Global and Indian Economic History

Transcription

1 MINISTRY OF FINANCE GOVERNMENT OF INDIA 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 1

2 Overview World Economic History Reversal of Fortune Post-War Experience of convergence and divergence Indian Economic History The Economic Outcomes Recommended Readings 2

3 World History in One Slide Malthusian Stagnation Slowly Exiting Malthusian Stagnation Industrial Revolution Source: Maddison Historical Series, World Development Indicator and Own Calculation 3

4 Cont (World History in One Slide) Malthusian Stagnation Slowly Exiting Malthusian Stagnation Industrial Revolution Source: Maddison Historical Series, World Development Indicator and Own Calculation 4

5 History of Different Regions in One Slide Post-Malthusian Stagnation Great Divergence Convergence Begins Source: Maddison Historical Series, World Development Indicator and Own Calculation 5

6 Log GDP Per Capita, PPP, 1995 Log GDP Per Capita, PPP, 1995 Reversal of Fortune: The Colonized Rich in 1500 Are the Less Rich Today Urbanisation in 1500 Log 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

7 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 9

8 Post-War Experience: Examples of convergence and divergence Within rich countries All countries, Source: Barro and Sala-i-martin 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

9 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? 12

10 World Bank Poverty Definition : $1.25 (PPP) per day As of October 2015: $1.90 (PPP) per day Rs per day (2015) and Rs per day (2011) 21.23% below poverty line ($1.90 poverty line, 2011) Official Poverty line (Tendulkar Committee) * Rs 39.5 per day ( ) Rs per day( ) Global poverty: ~900 million people in 2011 of which 255 million in India Note: * Estimated using Rural-Urban population weight and adjusting for inflation. 13

11 Since WWII, only 13/101 transitions to High Income Status Source: China 2030 : Building a Modern, Harmonious, and Creative Society, World Bank (2012) 14

12 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,

13 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,

14 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 18

15 Despite Divergence of Incomes, Convergence of Life Expectancy Source: World Development Indicator and Own Calculation 19

16 Indian Economic History 20

17 Precocious Democracy: Sustained Political Openness at Low Levels of Income Source: Data from Rodrik 2013 and Polity IV. India growth data from WDI for

18 Precocious and Cleavaged Democracy: Sustained Political Openness Despite Social Cleavages Source: Banerjee & Somanathan, 2007 and Own Calculations 22

19 Three Development Choices Political: Democracy versus Autocracy Economic: Markets versus State Social: Guarantees versus Opportunities 23

20 Background: Individuals Competing visions of Nehru, Gandhi, and Patel Jawaharlal Nehru: Self-reliance, industrialize or perish, importance of state Mahatma Gandhi: Self-reliance, village communities, industrialize and perish Vallabhai Patel: Pro-agricultural landlords and business 24

21 Cont (Background: Ideology) Zeitgeist (abroad): Inspired by Russia and Japan; Great Depression but also post-war Europe s move toward the Welfare State 25

22 26

23 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 27

24 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 ) 28

25 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. 29

26 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 30

27 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 31

28 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 32

29 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 33

30 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 34

31 Import Substitution and Licensing with Indian Characteristics 35

32 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 Castes and Schedules Tribes (Also, they got guaranteed seats (15 %) in the legislatures) In 1989, reservations expanded to include Other Backward Castes and now account for about 50% 36

33 Reforms of 1991 Macro-economic stabilization Exchange rate devaluation Trade and FDI reforms Dismantling industrial licensing 37

34 The Economic Outcomes 38

35 Indian Growth History: (Hindu versus Rapid Growth) Crisis Boom Take off Hindu Rate of Growth

36 Chindia From

37 Reversal of Fortune Between China and India 41

38 Steady Decline in Poverty Poverty Ratio No. of Poor (million) Rural Urban Total Rural Urban Total URP MRP 42

39 Growth and democracy have led to seismic social transformations Western Uttar Pradesh Eastern Uttar Pradesh Change Change Dalits not seated separately at non-dalit weddings 26.9% 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 babies 0.0% 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

40 Precocious Indian Model: Services-Intensive Not Manufacturing-Intensive Pattern 80 India 80 China 80 World Agriculture Manufacturing Services Agriculture Manufacturing Services Agriculture Manufacturing Services Source: World Development Indicator and Own Calculations 44

41 Prematurest De-Industrializer Source: Premature Deindustrialization; Dani Rodrik 45

42 Large Exporter of FDI (Skill) FDI Gross Inflow (% of GDP) FDI Gross Outflow (% of GDP) China India China India Source: International Monetary Fund and Own Calculations 46

43 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 47

44 Recommended Readings Branko Milanovic, Global inequality: A new approach for the age of globalization 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 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 48