Development as Freedom (23 page)

It is in this context rather remarkable that some market enthusiasts recommend now to the developing countries that they should rely fully on the free market even for basic education—thereby withholding from them the very process of educational expansion that was crucial in rapidly spreading literacy in Europe, North America, Japan, and East Asia in the past. The alleged followers of Adam Smith can learn something from his writings on this subject, including his frustration at the parsimony of public expenditure in the field of education:

The “public goods” argument for going beyond the market mechanism supplements the case for social provisioning that arises from the need of basic capabilities, such as elementary health care and basic educational opportunities. Efficiency considerations thus supplement the argument for equity in supporting public assistance in providing basic education, health facilities and other public (or semipublic) goods.

While these considerations provide good grounds for public expenditure in the areas crucial for economic development and social change, there are contrary arguments that must also be considered in the
same context. One issue is that of the fiscal burden of public expenditure, which can be quite large, depending on how much is planned to be done. The fear of budget deficits and inflation (and generally of “macroeconomic instability”) tends to haunt contemporary discussions of economic policy, and this is indeed a momentous issue. Another issue is that of incentives, and the effects that a system of public support may have in discouraging initiative and distorting individual efforts. Both these issues—the need for fiscal prudence and the importance of incentives—deserve serious attention. I begin with the latter, and will come back thereafter to fiscal burden and its consequences.
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Any pure transfer—the redistribution of income or the free provision of a public service—can potentially have an effect on the incentive system of the economy. For example, it has been argued particularly strongly that generous unemployment insurance can weaken the resolve of the jobless to find employment, and that it has actually done so in Europe. Given the obvious equity argument for such insurance, there may be a difficult issue here if the potential conflict proves to be real and quantitatively substantial. However, since employment is sought for various reasons—not just to receive an income—the partial replacement of the lost wage by public support may not, in fact, be as much of a disincentive against seeking employment as it is sometimes presumed. Indeed, the reach and magnitude of the disincentive effects of unemployment insurance are far from clear. Nevertheless, it is a matter for empirical examination to ascertain how strong the adverse incentive effects may actually be, in order to facilitate informed public discussion of these important matters of public policy, including the choice of an appropriate balance between equity and efficiency.

In most of the developing countries there are few provisions for unemployment insurance in general. But the incentive problem is not absent for that reason. Even for free medical care and health services, or free educational facilities, questions can be raised regarding (1) the extent of the need for these services by the recipients and (2) the extent to which the person could have afforded to pay for these services himself (and might have done so in the absence of free public provisioning). Those who see entitlement to these basic social provisions (medical attention, education and so on) as an inalienable right
of citizens would tend to see this kind of questioning as wrongheaded and even perhaps as a distressing denial of the normative principles of a contemporary “society.” That position is certainly defendable up to a point, but given the limitation of economic resources, there are serious choices involved here, which cannot be altogether neglected on grounds of some pre-economic “social” principle. At any rate, the incentive issue has to be addressed if only because the
extent
of social support that a society would be able to provide must depend in part on costs and incentives.

The basic problem of incentives is hard to overcome completely. It is, in general, quite hopeless to look for some indicators that are both relevant for identifying deprivation and—when used as the basis of public support—would not lead to any incentive effects. However, the extent of the incentive effects can vary with the nature and form of the criteria used.

The informational focus of poverty analysis in this work has involved a shift in attention from low income to deprivation of basic capabilities. The central argument for this shift is fundamental rather than strategic. I have argued that capability deprivation is more important as a criterion of disadvantage than is the lowness of income, since income is only instrumentally important and its derivative value is contingent on many social and economic circumstances. That argument can now be supplemented by the suggestion that focusing on capability deprivation has some advantage in preventing incentive distortions compared with working with lowness of income as a criterion for transfer and subsidy. This instrumental argument only adds to the fundamental reason for focusing on capabilities.

The assessment of capabilities has to proceed primarily on the basis of observing a person’s actual functionings, to be supplemented by other information. There is a jump here (from functionings to capabilities), but it need not be a big jump, if only because the valuation of actual functionings is one way of assessing how a person values the options she has. If a person dies prematurely or suffers from a painful and threatening disease, it would be, in most cases, legitimate to conclude that she did have a capability problem.

Of course, in some cases, this will not be true. For example, a person may commit suicide. Or she may starve not out of necessity, but because of a decision to fast. But these are relatively rare occurrences, and can be analyzed on the basis of supplementary information, which would relate, in the case of fasting, to religious practices, or political strategies, or such other reasons for fasting. In principle, it is right to go beyond chosen functionings to assess a person’s capability, but how far one would be able to go would depend on circumstances. Public policy, like politics, is the art of the possible, and this is important to bear in mind in combining theoretical insights with realistic readings of practical feasibility. What is, however, important to emphasize is that even with the informational focus confined to functionings (longevity, health status, literacy and so on), we get a more instructive measure of deprivation than we can from income statistics alone.

There are, of course, problems even in observing functioning achievements of some kinds. But some of the more basic and elementary ones are more amenable to direct observation, and frequently enough provide useful informational bases for antideprivation policies. The informational bases for seeing the need for literacy campaigns, hospital services and nutritional supplementation need not be particularly obscure.
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Furthermore, these needs and handicaps may be less open to strategic distortion than the handicap of low income, since income is often easy to hide, especially in most developing countries. If governmental grants were to be given to people on the ground of their poverty alone (leaving them to pay for medical care, educational facilities and so on out of their own incomes), there is likely to be considerable information manipulation. The focus on functionings and capabilities (extensively used in this work) tends to reduce the difficulties of incentive compatibility. Why so?

First, people may typically be reluctant to refuse education, foster illnesses or cultivate undernourishment on purely tactical grounds. The priorities of reasoning and choice tend to militate against deliberately promoting these elementary deprivations. There are, of course, exceptions. Among the most distressing accounts of famine relief experiences are occasional reports of some parents keeping one child in the family thoroughly famished so that the family qualifies to get nutritional support (e.g., in the form of take-home food rations)—
treating the child, as it were, as a meal ticket.
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But in general such incentive effects in keeping people undernourished, or untreated, or illiterate are relatively rare, for reasons that are not altogether astonishing.

Second, the causal factors underlying some functional deprivations can go much deeper than income deprivation and may be very hard to adjust for purely tactical reasons. For example, physical disabilities, old age, gender characteristics and the like are particularly serious sources of capability handicap because they are beyond the control of the persons involved. And for much the same reason, they are not open to incentive distortions in the way that adjustable features are. This limits the incentive distortions of subsidies targeted on these features.

Third, there is also the somewhat larger issue that the recipients themselves tend to pay more attention to functionings and capabilities achieved (and the quality of life that goes with them) than to just earning more money, and in this way public policy assessment that is done in terms of variables closer to the decisional concerns of individuals may be able to use personal decisions as selection devices. This question relates to the use of self-selection in providing public assistance, with requirement of work and effort, as is frequently practiced in providing famine relief. Only those who are destitute and need money strongly enough to be willing to work reasonably hard for it will volunteer to take up the open opportunities of employment (often at a somewhat low wage), which constitute a widely used form of public relief.
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This type of targeting has been used very successfully in providing famine prevention, and can have a wider role in enhancing the economic opportunities of the able-bodied deprived population.
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The rationale of this approach lies in the fact that the potential recipients’ choices are governed by considerations that are broader than maximization of income earned. Since the individuals involved focus more on overall opportunities (including the human cost of effort as well as the benefit from extra income), public policy making can make intelligent use of this broader concern.

Fourth, the refocusing of attention from low personal incomes to capability handicaps also points directly to the case for greater emphasis on direct public provisioning of such facilities as health services
and educational programs.
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These services are typically nonshiftable and nonsalable, and of not much use to a person unless he or she actually happens to need them. There is some “built-in matching” in such provisioning.
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And this feature of capability-directed provisioning makes targeting easier by reducing the scope for incentive distortions.

However, despite these advantages, the decision to target capability handicaps rather than low income does not, in itself, eliminate the need to judge the economic poverty of the potential recipients, since there is also the further issue of
how
the public provisions should be distributed. There is, in particular, the issue of charging for the public services according to the ability to pay, which would bring back the need for ascertaining the income of the potential recipient.

The provisioning of public services has increasingly moved in the direction of means-testing, across the world. The case for this is easy to understand, at least in principle. It reduces the fiscal burden, and the same amount of public funds can be stretched much further in covering the economically needy if the relatively affluent can be made to pay for the benefits they receive (or induced to make a significant contribution to the costs involved). What is more difficult to ensure is that the means be effectively tested with acceptable accuracy, without leading to other, adverse effects.

We must distinguish clearly between two different incentive problems in providing health care or education on the basis of means-testing, related respectively to the information regarding (1) a person’s capability handicap (for example, her physical illness) and (2) her economic circumstances (and her ability to pay). As far as the first problem is concerned, the form and fungibility of the help provided can make a significant difference. As was discussed earlier, when social support is given on the basis of direct diagnosis of a specific need (for example, after checking that a person is suffering from some particular illness) and when it is provided free in the form of specific and nontransferable services (such as being medically treated for that ailment), the possibility of informational distortion of the first kind would be substantially reduced. There is a contrast here with providing fungible money for financing medical treatment,
which would require more indirect scrutiny. On this score, the direct-service programs such as health care and school education are less open to abuse.

But the second issue is quite different. If the intention is to provide free service for the poor but not for those who can afford to pay, there is the further issue of checking the person’s economic circumstances. This can be particularly problematic especially in countries where information on income and wealth is hard to elicit. The European formula of targeting the capability handicap without means-testing, in providing medical coverage, has tended to take the form of a general national health service—open to all who need those medical services. This makes the informational task easier, but does not address the rich-poor division. The American formula of Medicaid targets both (at a more modest level), and has to cope with both the informational challenges.