.

(Part 2 will look at the flawed economics of inclusive growth)