Economic Growth – Page 6 – Undergraduate Economist

Budget 2008-09: Whither Indian Economists’

Almost a month has passed since the Budget was announced. The media has stopped discussing loan waivers. Economists are done with their write ups on the same as well. I guess it is no more glamorous or more pressing matters might have cropped up. This post discusses some of the concerns relating to the loan waiver which had been voiced by the media and my concern for economics in general and economists (associated with policy making) in particular.

P. Sainath says that ‘The UPA government’s waiver is no solution to even the immediate crisis let alone long-term agrarian problems. Nothing in this budget will raise farm incomes.‘

Satish Nandgaonkar writes in The Telegraph that the loan waiver was unjust because ‘the waiver helps only if the loan has been taken from a government-backed institution, but most farmers in Vidarbha borrow from moneylenders at the start of the sowing season to buy seeds.‘ Didn’t the economists behind the budget know this’

The economist from Harvard, P. Chidambaram said that ‘loan waiver will strengthen banking.’ I had thought that the loan waiver was targeted at the farmers in India! But then, the FM talks about growth quite a lot and how it is the only fast remedy to poverty. I wonder what growth he refers to!

Gurcharan Das thinks that the loan waiver is immoral as it ‘wounds that moral universe. It tells the farmer not to bother to repay his next loan, because, who knows, another party will be in power and it too will cancel his debts. What message does this send to the honest village woman who struggles every week to repay her micro-loan’‘ He has brought in the ‘moral’ angle to the loan waiver. It is interesting because, the government frames laws and establishes morality which is then modified by the civil society. The concern should be whether the loan waiver achieves its objectives or not.

Mutiny.in does not question the FM’s ‘economic sense’ and goes on to say that ‘but, burdened no doubt by political considerations, the Finance Minister has made this unabashedly populist announcement.‘ Populist-in what sense’

‘India cancels small farmers’ debt’ says the BBC. It also has a picture of a representative small farmer. I wonder whether the objective of the waiver was to help the small farmers at all. The rationale behind the waiver is debatable. It has not fooled the public therefore it won’t help in the elections. It has done nothing to resurrect the farmers in distress.

According to Business Standard, the present budget is evidence for politics winning over economics. The author(s) have not studied anything but neo classical economics. Their notion of politics and economics as distinct disciplines is quite scary. This is where Classical Political Economy aids. They do not view economics as an independent arena. For them, it is very much a part of politics, society, etc.

India Today describes the budget as ‘Bad politics bad economics‘. According to me, this is the best description of the budget.

The Indian Government consults famous economists who have been trained abroad and in India and also has talks with various eminent economists. Have they suggested ‘wrong’ policies’ Or is that the Government decided not to accept their policies’ To make such ‘loan waivers’, one does not need an academician.

Economists like Keynes, Smith, Ricardo, etc wrote ‘economics’ books not for fame or money but to help their respective economies. They studied economics to rectify the problems that existed then. Though a lot of research papers and articles are being published by Indian Economists, none of them seem to help the people of India. What are economists doing these days’

India and it’s ‘Segregated Growth’

This article tries to show that high rates of GDP in India need not trickle down to the rest of the masses and also strives to explain why ‘segregated growth’ further fuels inequality. By ‘segregated growth’, I refer to growth which takes place in sectors which employ relatively a small percentage of the total labour force.

The IT revolution is happening but the GDP contribution of agriculture is decreasing.’ One inference from this change could be that, labour from agriculture is migrating to the services sector; but that is not the case in India. India is witnessing farmer suicides, increased debts, droughts and low productivity in the agricultural sector.

Sustained economic growth requires progress in several dimensions ‘ education, health, infrastructure, legal institutions, etc. [Noll 2006] For the whole of the population to enjoy sustainable growth, it is essential that growth takes place in all sectors of the economy. Otherwise, it will lead to growth, but only in a few sectors, like the IT boom which India faced. This growth is not sustainable in the long run. Another consequence of such ‘segregated growth’ is that, the GDP figures will show an increase. And as the GDP is the most commonly used (By the media) measure among the masses to portray economic growth, the picture presented will appear rosy.

Moreover, the per capita income will also show a rise due to the increase productivity coming from ‘such sectors’. This increased GDP will not trickle down as many economists and others state. This increased income accruing to the denizens of ‘such sectors’ will only be spent in conspicuous consumption. Thorstein Veblen coined the words ‘conspicuous consumption’ in his book ‘The Theory of the Leisure Class’. The basis on which good repute in any highly organised industrial community ultimately rests is pecuniary strength; and the means of showing pecuniary strength, and so of gaining or retaining a good name are leisure and a conspicuous consumption of goods. [Veblen 1899]

On Poverty

And though the country (India) has made significant strides ‘ poverty levels are roughly 35%, down from close to 60% in the 1970s, (by the World bank’s $ 1 a day definition of poverty, though precise numbers are the subject of never-ending debate) – the benefits of this rapid growth are yet to trickle down to the masses. [Bhusnurmath 2006]

Development agencies define poverty as an income of less than $2 per person per day (about $3,000 annually for a family of four). By this standard, nearly 3 billion people are poor. [Noll 2006]

I wonder why India still defines poverty as an income of less than a dollar per day for a person. I had argued for a restructuring of the current poverty line in another article of mine. Probably the present estimate makes it easier to state that poverty levels have come down from 60% to around 35%!

On Development

Amit Bhaduri, in his recent paper in the Economic and Political Weekly, wonders if it is Developmental Terrorism or Development which is taking place.

Destruction of livelihoods and displacement of the poor in the name of industrialisation, big dams for power generation and irrigation, corporatisation of agriculture despite farmers’ suicides, and modernisation and beautification of our cities by demolishing slums are showing everyday how development can turn perverse. [Bhaduri 2007]

Conclusion

Thus, the Indian populace is dichotomized in terms of economic growth; there are certain areas where growth levels are very high along with a majority of sectors which are witnessing a decline. Thus, this kind of ‘segregated growth’ fails to ‘trickle down’ to other sectors of the economy.

References

1) Roger Noll, The Foreign Aid Paradox, SIEPR Policy Brief, October 2006.

2) Thorstein Veblen, The Theory of the Leisure Class, 1899. (Full book available here)

3) Mythili Bhusnurmath, Time for a reality check, www.forumblog.org, November 25, 2006.

4) Amit Bhaduri, Development or Developmental Terrorism’, EPW, February 17, 2007.

On Economic Growth

‘Economic Growth’ is a term which one often sees in the media. It is also looked at closely by the economists, the government and the people. Economic growth tends to show the rate of growth of an Economy

The chart graphs the growth rate of the Indian Economy.

What is this ‘Economic Growth”

Economic growth is the increase in value of the goods and services produced by an economy. It is conventionally measured as the percent rate of increase in real gross domestic product, or GDP. [Wikipedia]

Economic growth has become the Holy Grail of the 20^th century. [Lewis 1974] The ‘saga’ continues. Governments like projecting a target rate of growth (The higher the better) for the economy and the economists like to fiddle around with the projected targets.

Why ‘growth’ happens’

One factor which caused growth is said to be the increments in capital. This ‘link’ was given to us by Roy Harrod in the 1940’s. This causality led to the policy of increased expenditure on capital mainly by the government, so as to ‘grow in GDP’.

In the 1950s, Robert Solow (1956) of MIT generalised the relationship between capital, labour, technology and output in the neat little ‘neoclassical production function’, which still lies at the heart of contemporary growth accounting exercises. Other theorists (as well as planners and policy-makers) also emphasised the importance of education (human capital) and technological development in spurring sustained growth. [Acharya 2006]

Economic growth was caused by capital accumulation, or a rise in the ratio of investment to income and/or increasing efficiency and productivity. [Roy 2006]

Thus, basically with growth in labour, capital (Physical and Human) and technology, there will be growth in the economy too.

According to Paul Romer, three broad factors contribute to growth in output per capita:

1) Increases in physical capital ‘ the buildings, machinery, and infrastructure that we use in daily life.

2) Increases in human capital ‘ the skills and experience of the workforce.

3) Increases in productivity ‘ a catchall category that includes the many large and small discoveries that lead to the introduction of new goods and services or to more efficient production of existing goods and services.

The significance of economic growth

History shows us that a small permanent increase in the trend rate of growth can profoundly alter our quality of life. [Romer 2001]

Keeping this in mind, economic growth acts as an important indicator. So Governments try to achieve high rates of growth so as to provide their respective nations with a high quality of life. But, quality of life is better measured using the HDI rather than GDP.

There is, indeed, a positive relationship between rapid economic growth and a victory over poverty. But this does not happened automatically. A good economics that concentrates on the even distribution of economic opportunities and benefits is essential. And further, good economics has to be also combined with sensible and responsible politics. [Alexander 2005]

Early works on Economic Growth

Robert M. Solow, the Nobel Prize winner in 1987 says in his Prize lecture ‘Growth theory did not begin with my articles of 1956 and 1957, and it certainly did not end there. Maybe it began with The Wealth of Nations; and probably even Adam Smith had predecessors.’

Some of the economists who worked on growth models prior to Solow were Roy Harrod, Evsey Domar and W. Arthur Lewis.

Conclusion

It is the GDP rate which appears to be more of a concern than the HDI, which does not enjoy the limelight as GDP does. Both these criteria are important and thus the need for understanding both of them.

References

1) Shankar Acharya, Economic Growth: Some Reflections, November 4 2006, EPW.

2) Tirthankar Roy, The Economic History of India 1857-1947, Second Edition, Oxford Textbooks.

3) Paul M. Romer, Growth Policy, 2001 SIEPR Policy Brief.

4) John M. Alexander, Economic growth and the Millennium Goals, 2005, The Hindu.

5) [Indian Growth trend picture]

Kerala’s Economy: Crouching Tiger, Sacred Cows

Kerala’s Economy: Crouching Tiger, Sacred Cows

Edited by Sunil Mani, Anjini Kochar and Arun M. Kumar

DC Books

Price: Rs. 195

This book contains articles which relate to the Economic development of Kerala. I have posted those facts and thoughts which I found interesting.

Statistics

The state has created 12% of all new non-farm jobs in India over the 1998-2005 period, no mean achievement for a state that is home to only 3.5% of the county’s population.

The state’s poverty ratio is now 12.72 per cent, down from 60 per cent in the early seventies. Its per capita income, at Rs 22,000, exceeds the national average. If remittance income is included, per capita income is 60 per cent above the national average.

The contribution of agriculture to the state’s GDP fell to about 20%. The major portion of the state’s GDP is driven by services. While the service sector grew by 13.8% in 2005-06, industry and power grew by a mere 1.3% and agriculture by 2.5%.

Contributions

An author, Arun M. Kumar calls for attention in the following five areas- nurturing a culture of entrepreneurship, making Kerala more attractive for non-Keralites, making it easy to do business in Kerala, creating a stimulating educational environment for the college going population and by involving expatriate Keralites so as to promote development.

Another author M N V Nair, talks about ‘patronage dispensation’ which he says is the philosophy of governance pursued by the elites, who consists of political functionaries, administrative bureaucracy, organized business, community and caste organizations and trade unions. He goes on to say that this ‘elite’ lives off the ‘influence peddling’.

K. Pushpangadan and M. Parameswaran talk about the ‘virtuous cycle of human development’ which facilitates rapid growth; as Kerala’s progress is in contrast to the accepted notion that ‘economic growth precedes human development’. ‘The authors suggest that the linkage is that human capital development resulted in migration that brought in remittances to the state which in turn facilitated economic growth.’ They posit that ‘dependence on remittances carries the risk of external shocks.’

Sunil Mani talks about the infocommunications sector in Kerala. He says that ‘Kerala has the highest teledensity (telephones per thousand people) among all Indian states.’ ‘Residential customers in Kerala get electricity at the cheapest rates in India’ writes V. Santhakumar.

My conclusions

The book portrays a growing picture of Kerala Economy. The authors suggest several measures to sustain this growth. It is a good read for those who want to get an in depth analysis of the economy of Kerala.