Saturday, January 1, 2011

Time to scrap Planning Commission

Time to scrap Planning Commission by Sauvik Chakraverti

Economics is about the allocation of resources and something is very wrong with the manner in which resources have been allocated in India. Money has not been invested in the "infrastructure". Technically speaking, it can be said that "planning" has diverted scarce resources away from public goods especially roads to finance statist schemes, Laloo's fodder and the entire politico-administrative spoils system. The theoretical shortcomings of central economic planning, with which we continue, therefore needs to be thoroughly examined.

Resources can be allocated through two markets: the private market and the political market. The principal players of the private market are businessmen and consumers. The principal players of the political market are politicians, bureaucrats, vested interest groups and voters. In the private market, everyone is assumed to be working in their self-interest, trying to obtain the best deals. Towards this end, they possess the incentives to minimise costs, trace out and correct past mistakes, to innovate and to acquire all the necessary information. Resource allocation through private markets is therefore `efficient'. Political markets are different. The self-interest of its participants works to disprove its claim to `intellectual-moral superiority'.

Politicians are primarily interested in re-election, and will pursue expenditures that will return them to seats of power. They will lavish money on `populist' measures. Our State Electricity Boards have all been bankrupted by politicians allocating scarce resources through the political market.

The self-interest of bureaucrats comes into play in two ways. First, they will tend to protect their `turf', and second, they will `rationally' seek the maximum possible budgets for their departments. All over the world, this led to the phenomenal growth of statal budgets, which refused to come under control despite strong political will. A nation with a history of imprudent deficit financing, whose completely dysfunctional bureaucratic machine has just extracted huge undeserved pay awards in the face of a spiralling deficit, should note that a vast, entrenched bureaucratic system is not as `benevolent' as it is assumed to be.

Judging from the self-interest of the participants in the political market, it seems fairly obvious that if this nation continues to place reliance on planning as a system of resource allocation, the real wealth of the country will simply be frittered away. The theory of planning assumes away all imperfections in the planners. They are supposed to be dispassionate experts. This theory does not look into the motivations of the players in the political market.

The same point can be put another way. There are four ways of spending money. You can spend your own money on yourself; you can spend your own money on someone else gifts; you can spend someone else's money on yourself as on the `company account'; or you can spend someone else's money on someone else planning. Efficient resource allocation occurs when all the wealth of society is well invested. That will only happen when people spend money in a manner that seeks to minimise costs and maximise benefits. People who spend other people's money on other people do not spend money efficiently. We live in a country that has opted to place maximum reliance on the state in resource allocation. Statal personnel have no interest in spending money efficiently.

Development planning in India also rests on very shaky economics. For example: employment is not `generated' when taxpayers' money is spent by the state. If the taxpayers had spent the money themselves, or invested in the market, the same amount of employment would have occurred `efficiently'. The fatal errors of the Planning Commission's development economics on poverty, population, urbanisation and especially on the key question that all development economists must answer, how do we become `developed'?, makes it an institution that should be immediately scrapped, and its false ideas discarded. Let the private market guide resource allocation. And let the public purse invest in what our great planners have not public good.