The Dismal State of the World

From a recent speech by the World Bank President, Mr. Wolfensohn, one learns a number of facts about the world. For instance, 80% of the global GDP is owned by about 1 billion people (or 1/6th of the world’s population.) About 1 billion live on less than $1 a day.

The rich are not only fewer in number, but their numbers are projected to increase much slower than the increase in the number of poor. In the next 25 years, the rich nations would add only 50 million people more; thirty times that number, or 1.5 billion, would be added to the population of the world’s poor nations. That would only go to increase the poverty figures. Especially in sub-Saharan Africa, the absolute number of poor will actually grow. They are not going to meet the Millennium Development Goals for sure.

Development assistance from the the rich nations to the poor is an impressive $56 billion a year. That figure is no longer impressive when you learn that agricultural subsidies that rich farmers receive worldwide is $300 billion. That subsidy is at least a major factor in the impoverishment of the farmers in developing countries. In a globalized world, there is a strong link between agricultural subsidies in rich nations and the farmer suicides that are periodically reported in some developing nations.

Whatever be the dismal state of affairs, what is more disturbing is the trend. Development assistance fell from 0.5% of GDP of rich nations in the early 1960s to a mere 0.22% today. Compared to $56 billion of assistance, the world spends $600 billion on ‘defense’. Weapons’ spending dwarfs development spending worldwide.

It is important to recognize that one of the leading factors of the persistent and ubiquitous misery globally is the ‘defense’ expenditure of nations both rich and poor. All the futzing around with bridging the so called digital divide is pointless unless we also simultaneoulsy deal with the fact that we are awash in an ocean of weapons.

Overtaking China

Here is another bit from Anand’s comments.

The collective leadership that is fueling china’s growth today will have to go away in the future. Communism is not going to last long enough for china to become a developed nation. Once communism collapses and democracy begins to form in china, there will be a prolonged period of little or zero growth in the country’s economy.

That is when India will overtake china.

It is very likely wishful thinking combined with admirable patriotism that motivates Anand above. The engine of communism has been decoupled from the Chinese train long ago and it is the engine of capitalism that is driving that one. As Pranab Bardhan had observed, the Chinese were better socialists than Indians, and now the Chinese are proving to be better capitalists than Indians.
Continue reading “Overtaking China”

The Development Path of Economies

Anand’s comment in response to a past posting prompts this one. He wrote:

The fact that manufacturing accounts for such a small percentage of India’s GDP is not a minus but a plus. All the industrialized nations have seen manufacturing as a percentage of GDP shrink.

There is much misunderstanding about the process of development and it may be worthwhile to start thinking about development. (What follows is partly from another article I had written some time ago.)
Continue reading “The Development Path of Economies”

Crouching Tiger, Lumbering Elephant

In Crouching Tiger, Lumbering Elephant, an essay which recently appeared in a collection, Pranab Bardhan of UC Berkeley (one of my advisors during my doctoral work there) compares India and China while leading up to the main thesis of the paper. He concludes that

By most criteria of standard economic measurements of levels of living and their growth, China has clearly won the race.

To support his conclusion, he notes

Over the last three decades official data suggest that the average annual rate of growth of per capita income was about 7 per cent in China1 and 2.5 per cent in India. Productivity per hectare in agriculture (say, in rice) has been much higher in China for centuries, but the relative progress in manufacturing in recent decades has been phenomenal. In the early fifties the total GDP in manufacturing in India was slightly below that in China , in the late nineties it was less than a quarter of that in China. In 1999 the manufacturing share of GDP was 38 per cent in China, while it was 16 per cent in India. Indian labour productivity in manufacturing was about 71 per cent of that in China in 1952; in 1995 it was 37 percent2. Compared to India, total electricity use per capita is twice as high in China and teledensity (the number of telephones per thousand people) is several times higher. In 1999 the share of world trade (exports plus imports) in goods was 3.3 per cent for China, 0.7 per cent for India; in services the corresponding percentages were 2.1 and 1.2. The total amount (in dollars) of foreign direct investment in China was 18 times that in India in 1999. In the same year gross domestic saving as a proportion of GDP was exactly twice as high in China as that in India.

… The social or human development indicators all indicate the superior performance of China. The life expectation at birth is about 70 years in China, to India’s 63. Under 5 child mortality (per thousand live births) was 37 in China and 90 in India in 1999. Female illiteracy for above age 15 was 25 in China and 56 in India in 1999.

Dismal reading if you are an Indian wondering what went wrong. Bardhan’s thesis is that China has been better able to resolve collective action problems.

I have been convinced for many years that both at the macroeconomic level of political economy and the micro level of management of public space in general and of common property resources in particular , one of the most serious problems that Indian society faces is that of collective action. At the macroeconomic level collective action is necessary in formulating cohesive developmental goals with clear priorities and avoiding prisoner’s dilemma-type deadlocks in the pursuit of commonly agreed upon goals.

He had analysed India’s fiscal crises and development gridlock as an ‘intricate collective action problem in an implicit framework of non-cooperative Nash equilibria’ nearly two decades ago. In his judgement, Indian reform would lumber along, clumsily and haltingly. It is a despiriting conclusion reached by one who knows something about India and economics.

What interests me particularly in the paper is his identification of China’s township and village enterprises (TVE’s) as an important institutional innovation that has changed China’s fortunes. These are non-state industrial enterprises under local government (and sometimes semi-private) control.

Take the TVE’s which formed the leading sector in the industrial economy in the last two decades. I believe that the clue to their dramatic success particularly in coastal China lay in three major elements of this unique institutional experiment: (1) there was intense competition among the TVE’s run by different local governments; (2) this competition had teeth (unlike , say, in the case of the competition of public sector banks in India) in the sense that there was a “hard budget constraint” imposed on them, so that by and large a failing TVE could not expect a bailout by the provincial or central government (although there was some cross-subsidisation between enterprises within the same township or village); and (3) when the TVE made money, the local authority was largely allowed to keep most of it (residual claimancy without private ownership was the novel institutional feature).

Institutional innovation is what India chiefly needs. Like China’s TVE’s, we too have to find our innovation that would transform India’s economy. Since rural India is demographically larger, we need to focus on rural India seriously. Some of us are convinced that something like the RISC model is the appropriate innovation that needs to be implemented.

Creating the Conditions for ITES in AP

In a special report on Andhra Pradesh in the Financial Express in May 2003 called Towards Swarnandhra Pradesh the focus of one article is on Hyderabad becoming India’s ITES capital :

With the telecom bandwidth in excess of deand, the focus would be towards creating high quality office space with amenities like high-speed telecommunication links, uninterrupted power supply etc which are critical to attract the ITES companies.

Towards this, the State government is holding talks with leading real estate developers including Rahejas of Mumbai, DLF of Delhi apart from Larsen and Tubro Infocity for high-quality office spaces in and around Hyderabad.

So what AP is trying to do is to create the environment so that businesses — ITES — would locate themselves there because of the lower cost of doing business. In a sense, it is a no-brainer: if you have the proper environment, business will develop. However, this environment will not emerge automatically on its own. That is, the market will not supply it spontaneously. Why the market fails to do this? It requires collective action. Or in other words, it is a coordination problem.

RISC is motivated by similar concerns in the rural arena. For doing business in rural India, you need to have adequate infrastructure. Given the immense investment needs, every village cannot be transformed. So a core-peripheri approach is required. Further, RISC also stresses the same coordination failure in the provisioning of infrastructure in rural India.

Mark Twain had once remarked that there are fundamentally only three archetypical jokes. (I forget what those archetypes are, but one of them was the ‘mother-in-law’ joke.) So also, there are a small set of basic problems. These show up repeatedly in various theaters in different guises. Once you recognize them, the solution is pretty much the same. Why people don’t get this is a question that I have not fully been able to fathom.

India’s Human Development Goals

The United Nations Development Program (UNDP)website has a list of India Human Development Goals.

In the Tenth Five Year Plan the Planning Commission has outlined India’s human development goals and targets for the next five to 10 years. Most of these are related to and are more ambitious than the Millennium Development Goals.

Human development is a multifaceted and complex process. There are many dimensions along which development occurs and there are complex interdependencies and linkages between these dimensions. (In mathematical terms, you may say that these dimensions are not mutually orthogonal.) Due to these dependencies and linkages, attaining goals is not a simple process of randomly enumerating them and then arbitrarily attempting to work on each subgoal. The enumeration of the goals itself should reveal some of the dependencies. Care must be taken to distinguish between causes and effects, between underlying causes and their symptoms.

India’s Human Development goals (listed in its entirety in the extended part of this entry) enumerates them randomly. Indeed, the first “goal” is Reduction of poverty ratio by 5 percentage points by 2007 and by 15 percentage points by 2012. I disagree. Poverty cannot be reduced by declaring it as a goal. If indeed it were that easy, we should reduce poverty by 100 percent, and not pussy-foot around the place with goals of reducing it by only five percentage points.

Poverty reduction is the combined effect of a number of other ‘goals’ that one may have. For instance, poverty will be reduced if these were to happen.

1. Control population growth.
2. Increase access to education.
3. Provide access to credit.
4. Have a rational labor and industrial policy.

If you do all the above (and more, perhaps) successfully, the outcome will be reduction in poverty. Whether that is a 5 percentage points reduction or a 50 percentage points only time will tell.

Similarly the item about ‘Maternal Mortality Ratio’. The reduction in MMR is a result of other factors such as maternal nutrition, gaps between pregnancies, availability of pre-natal medical care, and so on.

To me, the goals ring hollow. Expect for the change in the dates (the 10th Five Year Plan runs between 2003 and 2007), something like this has always existed. Making up the plans occupy some bureaucrats and I don’t think anyone takes them seriously.

If there was an incentive for people to state realistic goals and achieve them, then we could have a honest goal setting exercise. For instance, suppose if the goals were not achieved, those setting the goals were to lose their jobs, they would not set these goals at all. They would then think very clearly and figure out what the factors are that, if obtained, would lead to certain results. These bureaucrats would then list out the factors and say in the end, “Don’t know by how many points exactly will poverty be reduced but it will be reduced if the factors are obtained.”

My (incomplete) list of factors need to be targeted for achieving development

  • education, primary as well as vocational
  • access to credit
  • access to markets
  • a transparent legal system and law enforcement
  • rule of law as opposed to rule by men
  • MONITORABLE TARGETS FOR THE TENTH PLAN AND BEYOND

    * Reduction of poverty ratio by 5 percentage points by 2007 and by 15 percentage points by 2012;

    * Providing gainful and high-quality employment at least to the addition to the labour force over the Tenth Plan period;

    * All children in school by 2003; all children to complete 5 years of schooling by 2007;

    * Reduction in gender gaps in literacy and wage rates by at least 50 per cent by 2007;

    * Reduction in the decadal rate of population growth between 2001 and 2011 to 16.2 per cent;

    * Increase in Literacy Rates to 75 per cent within the Tenth Plan period (2002-3 to 2006-7);

    * Reduction of Infant mortality rate (IMR) to 45 per 1000 live births by 2007 and to 28 by 2012;

    * Reduction of Maternal Mortality Ratio (MMR) to 2 per 1000 live births by 2007 and to 1 by 2012;

    * Increase in forest and tree cover to 25 per cent by 2007 and 33 per cent by 2012;

    * All villages to have sustained access to potable drinking water within the Plan period;

    * Cleaning of all major polluted rivers by 2007 and other notified stretches by 2012.

    HIV/AIDS targets within the Tenth Plan period:

    80% coverage of high risk groups through targeted interventions;
    90% coverage of schools and colleges through education programmes;
    80% awareness among the general population in rural areas;
    reducing transmission through blood to less than 1%;
    establishing of at least one voluntary testing and counselling centre in every district;
    scaling up of prevention of mother-to-child transmission activities up to the district level;
    achieving zero level increase of HIV /AIDS prevalue by 2007)

    Malaria targets within the Tenth Plan period

    ABER (Annual Blood Examination Rate) over 10 per cent
    API (Annual Parasite Incidence) 1.3 or less
    25% reduction in morbidity and mortality due to malaria by 2007 and 50% by 2010 (NHP 2002)

    A Brief Biography

    Atanu Dey suffers from a rather severe form of attention deficit disorder. After his bachelors in mechanical engineering, he moved to computer science and received a master’s degree. Product marketing at HP in the Silicon Valley kept him occupied briefly for six years. Then he traveled in India, US, and Europe for five years before realizing that he knew nothing about economics. So he studied economics at the University of California at Berkeley and received his PhD for his thesis on the Indian telecommunications sector. His critique of the New Telecom Policy 1999 is worth a read, even though his thesis will only appeal to hardcore economists and is guaranteed to distress socialistic Indian policy makers. Playing hooky while at UC Berkeley, he slummed at a junior university called Stanford as a Reuters Digital Vision Fellow 2001-02. Rumor has it that there he actually developed a model which he calls “Rural Infrastructure and Services Commons (RISC)” that promises to bring about the economic transformation of rural India. Someone asked him to demonstrate that claim and so he is off in India trying to implement the RISC model, leaving behind a lot of very relieved people in California where he spent nearly two decades. In his spare time (about 90% of his total time) he listens to classical music, practices Vipassana meditation, reads physics, gives lectures on Buddhism, maintains a sporadic blog, and occasionally makes sense. He plans to become a philosopher when he grows up. He would also like all to know that he is a published poet.