The spurt in gross domestic product (GDP) growth rate over the past decade or so has led people to believe that inclusive growth will ensure that India’s human development index (HDI) will rapidly improve and ensure greater equality in terms of access to the basic necessities of life such as food, health and education. That it will not is clearly borne out by a comparative analysis of the performance of the United States and Europe in terms of their human development indices. Indeed, evidence points to a strong positive link between substantive improvement in human development indices and increased government spending, particularly on the social sector.
Despite similar income levels and cultural and religious roots, the United States and continental Europe have developed distinctive redistributive policies. Evidence below shows that over the years Europe has developed a model of a welfare state whereas America has not. The question that arises is what determines the preference for redistribution?¹ Does the US-Europe dichotomy have any relevance for emerging market economies like India?

What is redistribution?
How do we define a redistributive policy? Government spending per se does not constitute redistribution; it is government spending, supported primarily by progressive taxation, in favour of the poor and disadvantaged which constitutes redistribution.

The US-Europe Dichotomy
Figure 1 shows comparative government spending in the United States and selected European countries. Government spending in United States is 30 per cent of GDP whereas in continental Europe government spending is 45 per cent of GDP (Scandinavian countries spend more than 50 per cent).²

Traditionally, government expenditure in the US has been much lower than in continental Europe. Consequently, social expenditure on health and education too has lagged behind a great deal.³ The expenditure on social programmes in the United States and Europe are shown in Figure 2 below. Human development indices, as calculated by Human Development Reports (HDRs), reflect this difference in government spending – countries in continental Europe have done far better in terms of indices like the education index and life expectancy index than the United States poverty and inequality figures too suggest that Europe has done better than US.

Fig. 1: Government Expenditure as a % of GDP in 2000

Source: Alesina, A. and E. Glaeser (2004), Fighting Poverty in the US and Europe: A World of Difference, Oxford University Press, Oxford UK

Fig. 2: Government Expenditure on Social Programs (% of GDP) in 2000

Source: Alesina, A. and E. Glaeser (2004), Fighting Poverty in the US and Europe: A World of Difference, Oxford University Press, Oxford UK
The Indian Case
What lesson does the experience of the United States and Europe hold for India and other emerging economies? We shall dwell in this section not on the theoretical aspects of what determines redistribution but on why redistributive measures merit a closer look in countries like India where deprivation is all pervasive.

In the recently released HDR 2009, India has slipped further down the ranking ladder (134) in human development. This is an indication of the fact that a majority of India’s population live outside the market economy. Hence, the minimalist role of the government that has been repeatedly advocated by the ‘freshwater’ school of economic thought is neither tenable under the Indian circumstances nor is it desirable.
A brief look at government spending and HDI of selected Indian states might be instructive. Table 1 gives a comparative picture of the state government expenditures at the disaggregated level for five states. The states are so chosen that we have two representations from the least developed states (Bihar and Uttar Pradesh), one from medium ranked states (West Bengal) and two from high ranked states (Punjab and Kerala). The ranking has been based on Ghosh (2006)⁴ . What clearly emerges is that states which have done well in the context of human development are also states which have had high government expenditures. These states also had much higher social and the developmental expenditure at a per capita level. The linear trend line though simplistic substantiates our claim in Figure 3.

Table 1. Comparison of disaggregated public expenditure in five Indian states

Figure 3. Plotting HDI and Social Expenditure from Table 1.

And Finally
It may perhaps also be useful to take a brief look at human development initiatives in China, probably India’s strongest rival in the growth story. Analysts say that after three decades of relentless focus on growth, the Chinese authorities are shifting their focus on human development. Given the efficacy of their policy implementation, it is only a matter of time before China takes gigantic strides in the development of its 1.3 billion strong population. This will only further augment the performance of Chinese economy in terms of growth given the externality related linkages stated above - something India’s policy makers can learn from.
The above analysis shows that heavy investments in education, health, infrastructure and social security and a proactive government role in these areas are essential if any significant difference is to be brought about in the dismal state of human development in our country.