Latest news with #RobertLucas
Hindustan Times
14-07-2025
- Business
- Hindustan Times
The possibilities and limits of the Tamil Nadu model
Drawing attention to the sharp differences in incomes across developing countries, the Nobel-winning economist Robert Lucas had suggested that we should see these differences as possibilities. 'Is there some action a government of India could take that would lead the Indian economy to grow like Indonesia's or Egypt's?' Lucas wrote in an oft-cited 1988 paper (the Indian economy was considered a global developmental laggard then). 'If so, what, exactly? If not, what is it about the 'nature of India' that makes it so? The consequences for human welfare involved in questions like these are simply staggering: Once one starts to think about them, it is hard to think about anything else.' Looking at the stark differences in incomes and human development indicators across Indian states, similar questions come to mind: Is there something that Uttar Pradesh could do to grow like Tamil Nadu or Maharashtra? If so, what exactly? If not, why not? Such questions have gained greater salience as inter-state disparities have widened in recent years. Some economists and policy wonks seem to have found an ideal growth 'model' in the state of Tamil Nadu. With manufacturing accounting for a quarter of the state's economic output, Tamil Nadu is seen as a desi version of Vietnam. Former chief economic advisor Arvind Subramanian has argued that the Tamil Nadu model could be adopted by other states to improve their industrial performance. Venture capitalist-turned-philanthropist Ashish Dhawan has also made similar arguments, praising the role of the state government in hand-holding new investors. Compared to other industrialised states such as Haryana or Maharashtra, Tamil Nadu has more impressive attainments in health and educational outcomes. That makes it more attractive as a developmental model compared to either Kerala (which lacks a modern industrial base) or Gujarat (which has relatively poorer human development outcomes), economist Pranab Bardhan has argued. What lies behind Tamil Nadu's developmental success? A part of the answer lies in the unique political economy of the state. The two major Dravidian parties share a common heritage and have adopted similar policy positions on key socio-economic issues. Both parties were born out of an anti-Brahminical movement going back to the British Raj, and have sought to empower the intermediate castes (OBCs). As some of these communities transitioned from traditional farm-based activities to modern businesses, they received bipartisan support from the state's politicians. Entrepreneurs were never seen as 'class enemies' to begin with, and continue to enjoy greater social legitimacy than in many other parts of the country. Dravidian ideologues advocated industrialisation and modernisation of the economy so that Tamil society could break free from the shackles of caste-based occupations and hierarchical traditions, economists Kalaiyarasan A and Vijayabaskar M wrote in their 2021 book, The Dravidian Model. The Dravidian ideologues envisioned a democratisation of capitalist activities, and promoted the interests of local businessmen, the duo argue. The pro-business tilt in the state's policy stance has endured despite a series of corruption scandals over the past three decades. Any state-level policymaker who wishes to emulate the Tamil Nadu model must also note its limits. Over the past decade, Tamil Nadu's share in manufacturing employment has declined even as those of other states have increased. While the organised manufacturing sector has grown rapidly, the unorganised sector seems to have languished. Since the unorganised sector employs more people, the gains in employment have been much less impressive than the gains in manufacturing output. Second, despite the state government's significant investments in health and education, a growing section of the state's population has been turning to private educational and health care providers in search of better quality, as Kalaiyarasan and Vijayabaskar note. Third, the state government's OBC-friendly tilt in social policies seem to have benefited some sub-castes (or jatis) much more than others. For instance, in 2007, Tamil Nadu abolished the common entrance test (CET) for admissions to professional courses since it was deemed to favour socially privileged communities (who could afford private coaching). While the move helped widen access to technical education, it is the better-off communities within OBCs that gained most, a 2019 analysis by R Srinivasan and N Raghunath showed. Despite these limitations, Tamil Nadu's track record in delivering inclusive growth remains better than most other states. The southern state offers useful lessons for other regions. However, it may not be easy to replicate the Dravidian model in toto, since that model rests on an unique demographic endowment. Most Tamils belong to lower caste groups and hence it has been relatively easy to build a consensus in favour of egalitarian policies in the state. Upper castes account for only 2% of Tamil Nadu's population according to the last National Family Health Survey. In states such as Uttar Pradesh — where upper castes account for nearly a fourth of the population — the Dravidian model may not be easy to implement. Yet, if Uttar Pradesh were to achieve a (Tamil Nadu-style) political consensus on socio-economic reforms, it will find it easier to generate inclusive growth. Pramit Bhattacharya is a Chennai-based journalist. The views expressed are personal.
The Guardian
09-03-2025
- Business
- The Guardian
‘Military Keynesianism'? Reeves faces British defence dilemma after EU spending surge
As the Nobel laureate Robert Lucas quipped during the 2008 financial crisis: 'I guess everyone is a Keynesian in a foxhole.' Donald Trump's upending of the postwar security consensus has underlined the enduring wisdom of Lucas's observation. But now, instead of bank bailouts and emergency bond buying, European firepower is being directed at bombs, tanks and drones in the desperate fight to secure the continent's border with Russia. Berlin and Brussels – typically capitals of financial orthodoxy – have been convinced that this approach is required once again. Under the plan put forward by Germany's chancellor-in-waiting, Friedrich Merz, Berlin is on the brink of relaxing its 'debt brake' rule to pave the way for spending on defence and infrastructure worth an additional €1tn (£840bn) over the coming decade. The EU, too, is at a 'watershed moment', having agreed an €800bn plan allowing member states to ramp up borrowing for their defence spending, under an 'escape clause' from its stability and growth pact debt rules. It is being chalked up as one of the most remarkable shifts in European economic policy in decades. But for Britain, a more old-fashioned approach still prevails, with the chancellor, Rachel Reeves, insisting that her self-imposed fiscal rules remain 'non-negotiable'. Rather than allow for a rise in borrowing, Labour's plan to increase defence expenditure from 2.3% of GDP to 2.5% by 2027 involved a corresponding cut for the overseas aid budget. Pushing spending higher still would require further 'difficult decisions', Reeves has suggested. The Treasury accepts the world has changed and that higher defence spending is a necessity, but with a tight fiscal position in advance of an already tough spring statement for the chancellor, paying for it will involve difficult decisions to find savings elsewhere. There are hopes in Labour circles that Britain will follow Germany's 'military Keynesianism', but the Treasury view has not shifted that much. Reeves still believes in it enough to stick to fiscal rules that, after all, were only announced less than six months ago. That is, in part, understandable. Fresh in Reeves's mind will be the bond market turbulence at the start of this year, in which the British government was in the eye of a global storm. Mostly that was driven by investor fears over Trump's inflationary policies. But there was also a UK-specific overlay. Reeves could point to the sharp rise in German yields last week. On Wednesday, the yield – in effect, the interest rate – on Germany's 10-year bonds rose by the largest amount in a single day since March 1990. She could also point to France, where even with newfound EU political cover, Emmanuel Macron could find he is still restricted by a rumbling political and fiscal crisis. In a divided Bundestag, Merz, too, has domestic roadblocks to overcome. Britain and Germany are at different starting points. Despite its deep economic troubles, Berlin, unlike London, has a recent history of recording budget surpluses before the onset of the Covid pandemic. Its debt-to-GDP ratio is close to 63%, compared with almost 100% for Britain. Even though German borrowing costs have risen sharply, yields remain significantly below those of the US and the UK, at about 2.8% for 10-year borrowing, compared with 4.6% for the UK. That said, Reeves is being held back by politics more than economics. The government could make the case that higher borrowing today can be a down payment on stronger economic growth. Across the Channel, that is exactly what investors anticipate. Before this month's spring statement, it is widely thought higher government borrowing costs will break Reeves's fiscal rules, fuelling speculation about cuts to the welfare budget. But the Institute for Fiscal Studies reckons a small breach could be overlooked: 'There is no meaningful economic difference between a forecast for a small current budget surplus in 2029-30 and a forecast for a small current budget deficit,' the thinktank suggests. Still, the chancellor is hamstrung after promising before the election not to increase taxes, and having signalled the virtue of balancing the books to draw a neat dividing line with the Tories' Liz Truss experiment. That position may not be tenable for much longer. Whittling away at government spending threatens to undermine Labour's other promises: of fixing public services, avoiding a return to austerity and growing the economy. It is a point made clearer by growing disquiet within Labour ranks, and by the government's sliding opinion poll rating. So watch this space: it may not be wise to burrow much further into a fiscal foxhole.
