View
213
Download
0
Category
Preview:
Citation preview
1
Global and Indian Economic
History
Module 1
Contemporary Themes in India’s
Economic Development and the Economic Survey
Arvind Subramanian
Chief Economic Adviser
Government of India
MINISTRY OF FINANCE
GOVERNMENT OF INDIA
2
Overview
• World Economic History
• Reversal of Fortune
• Post-War Experience of convergence and divergence
• Indian Economic History
• The Economic Outcomes
• Recommended Readings
3
World History in One Slide
Industrial
Revolution
|------Malthusian Stagnation -------| Slowly Exiting Malthusian
Stagnation
Source: Maddison Historical Series, World Development Indicator and Own Calculation
4
Cont…(World History in One Slide)
|----------Malthusian Stagnation -----------| Industrial
RevolutionSlowly Exiting Malthusian
Stagnation
Source: Maddison Historical Series, World Development Indicator and Own Calculation
5
History of Different Regions in One Slide
Post-Malthusian Stagnation |-----------Great Divergence ------------|
Source: Maddison Historical Series, World Development Indicator and Own Calculation
Convergence
Begins
6
Reversal of Fortune: The Colonized Rich in
1500 Are the Less Rich Today
Urbanisation in 1500
Lo
g G
DP
Pe
r C
ap
ita
, P
PP, 1
99
5
Lo
g G
DP
Pe
r C
ap
ita
, P
PP, 1
99
5Log Population density in 1500
Source: “Reversal of Fortune: Geography and Institutions in the Making of the Modern World Income Distribution” ; Daron
Acemoglu, Simon Johnson, James A. Robinson. The Quarterly Journal of Economics, Vol. 117, No. 4 (Nov., 2002), pp. 1231-
1294
9
Convergence and Divergence: Definition• Unconditional Convergence (Catch-up) : Growth rate over
some period) (on y-axis) negatively correlated with initial value of
outcome (on x-axis): Poorer you start off the faster you grow
subsequently
• Regression fit line with negative slope (negative β) suggests
convergence otherwise suggests non-convergence or
divergence
• Slope is average catch-up rate assumed to be about 2% in
general
• If catch-up rate is 2% (5%), average poor country closes half the
distance with the rich in 34 (14) years
10
Post-War Experience: Examples of
convergence and divergenceWithin rich countries All countries, 1960-1985
Source: Roy, S., Kessler, M., and Subramanian A. (2016). "Glimpsing the
End of Economic History? Unconditional Convergence and the Missing
Middle Income Trap", CGD Working Paper 438
Source: Barro and Sala-i-martin
12
World Bank Definition of Income Groups • Low income, $1,025 or less;
• The effective eligibility threshold for borrowing under IDA (concessional finance
window of World Bank) is $1,185 or less.
• Lower middle income, $1,026–4,035;
• Upper middle income, $4,036–12,475; and
• High income, $12,476 or more.
• But definition can also be relative: what fraction of per capita
GDP of say the United States?
13
World Bank Poverty Definition
• 2008-2015: $1.25 (PPP) per day
• As of October 2015: $1.90 (PPP) per day
– Rs 32.51 per day (2015) and Rs 28.71 per day (2011)
– 21.23% below poverty line ($1.90 poverty line, 2011)
– Official Poverty line (Tendulkar Committee)* Rs 39.5 per day
(2015-16) Rs 29.04 per day(2011-12)
• Global poverty: ~900 million people in 2011 of which 255
million in India
Note: * Estimated using Rural-Urban population weight and adjusting for inflation.
14
Since WWII, only 13/101 transitions to High
Income Status
Source: “China 2030 : Building a Modern, Harmonious, and Creative Society”, World Bank (2012)
16
The Elephant Curve: Indian and Chinese Middle Classes and
the Super-Rich in Advanced countries have done well. The poor
in poor countries and middle class in rich countries have done
poorly
Source: Global inequality: A new approach for the age of globalization A book talk Branko Milanovic May 1, 2016
17
Global Inequality: Today about 80% of inequality
stems from the accident of birth location
Source: Global inequality: A new approach for the age of globalization A book talk Branko Milanovic May 1, 2016
18
Ratio of Wage in US and Developing
Countries for Identical Workers
Source: “The Place Premium: Wage Differences for Identical Workers Across the US Border”; M A
Clemens, C E Montenegro, Lant Pritchett
19
Despite Divergence of Incomes, Convergence
of Life Expectancy 1960-2015
Source: World Development Indicator and Own Calculation
21
Precocious Democracy: Sustained Political
Openness at Low Levels of Income
Source: Data from Rodrik 2013 and Polity IV. India growth data from WDI for 1979-2015
22
Precocious and Cleavaged Democracy: Sustained
Political Openness Despite Social Cleavages
Source: Banerjee & Somanathan, 2007 and Own Calculations
23
Three Development “Choices”
• Political: Democracy versus Autocracy
• Economic: Markets versus State
• Social: Guarantees versus Opportunities
24
Background: IndividualsCompeting visions of Nehru, Gandhi, and Patel
Mahatma Gandhi:
Self-reliance,
village communities,
“industrialize and perish”
Vallabhai Patel:
Pro-agricultural landlords
and business
Jawaharlal Nehru:
Self-reliance,
“industrialize or perish”,
importance of state
Photo is from “http://image.indiaopines.com/wp-content/uploads/2014/02/Nehru_Gandhi_and_Patel_1946.jpg”
25
Cont…(Background: Ideology)
• Zeitgeist (abroad): Inspired by Russia and Japan;
Great Depression but also post-war Europe’s move
toward the Welfare State
27
Cont…(Background: Ideology)
• Zeitgeist (abroad): Inspired by Russia and Japan;
Great Depression but also post-war Europe’s move
toward the Welfare State
• Zeitgeist (home): Bombay Plan of mid-1944 (Leading
industrialists) proposed State-led industrialization and
protection from foreign competition
28
Democracy versus Autocracy-The Cruel Choice
• Need higher investment and resources for investment
• Autocracies are better able to extract resources (taxing or
expropriating, especially agriculture)
• Russia and China: Industrialize by taxing agriculture
Collectivization in Russia and Great Leap Forward in China
• India: Agricultural policies constrained by decentralized
democracy (“Cruel Choice”)
29
Cont… (Democracy versus Autocracy-The Cruel Choice)
• Political consequence: Help from outside, especially US, in
the 1950s and early 1960s, in the form of foreign aid
(especially food aid, PL 480). About 25% of Plan financed
by foreign aid in 1960s.
30
Markets Versus State: What did India Do?
• Commanding heights but mixed economy
• Industrialization via import substitution
• Prevent big actors/strive for equity;
• Self-sufficiency in scientific and research capacity
31
State and Industrialization (“Licence-Quota-Permit Raj”)
• Industrial Policy Resolution, 1956
• Commanding heights
– Investment in heavy industries by government
alone
• But mixed economy
– Other sectors open to public and private sectors
32
Cont… (State and Industrialization)
• Agriculture suffered because of industrialization
– Share of public expenditure on agriculture and irrigation
declined from 33% to 20%
– Land redistribution efforts reform of tenants rights less
successful
33
Self-Reliance/Import Substitution
• Intellectual origins
– Colonialism
– Prebisch-Singer (1950) hypothesis: Specializing in
agriculture/commodities bad because their prices will
keep falling. Justified the development of import
substitution
• Limits on foreign trade, exchange and investment
34
Equity/Phobia against size• Industrial licensing (1951 and 1973): Permission either
mandatory or required for investments above a certain level
• Control of big business : Monopoly and Restrictive Trade Practices Act (MRTP) which regulated activities of large firms
• Labor Laws: For example, Industrial Disputes Act, 1947 and 1982 requiring government permission for dismissing workers beyond specified employment levels
• Small scale reservations: Reservation that certain goods will be produced by this sector. Also tax concession and preferential credit access for small firms
36
Guarantees versus opportunities• Neglect of basic education:
– Basic education a state subject (until 1976) and then transferred to Concurrent List
– Higher education a central subject
– Spending on education about 3% of GDP. But share to primary education declined from 56 % in early 50s to 30% in early 1960s (Weiner)
• Reservations
– 22.5 percent of public sector jobs and enrollments in government-financed institutes of higher education set aside for “Scheduled Caste and Schedules Tribe”
– (Also, they got guaranteed seats (15 %) in the legislatures)
– In 1989, reservations expanded to include “Other Backward Classes” and now account for about 50%
37
Reforms of 1991
• Macro-economic stabilization
• Exchange rate devaluation
• Trade and FDI reforms
• Dismantling industrial licensing
39
Indian Growth History: 50-50 (Hindu
versus Rapid Growth)
9.0
9.5
10.0
10.5
11.0
11.51950-5
1
1952-5
3
1954-5
5
1956-5
7
1958-5
9
1960-6
1
1962-6
3
1964-6
5
1966-6
7
1968-6
9
1970-7
1
1972-7
3
1974-7
5
1976-7
7
1978-7
9
1980-8
1
1982-8
3
1984-8
5
1986-8
7
1988-8
9
1990-9
1
1992-9
3
1994-9
5
1996-9
7
1998-9
9
2000-0
1
2002-0
3
2004-0
5
2006-0
7
2008-0
9
2010-1
1
2012-1
3
2014-1
5
2016-1
7
|--------Hindu Rate of Growth----------|
|--------------Take off----------------|
1991 Crisis Boom
Log
GD
P a
t co
nsta
nt
price
s
42
Steady Decline in Poverty
Poverty Ratio No. of Poor (million)
Rural Urban Total Rural Urban Total
1973-74 56.4 49 54.9 261.3 60 321.3
URP
1977-78 53.1 45.2 51.3 264.3 64.6 328.9
1983 45.7 40.8 44.5 252 70.9 322.9
1987-88 39.1 38.2 38.9 231.9 75.2 307.1
1993-94 37.3 32.4 36 244 76.3 320.3
2004-05 28.3 25.7 27.5 220.9 80.8 301.7
1993-94 50.1 31.8 45.3 328.6 74.5 403.7
MRP2004-05 41.8 25.7 37.2 326.3 80.8 407.1
2009-10 33.8 20.9 29.8 278.2 76.5 354.7
2011-12 25.7 13.7 21.9 216.7 53.1 269.8
43
Growth and democracy have led to seismic
social transformations
Western Uttar Pradesh Eastern Uttar Pradesh
1990 2007 Change 1990 2007 Change
Dalits not seated separately at non-Dalit
weddings26.9% 82.1% 55.1% 22.7% 91.1% 68.3%
Non-Dalits visiting Dalit homes eat/drink
tea/water if offered 4.1% 62.6% 58.5% 1.1% 72.6% 71.6%
Government non-Dalit midwifes come to
Dalit homes to deliver babies0.0% 2.2% 2.2% 5.7% 54.3% 48.6%
Only Dalits lift dead animals 72.6% 5.3% -67.3% 19.1% 5.6% -13.5%
Source: Kapur et. al. 2011
44
Precocious Indian Model: Services-Intensive
Not Manufacturing-Intensive Pattern
0
10
20
30
40
50
60
70
80
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
India
Agriculture Manufacturing Services
0
10
20
30
40
50
60
70
80
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
China
Agriculture
Manufacturing
Services0
10
20
30
40
50
60
70
80
1960
1964
1968
1972
1976
1980
1984
1988
1992
1996
2000
2004
2008
2012
World
Agriculture
Manufacturing
Services
Source: World Development Indicator and Own Calculations
46
Large Exporter of FDI (Skill)
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
FDI Gross Inflow (% of GDP)
China India
0.0
0.2
0.4
0.6
0.8
1.0
1.2
1.4
1.6
1.8
1982
1985
1988
1991
1994
1997
2000
2003
2006
2009
2012
2015
FDI Gross Outflow (% of GDP)
China India
Source: International Monetary Fund and Own Calculations
47
Highly Skill Intensive Pattern of Specialization
Source: India’s Pattern of Development: What Happened, What Follows?; Kalpana
Kochhar, Utsav Kumar, Raghuram Rajan, Arvind Subramanian, and Ioannis Tokatlidis
48
Recommended Readings• Branko Milanovic, “Global inequality: A new approach for the age of
globalization”https://piie.com/system/files/documents/milanovic20160509ppt.pdf
• Dani Rodrik and Arvind Subramanian, “From ‘Hindu Growth’ to Productivity
Surge: The Mystery of the Indian Growth Transition.” IMF Staff Papers, vol. 52,
no. 2, 2005, pp. 193–228. www.jstor.org/stable/30035894.
• Daron Acemoglu, June 2003, “Finance and Development”, IMF
• Ian Morris, “Why the West Rules for Now”
• Jared Diamond, “Guns, Germs, and Steel”
• Lant Pritchett, 1997, “Divergence, Big Time,” - NYU Economics
Recommended