Economic Woes? Look to Kerala

In his 2005 book The World Is Flat, Thomas Friedman joined a chorus of economists who touted India as the latest development success story, despite overwhelming evidence to the contrary. While India has developed a middle class with disposable income for the first time in recent history, such growth has not been accompanied by meaningful poverty reduction.

According to the United Nations Development Program's Human Development Index, which measures human development through a variety of indicators, including life expectancy, literacy rates, and infant mortality rates, India consistently placed between 124 and 128 in the ranking of about 175 countries since 1998. While its absolute development grade has been going up, these marginal gains are not what one would expect to see in a "development success story." A quick scan of the Human Development Index rankings shows a number of other countries outpacing India's sluggish progress. These include big countries with similar sets of challenges, such as China (81), Brazil (70), and South Africa (121). It also includes smaller countries such as Cuba (51), which has done well despite a hugely damaging economic blockade orchestrated by the world's only superpower, and Guatemala (118), which has improved dramatically only a decade after the end of a 36-year-long civil war.

Despite the poor numbers, one Indian state has done remarkably well. The southern state of Kerala boasts nearly universal literacy — 91% as opposed to the Indian national average of 65%. It's also one of the fastest growing states in India, second only to the tourism-rich state of Goa.

What is it about Kerala that makes it look — from the standpoint of its development indicators — like an entirely different country? And why does that model seem so difficult to follow for other Indian states, let alone other countries in Asia, Africa, and Latin America? At a time when the world is looking for alternatives to market fundamentalism, Kerala may hold the secret to sustainable growth and development.

Understanding Failure

The situation in India is far worse than the Human Development Index suggests. According to economist Amartya Sen, who won the Nobel Prize for his work on hunger, India has fared worse than any other country in the world at preventing recurring hunger. While India hasn't been prone to the seasonal famines that plague many countries in sub-Saharan Africa, chronic hunger is rampant in India and just as deadly.

Building on Sen's work, Utsa Patnaik claims that caloric intake — a good way to measure hunger — has actually gone down in many states that are investing in high-tech industry. In other words, as call centers and software subsidiaries have proliferated in the cities, rural hunger has been on the rise. While Patnaik's work focuses on Madhya Pradesh, a large state in central India, the pattern holds for other Indian states as well. As governments prioritize the development of an urban economy based on the services industry, they transfer government funds to improving urban infrastructure. Village infrastructure and social services merit considerably lower priority, and chronic hunger is one manifestation of that neglect.

Chronic hunger and hunger-related deaths aren't the only serious development failures in India. Rural electrification more or less stalled for the last decade, while primary education never really provided a decent standard of education for the masses, despite government investment. According to UNICEF, health indicators such as life expectancy and infant and maternal mortality rates show only marginal improvements over the last 10 years. The rate of HIV infection also increased. Despite some improvements, for example in the mortality rate for children under the age of five, the overall situation seems poor, given India's GDP growth rate of over 8% for the last four years and a cumulative growth rate of over 4% since 1990.

The Kerala Model

Given India's particularly stark situation, those states that do well look twice as good as they might otherwise. In such a gloomy environment, Kerala stands out like the moon against the night sky.

In addition to its tremendous literacy rate, Kerala boasts one of the nation's finest healthcare systems, even for those who can't afford to pay user fees and therefore depend on government hospitals. Kerala's infant mortality rate is about 16 deaths per 1,000 births, or half the national average of 32 deaths per 1,000 births.

Aside from the social development indicators, Kerala's growth rate is nothing to sneeze at. In the last few years it averaged between 6-10%, not only keeping pace with the national average but at times ranking among the fastest growing states in the country. The sectors that are doing well are largely those that are thriving across India — IT, services, and tourism — but agricultural production and small-scale manufacturing are also succeeding.

So what is Kerala's secret?

Development experts have debated for years about whether or not a "Kerala model" exists and, if so, whether or not that model can be exported to other countries or even other Indian states. Whether or not Kerala's development experience can be categorized and replicated, a few things stand out about its political and economic history.

In the first place, the state had a matrilineal and even a matriarchal society, with a line of forward-looking queens that still ruled much of Kerala in the early days of the British Empire. The Queen of Trivandrum, for instance, issued a royal decree in 1817 declaring that "the state should defray the entire cost of the education of its people in order that there might be no backwardness in the spread of enlightenment." Not until the latter part of the 19th century would countries like Britain and the United States provide such services for their own populations.

A single party, the Communist Party of India (Marxist) or CPI(M), has ruled Kerala for much of the past 50 years. The CPI(M) successfully pushed for three major reforms in the 1960s and 1970s. The first and most important was land reform. While nearly everyone looks on land reform as a huge success in Kerala, the policy was controversial when it was first proposed in 1959. Land reform, after all, is an attack on one of capitalism's founding principles — the right to property. The central government intervened and effectively blocked the implementation of land reform for 10 years. But planners and unions in Kerala understood that building a more egalitarian economy required attacking the old feudal system at its roots, and small farmers weren't going to stand for anything less.

Secondly, the CPI(M) deliberately and methodically invested in education, setting goals so popular with the electorate that even when the Communists lost power, new governments did not dare modify education policies.

Lastly, Kerala invested heavily in government-financed healthcare. The state now boasts 160 patient beds per 100,000 people, the highest rate in the country.

When considered in its component pieces — state-sponsored land reform, education, infrastructure, and social services initiatives — the "Kerala model" is not particularly revolutionary. Even the International Monetary Fund (IMF) uses land reform (though it uses the phrase "market-based land reform" to justify a different kind of redistribution).

So why haven't other Indian states — or even many other developing countries — been able to use the Kerala model as a path to development? The answer may lie in when Kerala chose to follow this path. The 1960s and 1970s were before Structural Adjustment Programs and free-market principles dominated the discourse of development economics. Kerala borrowed heavily — and still borrows — to finance its social investments. While other countries have made similar investments, IMF-backed austerity measures have rolled back those investments before they could bear fruit. Now that the age of Milton Friedman appears to be nearing its end, the world would do well to give Kerala another look.

Kerala and the Current Crisis

Any honest assessment of the last 25 years in global development is bound to conclude that the period has been a dismal failure. In countries around the world, hunger rates have either remained stagnant or only improved at a snail's pace. While other development indicators such as maternal and infant mortality, literacy rates, and life expectancy show some improvements, those improvements are far from what a society as advanced as our own should expect. Those countries in which "free-market" oriented institutions like the IMF have a lot of power — for example in sub-Saharan Africa — tend to do worse than those that have more options in their fiscal policies. In that region, only Botswana has significantly improved its development indicators, and that country has had very little to do with the IMF.

The bursting of the housing bubble and the subsequent collapse of the U.S. financial industry — with much of the world's productive industry likely to follow suit — should put an end once and for all to a development model largely based on boosting U.S. over-consumption. Under the guise of development, the IMF ensured that most of the world remained chronically underdeveloped. It insisted that countries use their comparative advantage to provide raw goods for the global market, while simultaneously selling off state assets and spending less and less on social services. State planners from Alexander Hamilton to John Maynard Keynes would have been shocked.

With the end of this ideology, Kerala represents a real alternative. Investing in people — whether through breaking the oligarchy of big landlords (or perhaps investment bankers) or providing social services including universal education — will ultimately lead to the development of a meaningful middle class. Taking this path may involve some sacrifices. Income distribution is more equal in Kerala, so it is home to fewer rich people than other parts of India. But if the goal isn't just wealth creation, but ensuring basic human rights and human dignity for all, the Kerala model is worth considering.