Andrew Foster

As the title of this initiative suggests, the notions of rural governance and inclusive growth are often paired in discussions of fiscal and political reform in India and around the world.  It is suggested that rural governance and decentralization more generally may be a critical element in ensuring that the benefits of national economic growth are shared broadly across the economy, both between rural and urban areas, and among different groups within rural areas. But while there appears to be some level of consensus about what increasing rural governance means in the context of India, it is less clear what is meant by inclusive growth. This distinction is important because different elements of inclusive growth may be differentially served by increased democratization of rural governance and by fiscal decentralization.

One element of inclusive growth is the notion that the expansion in public resources made possible by higher productivity ought to be widely shared across the population.  Even if the primary source of growth is in particular pockets of the economy, concerns of both equity and efficiency would suggest it is not desirable for all public resources to be targeted towards those pockets.  Individuals in less rapidly growing areas should also benefit at least in part in terms of better quality health and schooling, functional roads, and access to reliable street lightsy and clean drinking water.  Moreover, within rural areas it is important that these benefits be available to all. While fair and equitable distribution of public resources within rural areas is not a necessary implication of rural democratization and fiscal decentralization, increasing evidence from this initiative as well an emerging body of research elsewhere suggests that it in fact can play that role. Rural governance introduces some level of accountability both in terms of stewardship of resources and in terms of ensuring that the interests of numerically large (but poor in terms of social standing or economic resources) groups are accommodated.

But there is another element of inclusive growth, that which is related to whether the benefits of overall productivity expansion result in higher private earnings for all groups within the economy.  In short, to what extent will individuals in rural areas and, within rural areas, those not endowed with substantial land or other physical resources, benefit from expanding productivity through access to better paying and more secure employment?  This is an active and growing area of research that is also of substantial interest to policy makers. While some would argue that ensuring that new agricultural technologies are in the hands of smaller farmers is sufficient, others place emphasis on the growth of the non-farm sector as a source of employment in rural areas.  It has been argued, for example, that in a setting in which villages are relatively isolated, agricultural productivity enhancement increases both land rents and wages and thus results in benefits to both rich and poor. On the other hand as a village becomes more integrated this may no longer be the case. Because land does not move but workers and investment capital do move, the local wage may respond slowly if at all to local agricultural productivity increases and thus most benefits of such growth will accrue to land-owning households. Moreover increased mechanization may displace workers as well as decrease the cost advantage of small farms that rely primarily on family labor, thus lowering wages and the financial viability of small farms.  From this perspective investment and support of employment that is not intensive in the use of land can be a key mechanism to reduce rural inequality. Investment in particular in non-farm activities that make use of local agricultural inputs may be particularly helpful as it ensures that expanding agricultural productivity (which will depress local non-labor input costs) translates into better rural jobs.

The role of fiscal decentralization and rural governance reform in expanding rural earnings growth is less clear. Certainly such things as providing better schools increase the potential for good-quality employment both within the village and as a result of migration to urban areas.  Migration also may have favorable effects on those not moving by reducing labor supply and through remittances that expand local incomes and increase the demand for local services. Also an adequate and fair basis for policing and dispute resolution can help to ensure that property rights are secure and thus increase the scope for the efficient allocation of financial assets towards non-farm activities.  But many things that might otherwise promote growth in employment in rural areas such as more competitive financial markets, reliable power for businesses, and better access to markets appear to be beyond the scope of the governance of single villages. If the rural areas are to be successful in this latter regard, it is through working together to ensure that the interests of the rural poor are met in terms of promoting the competitiveness of rural economic activity.   But if so, rural governance must be thought of as an integral part of a larger political system rather than an isolated entity that serves to ensure that the spoils of wider economic growth are equitably distributed.

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Andrew Foster is the Professor and Chair of the Department of Economics and Professor of Community Health at Brown  University.