How the mallus of Kerala made it

The rest of India has always tended to ogle at Kerala and the mallus.

Even before they had taken over not just the government of India --  and simultaneously become its main opposition in 2004 (a political yin and yang if ever there was one) -- the question was being asked: how do the mallus manage to be so well off without working? The Biharis and the UP bhaiyyas were especially outraged: ee padhai likhai ka chamtkar hai, babua?

They were not alone. The other bunch of layabouts  -- economists -- too were puzzled. So no less than a personage that His Nibs, Amartya Sen, and his colleague at Harvard, Martha Nussbaum, came up with this new theory, now known as the capabilities approach to growth.

Here what matters is not the usual caboodle of savings, investments, skills, organisation and technology etc but 'substantial freedoms'. These are things like longevity, political and economic freedom, good health, good education, clean environment etc.

What matters is not just how people function but whether they have the capability to be able to function as they choose. Growth, they said, happens when people are happy inside.

Narendar Pani, a former colleague of mine at The Economic Times, who has now reverted to type and become an economist at the National Institute for Advanced Studies (NIAS),  Bangalore  and his colleague there, Jafar K, have now come up with a paper* that tells us just how it is that the mallus made it -- of having their cake and eating it too.

"Kerala's image of a low growth state with high social indices has come up against some striking empirical trends," they say. "Its growth rate has taken off, it has become vastly less agrarian, and has yet refused to urbanise." Their explanation: it is all a result of the state's limited use of the capabilities approach.

They show how "the capabilities approach can affect patterns of growth as well as the transition of agrarian economies into non-agrarian ones. This in turn can affect the process of urbanisation, contributing to the creation of non-agrarian villages."

The critical juncture, say the authors, was the election of the Communist government in 1957 and the priorities it established. Like Banquo's ghost, these lingered on. The focus was on improving social opportunities, especially education and health care facilities, at a time of low growth.

This became the 'Kerala Model'. "It is often the cornerstone of arguments against a preoccupation with growth alone and forms a part of Amartya Sen's case for seeing development as freedom."

Things remained sluggish for about two decades but then, after 1987, growth started..  Economists were foxed: how could a state where there was so little investment, grow so rapidly? Amartya Sen came to the rescue.But of course there were other factors as well: "remittances that were growing very slowly during the earlier period began to gather momentum by 1987-88 and took off after 1991." Devaluation throughout the 1990s also helped.

So investment did take place, except not in factories because the mallus were so unionised. Jeffrey Sachs, being American, was one of those who was not just foxed but also quite incensed. He just couldn't figure it out.

The authors also say that the "marginal propensity to save of remittances was not just higher than that of domestic income, but also doubled over the period 1991-92 to 1999-2000 compared to the period 1980-81 to 1990-91". The share of construction increased from 4.0 per cent to 9.3 per cent, that of transport, storage and communication from 6.0 percent to 9.2 percent and Other Services from 15.2 per cent to 17.2 per cent.

Well, then, high incomes, high savings and, one must assume therefore, high investment: was growth such a mystery, after all? Did the world needed a new theory to explain it?

The only mystery was how Kerala did not urbanise and non-agrarian villages grew. Pani and Jafar attribute this to the emphasis on social development and the capabilities approach. They may well be right, I don't know; but two things do need pointing out in the Kerala context.

One, thanks to fiscal devolution, Kerala was able to sponge off the other states and the Indian Union. And thanks to out-migration, it exported its worst problem, namely, educated unemployment. Bihar, here the Sen-type freedoms are in very short supply,  is now emulating these two aspects of the Kerala model. It seems to be doing well, too. So what price capabilities?

Someone -- perhaps Pani and Jafar -- should conduct a comparative analysis?

*Capabilities, growth and non-agrarian villages: Second phase of the Kerala Model, National Institute of Advanced Studies, Bangalore