Unintended Consequences Of NREGS

"Economics is haunted by more fallacies than any other study known to man." 

This rather depressing assessment of the field is the opening sentence of Henry Hazlitt's classic primer, Economics in one lesson. In Hazlitt's view, most economists only measure the immediate impact of their policies. A good economist, Hazlitt contended, looks not merely at the immediate but at the longer effects of any policy, tracing the consequences of that policy not just for one group but for all groups.

I bring up Hazlitt because it has been ten years since the National Rural Employment Guarantee Scheme (NREGS) was launched and it's time to take stock of its impact. The scheme guarantees up to 100 days of annual employment along with a minimum wage rate to rural households. It also mandates equality of wages for men and women. At a cost of over $8 billion every year and reaching over 50 million households, NREGS is the largest social welfare program in the world. Evaluating the full impact of this program requires a "good economist's" view — the effect of NREGS on Indian society as a whole, not just the beneficiaries. 

For supporters, the scheme is a vital social safety net for rural Indians; for critics it's an expensive example of an inefficient and bloated welfare state. There is evidence which shows that NREGS has increased rural wages by about 5 percent and improved consumption spending in rural areas. However the results are patchy; there are marked variations across states in implementation, depending on political and administrative support.

But such large scale intervention by the government also has spillover effects in the social fabric. Recent studies point to two areas where NREGS has had an impact — rural education and Naxalite conflict.

First education. For poor families, the decision to invest in their children's education depends on income trade-off. A paper by Manisha Shaha and Bryce Sternberg¹ measures the effect of NREGS on rural enrolment. The authors find that in villages exposed to NREGS, high school children score lower on math and are less likely to be enrolled in school. There's also a split by gender, with boys more likely to be engaged in market work. Girls report an increase in domestic work, since their mothers are eligible for work under NREGS.

The authors estimate that in its first four years, NREGS caused between 650,000 and 2 million children to drop out of school. The study points to the unintended consequences of such programmes where incentives drive actions that cannot be predicted at the outset. Despite this, it is hard to dismiss the programme as detrimental to rural progress, because the loss of human capital has to be weighed against other welfare outcomes.

A case in point, is the effect of the programme on local violence. There are a few studies now that point to the positive effect of NREGS in reducing local conflict. For instance, research by Aditya Dasgupta and his colleagues shows that NREGS caused almost 50 percent reduction in violent incidences and deaths. This effect was even more pronounced in regions that experienced poor agriculture output due to low rainfall, indicating that NREGS reduced violence by actually improving livelihoods.

While inherently a complex subject, the Maoist insurgency thrives in areas of extreme poverty, with very little government action. By providing rural households with a safety net, NREGS helps the administration win local support. But there's a catch. The positive spillovers from NREGS depend on proper implementation. The above results only hold in districts where the programme was properly run. If implementation suffers, it could create distrust in government programs and give a fillip to insurgents.

The difficulty in assessing the success or failure of NREGS highlights how frustratingly complex India can be for economists with strong ideological bent. Given the huge gaps in the system, any government intervention has impact beyond its intended audience. Left leaning Keynesians cannot in good conscience push for large social programs when the implementation is weak and corruption is endemic. Free marketers cannot simply mouth drip-down economics in a country where over half the population lives in extreme poverty. 

The reality for India is somewhere in between. The challenge is finding that point.

Papers referenced in this article:

1. http://scholar.harvard.edu/files/steinberg/files/paper.pdf
    
2. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2495803