Development as Freedom (24 page)
Read Development as Freedom Online
Authors: Amartya Sen
Tags: #Non Fiction, #Economics, #Politics, #Democracy
Since the potential beneficiaries are also agents of action, the art of “targeting” is far less simple than some advocates of means-testing tend to assume. It is important to take note of the problems involved in fine-tuned targeting in general and means-testing in particular, especially since the case for such targeting is, in principle, quite strong and cogent. The possible distortions that may result from attempts at ambitious targeting include the following.
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1)
Information distortion:
Any policing system that tries to catch the “cheats” who understate their financial circumstances would make mistakes from time to time and disqualify some bona fide cases. No less important, it would discourage some who are genuinely qualified (to receive the intended benefits) from applying for the benefits to which they are entitled. Given the asymmetry of information, it is not possible to eliminate cheating without putting some of the honest beneficiaries at considerable risk.
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In trying to eliminate the “type 1” error of including the non-needy among the needy, serious “type 2” errors of not including some really needy people among the listed needy would very likely be committed.
2)
Incentive distortion:
Informational distortion cooks the books, but does not, on its own, alter the underlying real economic situation. But targeted support can
also
affect people’s economic behavior. For example, the prospect of losing the support if one were to earn too much can be a deterrent for economic activities. It would be
natural to expect that there would be
some
significant distorting shifts if the qualification for the support is based on a variable (such as income) that is freely adjustable through changing one’s economic behavior. The
social
costs of behavioral shifts must include, among other things, the loss of the fruits of economic activities forgone.
3)
Disutility and stigma:
A system of support that requires a person to be identified as poor (and is seen as a special benefaction for those who cannot fully fend for themselves) would tend to have some effects on one’s self-respect as well as on respect by others. This may distort the seeking of help, but also there are direct costs and losses involved in feeling—and being—stigmatized. Since the matter of self-respect is often taken by policy leaders to be of rather marginal interest (and considered to be a rather “genteel” concern), I take the liberty of referring to John Rawls’s argument that self-respect is “perhaps the most important primary good” on which a theory of justice as fairness has to concentrate.
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4)
Administrative costs, invasive loss and corruption:
The procedure of targeting can involve substantial administrative costs—in the form of both resource expenditures and bureaucratic delays—and also losses of individual privacy and autonomy involved in the need for extensive disclosure and the associated program of investigation and policing. There are, furthermore, social costs of asymmetrical power that the potentates of bureaucracy enjoy vis-à-vis the supplicating applicants. And, it should be added, there is greater possibility of corruption here since the potentates acquire, in a targeting system, the power to bestow benefits for which the beneficiaries may be willing to make a facilitating payment.
5)
Political sustainability and quality:
The beneficiaries of targeted social support are often quite weak politically and may lack the clout to sustain the programs in political jostling, or to maintain the quality of the services offered. In the United States, this consideration has been the basis of some well-known arguments for having “universal” programs, which would receive wider support, rather than heavily targeted ones confined only to the poorest.
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Something of this argument cannot but relate to the poorer countries as well.
The point of outlining these difficulties is not to suggest that targeting must be pointless or always problematic, but only to note that
there are considerations that run counter to the simple argument for maximal targeting. Targeting is, in fact, an
attempt
—not a
result
. Even when
successfully
targeted outcomes would be just right, it does not necessarily follow that attempts in the form of targeted programs would produce those outcomes. Since the case for means-testing and for heavy targeting has gained so much ground recently in public circles (based on rather elementary reasoning), the messiness and the disincentive effects of the proposed policy are also worth emphasizing.
It would be rather hopeless to try to get a case for a universal endorsement or a universal rejection of means-testing on the basis of very general arguments, and the relevance of the preceding discussion lies mainly in pointing to the contrary arguments that exist side by side with the arguments in favor of fine-tuned means-testing. In practice, in this field (as in many others already considered), compromises would have to be made. In a general work of this kind, it would be a mistake to look for some particular “formula” for an optimum compromise. The right approach would have to be sensitive to the circumstances involved—both the nature of the public services to be offered and the characteristics of the society to which they are to be offered. The latter must include the hold of behavioral values of different kinds, which influence individual choices and incentives.
However, the basic issues confronted here are of some general interest for the main approach of this book, and involve both the importance of agency (seeing people as agents rather than as patients) and the informational focus on capability deprivation (rather than only on income poverty). The first question relates to the need, emphasized throughout this work, to see people—even beneficiaries—as agents rather than as motionless patients. The objects of “targeting” are active themselves, and their activities can make the targeting-achievements quite different from targeting-attempts (for reasons already discussed).
The second question relates to the informational aspects of targeting; these include the identifiability of the characteristics relevant for the chosen system of allocation. Here the shift in attention from just income poverty to the deprivation of capabilities helps the task
of identifiability. While means-testing still requires that incomes and the ability to pay be identified, nevertheless the other part of the exercise is helped by the direct diagnosis of capability handicap (such as being ill or illiterate). This is a part—an important part—of the information task of public provisioning.
I turn now to the problem of financial prudence, which has become a major concern across the world in recent decades. The demands for conservatism in finance are very strong now, since the disruptive effects of excessive inflation and instability have come to be widely studied and discussed. Indeed, finance is a subject in which conservatism has some evident merit, and prudence in this field can easily take a conservative form. But we have to be clear as to what financial conservatism demands and why.
The point of financial conservatism is not so much the apparently conspicuous merit of “living within one’s means,” even though that rhetoric has much appeal. As Mr. Micawber put it rather eloquently in Charles Dickens’s
David Copperfield:
“Annual income twenty pounds, annual expenditure nineteen six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought six, result misery.” The analogy with personal solvency has been powerfully used by many financial conservatives, perhaps most eloquently by Margaret Thatcher. This argument does not, however, provide a clear rule for state policy. Unlike Mr. Micawber, a state
can
continue to spend more than it earns, through borrowing and other means. In fact, nearly every state does so nearly all the time.
The real issue is not whether this can be done (it certainly can be), but what the
effects
of financial overspending might be. The basic issue to be faced, therefore, is the consequential importance of what is sometimes called “macroeconomic stability,” in particular the absence of serious inflationary pressure. The case for financial conservatism lies, to a great extent, in the recognition that price stability is important and that it can be deeply threatened by fiscal indulgence and irresponsibility.
What evidence do we have about the pernicious effects of inflation? In a powerful critical survey of international experiences in this
area, Michael Bruno notes that “several recorded episodes of moderate inflation (20–40 percent [price rise per year]) and most instances of higher rates of inflation (of which there have been a substantial number) suggest that high inflation goes together with significant negative growth effects.” And, “conversely, the cumulative evidence suggests that sharp stabilization from high inflation brings very strong positive growth effects over even the short to medium run.”
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The policy conclusion to be drawn here requires some subtlety. Bruno also finds that “the growth effects of inflation are at best obscure at low rates of inflation (less than 15–20 percent annually).” He goes on to ask the question: “why worry about low rates of inflation, especially if the costs of
anticipated
inflation can be avoided (by indexation) and those of
unanticipated
inflation seem to be low?”
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Bruno also points out that “while the root of all high inflations is a financial deficit (and often, though not always, the monetary finance of it), this in turn can be consistent with multiple inflationary equilibria.”
The real problem lies in the fact that “inflation is an inherently persistent process and, moreover, the degree of persistence tends to increase with the rate of inflation.” Bruno presents a clear picture of how such acceleration of inflation takes place, and makes the lesson graphic with an analogy: “chronic inflation tends to resemble smoking: once you [are] beyond a minimal number it is very difficult to escape a worsening addiction.” In fact, “when shocks occur (e.g. a personal crisis for a smoker, a price crisis for an economy) there is great chance that the severity of the habit … will jump to a new, higher level that persists even after the shock has abated,” and this process can repeat itself.
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This is a quintessentially conservative argument, and a very persuasive one it is, based as it is on a rich set of international comparisons. I have no difficulty in endorsing both the analysis and the conclusions drawn by Michael Bruno. What is, however, important to do is to keep track of exactly what has been established and also to see what the demand of financial conservatism really is. It is, in particular,
not
a demand for what I would call the anti-inflationary radicalism that is often confused with financial conservatism. The case made is not for eliminating inflation altogether—irrespective of what has to be sacrificed for that end. Rather, the lesson is to keep in
view the likely costs of tolerating inflation against the costs of reducing it, or of eliminating it altogether. The critical issue is to avoid the “dynamic instability” that even seemingly stable chronic inflation tends to have, if it is above a low figure. The policy lesson that Bruno draws is: “The combination of costly stabilization at low rates of inflation and the upward bias of inflationary persistence provide a growth-cost related argument for keeping inflation low even though the large growth costs seem to be directly observed only at higher inflations.”
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The thing to avoid, in this argument, is not just
high
inflation, but—because of dynamic instability—even
moderate
inflation.
However, radicalism in the cause of zero inflation does not emerge here either as particularly wise, or even as the appropriate reading of the demands of financial conservatism. The “clouding” of distinct issues is seen clearly enough in the ongoing fixation with balancing the budget in the United States, which resulted not long ago in partial shutdowns of the U.S. government (and threats of more extensive closures). This has led to an uneasy compromise between the White House and the Congress—a compromise the success of which is rather contingent on the short-run performance of the U.S. economy.
Anti-deficit radicalism
has to be distinguished from genuine
financial conservatism
. There is indeed a strong case for reducing the large budget deficits that are seen in many countries in the world (often made worse by huge burdens of national debt and high rates of its escalation). But this argument must not be confused with the extremism of trying to eliminate budget deficits
altogether
with great rapidity (no matter what the social cost of this might be).
Europe has much more reason to be concerned about budget deficits than the United States has. For one thing, the U.S. budget deficits have been, for many years now, moderate enough to be below the “norms” set up by the Maastricht Agreement for the European Monetary Union (a budget deficit of no more than 3 percent of gross domestic product). There seems to be no deficit at all, at this time. In contrast, most of the European countries had—and still have—rather substantial deficits. It is appropriate that several of these countries are currently making determined attempts to cut the levels of these large deficits (Italy has provided an impressive example of this in recent years).
If there is a question to be raised still, this concerns the overall priorities of European policies—an issue that was discussed earlier, in
chapter 4
. The point at issue is whether it makes sense to give absolute priority to one objective only, viz., the avoidance of inflation (a priority formalized by many central banks in Western Europe), while tolerating remarkably high rates of unemployment. If the analysis presented in this book is right, the making of public policy in Europe has to give real priority to eliminating the capability deprivation that severe unemployment entails.
