Economics for all: Unshackling Economic Theory and Practice from the Clutches of Racism

Review article contributed by Chaitanya Talreja and Ritwika Patgiri, PhD students, Faculty of Economics, South Asian University

All eyes were on the US elections on the 3rd of November, 2020, in a year which has been marked by the Coronavirus pandemic along with an unprecedented rise in the Black Lives Matter movement. The student-led Development Study Group (DSG) of South Asian University invited Professor John Komlos from the University of Munich who has been pivotal in the emergence of anthropometric history as a field of research. The topic of the talk was ‘The Covert Racism in Economics’ – a topic much needed to be discussed. It is hard to deny economics as a subject has paid scant attention to racism. And when race is indeed brought up, it has reflected the biases of the economics profession. For instance, the 1982 Nobel Laureate George Stigler had claimed that Black workers are inferior workers who need to ‘work harder’ (Sigler 1965). Keeping this in the background with the recent widespread protests, it becomes important to address the elephant in the room.

Professor Komlos started his lecture by pointing out that economic theory has a racist consequence to it but warned us against making the presumption that economists are racists. He talked about institutional racism which is structured in a way that disadvantages certain groups. He pointed out that the racial and ethnic minorities in the US are much more likely to be poor as compared to the whites. This according to him is a manifestation of historical exclusion and disadvantages faced by these groups in the economic spaces. Professor Komlos then introduced 14 ways in which disadvantages faced by racial and ethnic minorities are systematically ignored in economic theory by attacking its several foundational assumptions. He paid special emphasis to power and economic theory’s total disregard to it. He then questioned the assumption of free information and rationality. The disregard of economic theory towards society was also questioned. Economics as a discipline has always focussed on utility-driven individuals but this is far from the truth. The disregard of the discipline to morals is also questioned which is fixated with efficient free markets and economic growth. The belief that exploitation does not exist does not help either. He called them the “Alice in Wonderland” assumptions and implied that mainstream economics feeds into structural racism.

Prof. John Komlos, Emeritus Professor of Economics and Economics History, University of Munich.

Prof. Komlos categorically pointed out the manner in which the mainstream tradition analyzes discrimination within the ambit of its individualistic approach as opposed to a systematic or structural issue. His talk motivated us to seek reasons for such systematic ignorance of the issue of discrimination in the economics discipline and profession. We briefly discuss why this possibly has been the case in this blog post.

Methodology of mainstream economic theory and practice

Prof. Komlos in his talk gave a lucid account of how the mainstream economics fails to address crucial aspects of social reality as a social science discipline, implicating systematic exclusion of historically disadvantaged sections of our society. The important question that arises is why has economics failed to address the perpetuation of systematic social inequalities both in terms of its theoretical framework and practice and has continued with a visibly degenerative methodological approach?

To answer this question, we first need to understand the immanent characteristics that dominate the discipline of economics.  The methodological approach that dominates the epistemic validity of economics comes from what is commonly understood as mainstream economics. Dani Rodrik pins down these defining methodological characteristics as methodological individualism, market fundamentalism and mathematical formalism. It is these methodological characteristics that dominate the theoretical approach of economists in defining and understanding problems. Methodological individualism leads to defining economic problems in terms of homo economicus or individuals/entities. These economic agents adhere to apriori behavioural principles and interact in the economic system separating them from the cultural, social or institutional reality they belong to. Market fundamentalism pertains to the excessive use of markets as the fundamental space of defining economic problems and also searching the solutions of problems defined in this manner in the space of markets. Mathematical formalism displays the fettish to use mathematical and statistical techniques to establish and explain economic phenomena as opposed to their instrumental role in advancing or simplifying an inquiry. It is the bedrock of the combination of these methodological approaches that form the building blocks of a plethora of economic theories that come from mainstream economics which has been dominating the economics profession since the middle of the twentieth century. This approach has had a profound influence on how economists have studied discrimination.

The economics of discrimination  

One of the central issues that attracted economists to study discrimination has been in the realm labour market. Economists have attempted to explain the observed wage differentials between the whites and the non-whites using their market-based frameworks. Gary Becker the 1992 Nobel laureate in economics laid the foundations for economists foray into the field of discrimination. This approach boils down to show that the competition in the market of rationally profit maximising economic agents/employers will tend to drive out the discriminatory employers. This is because it would be irrational for an employer to employ an equally qualified white worker at a higher wage than a non-white worker. The competitive forces would drive out discrimination. Another 1972 influential Nobel laureate Kenneth Arrow’s work has similarly approached the issue using a market based framework. The discrimination faced by the non-whites in the economic spaces in this line of work relies on defining “taste-based discrimination” and “statistical discrimination”. Taste-based discrimination reflects the dislike for members of certain race or certain ethnic community in economic spaces like labour, housing or credit markets. In the market framework such a taste-based discrimination is unviable due to competitive forces at work. Statistical discrimination on the other hand emanates not from a dislike for a particular community. It depicts the perception of the employers to use race, gender or ethnicity as surrogates for unobserved characteristics like productivity of an individual. This concept places emphasis on the rational behaviour of utility or profit maximizing economic agents while facing such choices, thus, justifying such observed discrimination in the economic spaces. Economic spaces thus, are viewed to exist in a discriminatory world which is given, and such tools of analysis depict its manifestation in the market as a constraint against which individuals optimize. The discriminatory outcome in the market is considered to be due to lack of “information” and not  the stereotypical mindset of economic agents. If provided with more information on “productivity”, economic agents would not discriminate because to them only performance matters. Historically disadvantaged communities as noted by Prof. Komlos are more likely to be poor and less likely to have access and opportunities to educate and skill themselves to participate and compete in the markets. This reinforces beliefs held by the privileged sections about the performance of the disadvantaged sections of a society in the markets. Therefore, the market based approach is instrumental insofar it captures the manifestations of such beliefs in the markets but fails to address the larger issue by keeping its focus on the margins. It puts the onus of better signaling the performance related “unobservable” characteristics by the disadvantaged communities in the markets or on devising mechanisms to improve flow of such information. An ideal approach is to address the issue holistically by including the historical and structural disadvantages in their frameworks to capture and remedy such systematic disadvantages.

It is not just the methodological approach that has fallen short of adequately addressing the issue of structural disadvantages. There is evidence to show that the profession is disproportionately under-representated by the historically disadvantaged sections of the society.

Racism in economics profession: What does the empirical evidence say?

A recent calculation by Cihak, Mlachila, and Sahay shows that only a meager 0.2% of the top 7000 articles published in the top 10 economics journals in the last 10 years talk about race, racial inequality, or racism. Although, gender does slightly better here, but only meagrely at just under 1 percentage . In the year 2014, out of 500 doctorate degrees awarded in Economics to US citizens, only a minuscule 42 were non-whites (Bayer and Rouse, 2016). Again, the number of women who were awarded a Ph.D. in Economics that year was 157. It is noteworthy that Black representation in Economics is lower than in other disciplines like science, maths, engineering, and technology. The numbers from the Ivy League colleges are even more dismal. In addition, Black economists are less likely to get published in the top journals of economics (Mason, Myers, Darity, 2005). These numbers are alarming but represent the structural under-representation of certain groups of people within the discipline of Economics. This intrigues us to question whether there is a bias within the discipline that effectively makes a certain group of people ‘invisible’? Isn’t increasing diversity within the Economics profession a part of the solution to racial inequality?

Professor Komlos in his book Foundations of Real-World Economics notes mainstream textbooks fail to mention Nobel laureates like Herbert Simon, Daniel Kahneman, Oliver Williamson, and Robert Schiller among others who have challenged the mainstream orthodoxy through their works. This is an indication of how the discipline misleads students into thinking of a perfect world sans racial inequality and all the other problems of the world. There is evidence of diversity leading to changing dynamics and decision making in policies or that ethnically diverse research teams receiving more citations and higher-quality research (Freeman and Huang, 2015). It is indeed time that the discipline transitions to the ‘right side of history’ as IMF policymakers Cihak, Mlachila, and Sahay have pointed out after the Black Lives Matter Movement broke out. The onus, thus, naturally falls on what we call the ‘mainstream economics’. But the question still remains: why has the economics profession been holding on to such methodological and professional biases? The answer possibly lies in the political economy of the economics profession.

The political economy of economics profession: Restructuring the economics edifice 

The methodological devices economics profession uses to approach issues in society seems to be interrelated with the way economics trains, hires, grants tenures and sets parameters for “good” professional economists. Expert historical accounts like Blaug (1976), Hausman (2008) and Caldwell (2013) on the history of methodological approach in economics note that the 1953 essay by the 1976 Nobel Milton Friedman “The methodology of positive economics” has had a deep influence on the methodological frameworks used by economists. Blaug (1976) and Hausman (2008) note that in essence the essay propagates an instrumentalist view of economics as a science-economic theories should be appraised by their ability to predict/anticipate outcomes without much concern about the realism of assumptions as opposed to a realist view of science which seeks to find the truth or the real mechanisms of how the reality works. Another related development has been the influence of the so called neoliberal ideology on economics, genesis of which again is credited to Milton Friedman and the 1974 Nobel Laureate Friedrich Von Hayek. Their contribution was not limited to their influential works but in founding the ideological institution, Mont Pèlerin Society (MPS) in 1947. The MPS is speculated to be the melting pot for intellectuals supporting the neoliberal thought collective (Mirowski, 2014; Naidu et.al, 2020).

Founder members of the Mont Pèlerin Society-from left Ludwig Von Mises, Freidrich Von Hayek and Milton Friedman.
Image source: https://twitter.com/montpelerinsoc

According to Dani Rodrik, although it is a tricky task to circumscribe the neolibreral ideology in a well defined frame, it is responsible for heavily influencing mainstream economics theory and policy towards market fundamentalism and its individualistic focus. Naidu et.al. (2020) assert that the neoliberal ideology has been instrumental in shaping the economic policy landscape since 1980s with its excessive emphasis on instituting market institutions, financialization, retreat of the public sector and hyperglobalization of the world economy as panacea for all economic problems disregarding the local contexts and institutions. 

These methodological and ideological influences also impact how the economics profession rewards professional economists and academicians. This has been elucidated by the 2001 Nobel Laureate in economics George Akerlof through his 2020 study “Sins of Omission and the Practice of Economics”. According to this study there is a “hardness” bias in the economics discipline. Economists perceive economics at the top of the pecking order in social sciences with better analytical tools as compared to disciplines like sociology, anthropology etc. and more “scientific” in its approach. This is related to its use of mathematics and quantitative techniques as a reflection of its superiority. Generally, good economic practice involves training in mathematical modelling and statistics as opposed to understanding ways how an economy functions. This bias influences not just the training but also publications, jobs and reward mechanisms. This process has further strengthened already formed belief on what good economics practice is and keeps perpetuating by favouring this hardness bias and circumscribing it against “softer” modes of inquiry which involve qualitative methods like ethnography or case studies. This way the profession ends up omitting various important questions and issues which generally are difficult to address through its established frameworks and techniques.

There are strong tendencies within the economics profession of protecting and preserving approaches perceived as intellectually virtuous and elegant but are potentially degenerative to understanding reality. This is being recognised and pointed out from all corners within the profession both from eminent mainstream economists and non-mainstream economists as discussed in this blog. We think these calls are an important indication of regeneration of economics towards progress in “economic sciences”. But these voices of change are still peripheral in nature as compared to the continuing dominance of mainstream economics. It is time for a radical restructuring of teaching methods, practice and epistemic approach to create progressively inclusive institutional architecture of the economics profession (See Bayer and Rouse (2016); pp. 233-237). This will help to not only tackle lack of diversity within the profession but also preserve its importance as a part of the solution against systematic discrimination and support human progress.        

“It would be wrong to assume that one must stay with a research programme until it has exhausted all its heuristic power, that one must not introduce a rival programme before everybody agrees that the point of degeneration has probably been reached.” 

-Imre Lakatos

PS: Here is the video of the DSG web talk by Professor John Komlos.

Knowledge, State and Society: Rethinking NEP 2020

A web panel discussion hosted by DSG

The Panel:

Dr. Ravi Kumar, Associate Professor, Faculty of Social Science, SAU

Prof. Disha Prof. Disha Nawani, Tata Institute of Social Sciences, Mumbai

Prof. Saumen Chattopadhyay, Jawaharlal Nehru University, New Delh

Moderator: Samyak Jain, PhD student from Faculty of Economics, SAU, New Delhi

IMG-20201004-WA0004

Event Poster

Article contributed by: Konica Sehgal and Maheshwar Giri, PhD Students, Faculty of Economics, SAU

On 29 July 2020, the Union Cabinet of India approved The National Education Policy 2020 (NEP 2020) which envisions a comprehensive framework to guide the development of education in the country. NEP 2020 replaces The National Policy on Education 1986which was in place for 34 years. Some of the major departures in NEP 2020 include the shift from 10+2 structure of school education to “5+3+3+4” design encompassing foundation stage (3-8 years), preparatory (8-11 years), middle (11-14 years), and secondary (14-18 years). NEP 2020 aims at reforming board exams through a reduction in the syllabus and focusing more on “experimental learning and critical thinking”. The changes in the higher education system include the opening up of higher education for foreign universities, the dismantling of University Grant Commissions (UGC) and All India Council for Technical Education (AICTE), the phasing out of the MPhil program, and the introduction of four-year Bachelor Programs. Also, NEP 2020 has envisioned a new National Research Foundation.

Renewed debates and discussion on the state’s role in the development of education surfaced soon after the approval of NEP 2020. NEP 2020 has sparked significant public interest in the broader question of how state and society can overcome the existing divisions and challenges in access to quality education. To deliberate further on this crucial issue the Development Study Group (DSG) organized a panel discussion “Knowledge, State, and Society: Rethinking National Education Policy 2020” on 7 October 2020 as a part of its DSG on web discussion series. 

The panel consisted of three expert and leading academicians in social sciences to deliberate and present a critical analysis of the contentious issues in the NEP 2020. Specifically, Dr. Ravi Kumar an expert in sociology spoke on the historical context of understanding of education and education policy in India in which the NEP 2020 must be situated; Prof. Disha Nawani with her expertise in education policy spoke on issues associated with education policy, learning for the child and the poor; Prof. Saumen Chattopadhyay a pioneer in economics of education provided insights on the challenges associated governance and financing education in India especially with concerns related to education quality and access. Here we bring you the main insights from the speakers and the discussion that followed.

The session began with Dr. Ravi Kumar’s talk who delineated the important difference between knowledge and education. He posited that education is a narrower term, talked about through schools, curriculum, etc. while knowledge is a critical concept containing in its womb the possibility to critique state politics of knowledge production. He asserted that the dominant political and economic regime determines the contours of education and has the power to control the content that is taught. Here, he also talked about the role of social relations in knowledge production. Connecting NEP 2020 to the history of education policy in India, he explained that the Indian state, particularly after National Education Policy 1986, has been pushing towards the commodification of education through incremental involvement of private players in the education sector, and historically education policies including NEP 2020 have persistently failed to address the inequalities in education. Prof. Ravi asserted that NEP, like its predecessors, encourages the interest of private capital with the active support of the conservative political forces making it a neoliberal neoconservative topic. He observed NEP 2020 as a part of the larger process that started long back in pushing education to be subservient to the market, thereby commodifying it, under the market rule. Dr. Kumar towards the end of his talk, with a rather dim view, explained that teachers as workers in education industries would be the worst sufferers under NEP 2020. The usage of corporate language like ‘incentivizing the teachers’, performance-based-remuneration, employment on a contractual basis, and appraisal for tenure extension are some of the examples of treating teachers like corporate workers.

Next, Professor Disha Navani started her session with the question: Whether an equitable education system is, at all possible, in an unequal society that is deeply stratified and hierarchal? She asserted that social inequalities are bound to get reflected in an education system that perpetuates inequalities. Questions like whose knowledge gets reflected in the school curriculum, how are different social groups being represented or omitted in the institutions, what are the implications of pedagogical interactions between teachers and students, or what are the parameters of assessing children, reflect social stratifications that mirror inequities in education. She described the Indian education system as a “layered education system” with heterogeneity in the types of private and public schools. The kind of school a child attends reflects the kind of social background he/she comes from. To ensure quality education for all, she argued that this link needs to be snapped. However, to some extent, she admits the financial constraints of the state as one of the major reasons behind inequality in access to quality education. Professor Disha did not see NEP in opposition to the kind of policies that have been introduced in the past in the education sector in terms of privatization and contractualization. She asserted that it reinforces the past policy trajectory of commodifying education. She made a novel point about the use of the word ‘passion’ for teachers in NEP. She observed that more passionate teaching has been pitted as a solution for the abysmal learning outcomes and infrastructural issues of the education system, which is problematic. Since the provision of education is as inequitable as the social inequalities in the country, the NEP 2020 has continued an attempt to justify it through several mechanisms like board exams which perform the function of eliminating students and justifying failure. She also critiqued the idea of relevance which is used to justify a reduced curriculum to children who come from different backgrounds. Like earlier policies, NEP 2020 also promulgates the concept of fun and eventful learning, which Prof. Nawani viewed with skepticism as it might lead to no learning at all.

The last speaker of the event, Professor Saumen Chattopadhyay, shed light to locate governance in the reconfiguration of the higher education system that NEP 2020 has prescribed. He started by pointing out the rationale behind the policies and recommendations stipulated in the policy. He highlighted the major challenges identified by NEP 2020 in the governance aspect of the higher education institutions which include: failure of UGC regulations; lack of vibrancy and enthusiasm among teachers and students; promotion based on seniority; lack of performance-based incentives for teachers; the small scale of higher education institutions leading to suboptimal utilization of resources. Prof. Chattopadhyay then explained the importance of teachers and students concerning governance challenges. This is because of the important role they play in the university performance supported by its physical infrastructure and financial resources. Further, he laid down four points along which the policy tries to reform the aforementioned governance issues. These are institutional reform; policy-induced governance reform; improving governance through market and funding induced government reforms. Teacher autonomy in deciding on and setting targets for academic activities, focus on ‘light but tight’ regulation, strengthening of vertical leadership (vertical relations in governance) as opposed to the horizontal, ensuring student’s sovereignty to promote marketization of education, performance-based funding of universities are some of the many aspects touched by Prof. Chattopadhyay. According to him the two positives that come out of NEP 2020 regarding governance are the recognition of higher education as a quasi-public good and enhancing budgetary support to 6% of GDP for education. However, encouraging competition among research institutes for acquiring funds based on merit and peer-reviewed research is likely to create unhealthy competition leading to continuous demand for funds and hierarchal issues with negative consequences for the quality of education. Concluding his presentation, he reiterated that under NEP 2020, higher education is going to emerge as a positional good as ranking, accreditation, and brand become important as opposed to promoting the intrinsic purpose of higher education.

The discussion was followed by a lively questions and answers round in which the audience participated. The entire session was enriching with wide-ranging issues being discussed in an intellectually fulfilling event that lasted one and a half hours. We gathered critical insights from the experts on the difficult challenges associated with the education system in India especially concerning NEP 2020. Framing and executing an ideal education policy that ensures quality education for all transcending India’s social inequalities facing challenges dynamic in nature is fraught with contradictions and struggles. Nevertheless, we academicians and intellectuals continue to struggle to figure out the ideal configuration of relations between knowledge, state, and society to promote free thinking in a just and equitable society. This discussion was a small attempt in this direction. We leave the reader with the wonderful lines by the pioneer of free-thinking and beloved Indian poet Rabindranath Tagore:

Where The Mind Is Without Fear

Where the mind is without fear and the head is held high

 Where knowledge is free

 Where the world has not been broken up into fragments

 By narrow domestic walls

 Where words come out from the depth of truth

 Where tireless striving stretches its arms towards perfection

 Where the clear stream of reason has not lost its way

 Into the dreary desert sand of dead habit

 Where the mind is led forward by thee

 Into ever-widening thought and action

 Into that heaven of freedom, my Father, let my country awake.

PS: Click here to view the full video recording of the event.

By Development Study Group-DSG Posted in DSG on web

Panel Discussion: Demonetization

Date: 21st November, 2016

Panelists: Dr.Anirban Dasgupta, FES, Dr.Prabhash Ranjan, FLS, Dr. Ravi Kumar, FSS and Dr.Soumya Datta, FES

Contributed by Vasuprada Tatavarty

The objective of this panel discussion was to bring different perspectives from economics, law and sociology on the Indian government’s decision to demonetize Rs. 500 and Rs. 1,000 currency notes at the same platform. The event generated more than anticipated interest even though it was organised at a short notice with exams looming just around the corner.

Dr.Soumya Datta was the first speaker from the panel presenting the current macroeconomic scenario. He emphasized on the various aspects concerning implementation of this policy. The first aspect of his concern was regarding the disruption of economic transactions disproportionate effect on the agricultural and informal economy. Even though there is no black money in agriculture (Agricultural income is tax exempted in India), it will be one of the hardest hit sectors with the sowing season just about to begin. Dr. Datta recognised the difficulty in segregating cash into white or black money. Even if people just have two options, that is, to either deposit money in the bank or forgo it as a loss, the benefits are not so obvious to begin with. If the money is deposited in the bank, then it will be appropriately taxed but if it is foregone then the liability of the central bank cannot be written off unless the notes are destroyed. Therefore, the government cannot use the money for social expenditure as is being suggested. The speaker concluded with the prediction that the policy shall prove to be a disaster since the costs would far outweigh the benefits. Also, the credibility of the financial system would be adversely affected.

Dr.Prabash Ranjan started with some interesting figures to better assess the current exercise. About 14 trillion rupees was de-legalized with estimates suggesting that about 10-25% of it is in the form of black money hoarded in cash. This translates to about 3.5 trillion rupees. This 3.5 trillion is a miniscule 6-7% of the total black economy because a lot of black economy exists in the form of gold, benami property etc. This amount maybe insignificant in comparison to the total black economy but not in absolute terms since it amounts to 2.3 to 5.2 % of India’s GDP. The speaker posed the question that if 3.5 trillion rupees could be wiped out of the system, then why was this policy not worthwhile? The speaker believed that 10.5 trillion rupees will be tendered for exchange at banks and that which is not tendered can be presumed as black money in cash. This shall reduce the net liability of the central bank post December. It would reflect on the asset side of RBI’s balance sheet and any windfall profits that the central bank makes, will get transferred to the central government which would in turn give it more fiscal space. But the speaker noted that the grey area here was that the law on this front is ambiguous.

Though the speaker agreed that costs of transition were high coupled with a frequent change in govt. notifications, he believed that a fair assessment could be made only after December by considering the amount that would not been tendered back. The legal arguments of this policy are summarized as follows:

  1. What is the legal basis for the central govt to issue a notification and declare 86% of currency in circulation will no longer be legal tender?

The legal basis is provided by section 26(2) of the RBI act which states that the central government may declare with effect from a specified date, any series of bank notes of any denomination to no longer be legal tender. PILs have been filed in the Supreme Court over this legal issue stating that this section only gave the government a limited right to declare that a particular series of bank notes of a particular denomination shall cease to be legal tender. Therefore, it did not give the state the right to de-legalize one whole denomination. The government notification stated that bank notes of existing series (that is, the Mahatma Gandhi series) shall cease to be legal tender. Therefore, the speaker concluded that the govt’s action is consistent with the act.

  1. Does imposing restrictions on withdrawals have a legal basis?

Under normal circumstances, there was no basis for the government to declare how much a person can withdraw from his/her account but in the current situation of a cash crunch, this can only be dealt with by placing restrictions. Otherwise the very purpose of the policy would be defeated. Therefore, the speaker found it to be a reasonable restriction.

  1. Demonetized currency that has been expropriated by the government and this amounted to the violation of a person’s right to property.

Right to property is a constitutional right but anyone can be deprived of their property but only through an authority by law. Presuming that the government notification was law, even if there is an expropriation of property there was a procedure to get your notes exchanged. According to the speaker, the right of property was not violated. But that said for a person with considerable amount of cash holdings and no bank account, the government has effectively deprived such a person’s right to property. The courts would have to decide about such cases later.

Dr. Ravi Kumar began by discussing the very definition of black money. Since money accumulated by casual workers, housewives and different type of workers is being deposited in banks currently, a certain dis-aggregation according to the source should be made. The definition of black money, that on which tax has not been paid, depends on the process and the person because when a person with black money pays it to a person paying taxes, it is automatically converted to white money. Therefore, any estimates of black money are dependent on presumption. Bringing in the sociological perspective, the speaker gave the example of a maid who has saved up five lakhs over the years. The patriarchal nature of society does not allow her to open a bank account, since that will imply a disclosure to her husband who will choose to spend the money on alcohol. The speaker expressed concern whether the money the government will gain through this exercise will even be spent on health and education or any worthwhile social expenditure. Further, the speaker questioned the need of a policy that treats accumulation by housewives, casual workers, and that by corporates on par with each other. Drawing a parallel with the operation shock and awe conducted at the beginning of the Iraq war, the speaker felt that the purpose of this policy seems to be similar in nature. The speaker concluded by stating that like the Iraq war, this operation is also likely to backfire and called for a transparent system in which black money cannot be created in the first place.

Dr.Anirban Dasgupta, the last speaker on the panel, summarized the different perspectives presented by the speakers and drew a parallel between, the way the nation is being run in recent times and the patriarchal nature of decision making within a household. Next, he drew attention to the crowds standing in lines in an urban area in Delhi, visibly happy about the entire operation thinking that the head of the family is doing this for the greater good of the nation. The speaker ended the discussion by raising a pertinent question, that is, through what processes does this govt manage to retain the trust of the people and when will a moral outrage engulf this country that will see an end of this complacency?

This panel discussion was followed by two question-answer rounds and ended with a lively discussion which exceeded the allotted time by a wide margin.

By Development Study Group-DSG Posted in Dsg events
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Politics, Diplomacy and Trade Relations

ind-pak

Article Contributed by: Vidhi Garg, M.A. Development Economics, Second Year

In the wake of recent terrorist attack in Uri, the Modi government has taken certain bold steps like the surgical operation to damage terror related infrastructure in Pakistan occupied Kashmir. Further, the PM’s statement “blood and water can’t flow together” hinted at a review of the Indus Water Treaty with a threat to stop or reduce water flows to Pakistan. Also, a call to review the MFN status accorded by India unilaterally to Pakistan in 1996 has been made.

Trade relations between two countries have always been held hostage by political relations, often leading to a curtailment of trade. Thus, the call to review the MFN status accorded to Pakistan comes as no surprise. Granting MFN status to a county is a guarantee that their exporters will not pay tariffs higher than the nations that pay the lowest tariff. So the situation is that while Pakistani goods are entering Indian markets at minimum possible tariff rates but Indian goods may be paying a higher tariff than some other third country while entering Pakistani markets.

On the face of it, it may sound like a good idea to withdraw the MFN treatment which is yet to be reciprocated. Though the approach of Pakistan on this issue has been gradual, it would not make economic sense for India to withdraw the MFN status already granted to Pakistan. It has to be noted that Pakistan has already moved from specifying a positive list (i.e. listing products or services on which the country agrees to lower tariffs) which allowed only 1946 out of 5203 goods (as per HS code at six-digit level) to be imported from India to specifying a negative list (i.e. listing products or services on which trade barriers will be maintained) in November, 2011. The current negative list that bans 1209 products would also be hopefully phased out over time. Under a similar negative list, India also restricts import of 428 of 5203 items from Pakistan. But this is the same set of commodities on which India restricts imports from all countries of the world.

Next, if we look at trade figures, India has been consistently maintaining a trade surplus vis-a-vis Pakistan. India’s exports to Pakistan have been more than USD 2 billion while imports have been less than USD 0.5 billion. In this scenario, if we cancel the MFN status to Pakistan and in retaliation Pakistan gives up its negative list approach, the increased taxes will increase the prices of Indian products in Pakistani markets hence hurting the interests of Pakistani consumers and producers using Indian inputs to manufacture export goods. But the simple law of demand and supply states that increased prices tend to reduce the demand which will have adverse effects on both Indian exporters’ and India’s balance of payments (though relatively small as share of exports to Pakistan in India’s total exports are 0.74% according to UNCTAD WITS database). The worst hit would be top traded items.

Table 1: Top Items of India’s Exports to Pakistan (2015-16)

HS Code Brief Product Description Value in million USD
520100 Cotton 647.1
390210 Polypropylene 84.02
71320 Chickpeas 62.62
540710 Woven Fabrics 45.81
520527 Yarn 42.18
170199 Sugar 41.12
70200 Tomatoes 38.63

(Source: Directorate General of Foreign Trade)

Table 2: Top Items of India’s Import from Pakistan (2015-16)

HS Code Brief Product Description Value in million USD
271012 Light oils and preparations 90.62
80410 Dates 87.98
252329 Other petroleum oils 48.61
271019 Cotton 25.77
520100 Petroleum oils 21.59
270900 Gypsum 20.72
252010 Aluminum ores 18.14

(Source: Directorate General of Foreign Trade)

Often formal channels of trade are being circumvented in this region, making way for significant informal trade between two countries which is estimated to be almost double the value of formal trade.
So an adverse political outcome will not lead a situation of no trade but rather trade will continue to happen via informal routes. Informal routes include trading through third countries like Dubai, Iran and Afghanistan using land, sea and airways or across LOC (Uri-Salamabad and Poonch-Rawalkot). According to a survey conducted by ICRIER[1], the major reasons for informal trade include a long negative list by Pakistan, high duties, inadequate payment mechanism in formal route, difficulty in meeting standards, ease of sending goods via third country, harassment by custom officials, etc. According to the survey conducted in India and Dubai, informal trade between India and Pakistan is estimated to be around USD 4 billion.
The survey also quotes that comparison of transaction costs between the direct Delhi-Lahore route and indirect and informal Delhi-Mumbai-Dubai-Karachi-Lahore route shows that the indirect route is 11 times longer than the direct route; 4 times more expensive than the direct route; but is almost 3 times more efficient. This informal trade via informal route not only causes a loss of revenue to governments on both sides, but also leads to trade of sub-standard products, which is of grave concern when it involves products like drugs and pharmaceuticals.
So if formal routes of trade are discouraged by political events, it will provide a further impetus for trade to happen via informal routes. It is next to impossible to wipe out informal trade in the presence of historical ties between people on both sides of the border as well as weaker institutions to regulate the implementation. Thus it will simply be inefficient to formally restrict trade between the two countries and hence bad economics.

Reference:

[1] Nisha Taneja and Samridhi Bimal (2016), “India’s Informal Trade with Pakistan”, Indian Council of Research on International Economic Relations, Working Paper 327.

Disclaimer: The views expressed in this article are that of the author and do not reflect the view of the Faculty of Economics, South Asian University.

DSG Movie Screening 1: Inequality for all

Director: Jacob Kornbluth

Stars: Robert Reich, Mary Tyler Moore, Lily Tomlin

Premiere: 19th January 2013, Sundance Film Festival, USA

Screening date: 16th September 2016

Venue: FSI Hall, South Asian University

 Review article Contributed by: Chaitanya Talreja

“Inequality for all” is a narrative depicting widening material inequality in the American society since 1970s while explaining the functioning of modern capitalism. Inequality has been a significant issue of debate in social sciences from various socio-economic perspectives. This movie wraps in itself theoretical concepts from sociology and economics, politically associated with the leftward oriented philosophy in the American context. Robert Reich[1] manages to find wit and humor amidst the complexity of this subject. A message that the movie effectively conveys is that Inequality per seis not problematic, but it is the widening income gap among the social groups in the American society which is of concern. To explain this, it uses the apparatus of the State, market and class. The state and the market are the two most important institutions in a capitalist society within which the capitalists (owners of the means of production) and the working class operate. While these are serious theoretical concepts, the movie does a decent job of bridging the gap between abstraction and “reality” through recent and archival footages, interviews of various people belonging to different strata of the society and anecdotes from Reich’s own personal and professional life experiences.

The post second world war period until 1970s is understood as the “Golden Age of Capitalism” for America in particular. Their society witnessed decreasing rates of inequality. But this trend reversed during the last 30 years. This according to the movie has been because of rising income gap between upper income and middle-lower income groups and the shrinking size of the “middle class” (population lying between the interval of median income minus 50% of the median income to median income plus 50% of the median income). The middle class is associated with the working class that works for capitalists. But, the middle class is also an important consumer of the commodities sold by the capitalists. A direct consequence of shrinking size of middle class could be shrinking demand for capitalist commodities as the marginal propensity to consume out of income for this class is usually higher than the upper income groups. This has been explained using the concepts of virtuous cycle and vicious cycle. In a virtuous circle, when companies hire more, workers can buy more, productivity increases and as a result higher profits generate greater tax revenues which could be spent on enhancing public welfare, improving the quality of workforce, economy expands and again companies expand and so on. In a vicious circle, when companies downsize to preserve profits, unemployment rises, workers buy less, profitability is negatively affected, fall in tax revenues affect welfare spending which decelerates the economy and so on. The pre-1970s period here represented an economy in a virtuous cycle while the subsequent period a vicious one. This happened because of a few inter-related events. In the post 1970s period the American companies started facing stiff competition from the Japanese companies. As a response they substituted their relatively expensive labour costs by disintegrating their production chains. They outsourced the produce from regions inhabiting cheaper labour resources across the globe. The state forms the rules within which the market operates and this period also saw a shift in the regulatory behavior of the state. The trade unions were clamped down and the workers protests in America were suppressed. As a consequence, it was difficult for workers to maintain their household income and the period saw greater number of females entering the labour force to maintain the household income along with increased personal borrowing.

The relaxed regulatory environment led to greater “financialisation”, which opened avenues for the upper income groups to speculate and earn financial profits and borrowing became an important component in middle class consumption. These features of the post 1970s period became important contributors to the 2007 economic crisis. This in brief what the entire movie was about. While the experience of the movie is something personal and here it was an endeavour to bring out the best words can!

Post Movie Discussion:

The movie screening was open to all the departments of the University and we were glad to see students from International Relations and Sociology. There are two important points raised in the discussion which are worth mentioning here. One of the sociology students raised an issue that the movie though used the Marxists concepts of class and crisis in a capitalist economy it abstained acknowledging Marxian association. It supported capitalism as a system and only suggested fixes within a capitalist set-up. Although, this is a philosophical position that the movie makers chose which we do not have  control over, but was an important point from that student’s perspective. The second key point in the discussion raised by a student was that the movie was politically biased as it selectively showed people from certain political affiliations in American politics and abstaining from speaking about the others. The rest of the discussion briefly involved technicalities associated with taxation (regressive and progressive taxes) and the context of inequality and middle class in developing countries.

[1]Professor of Public Policy at the University of California at Berkeley and former Secretary of labor in the Clinton Administration

Movie Courtesy: Sahil Mehra

Development Study Group Meeting 1: Muzaffarpur: A Personal Experience

Speaker: Pratyoosh Kashyap, M.A. Development Economics

Date: 9th September, 2016

Contributed by Vasuprada and Chaitanya

The first DSG meeting started off in an engaging manner with one of our M.A. second year students, Pratyoosh sharing his personal experiences from a three week-long visit to a few villages in Muzaffarpur, an extremely impoverished district in North Bihar.

The theme underlying his talk was as to understand the nuances of how socio-economic conditions affect implementation of public schemes targeting the poor. ‘Information gaps’ were found to be a major public policy challenge in this region. The villages covered were described as “isolated islands” with no electricity, access to toilets, modern education (dysfunctional government schools). Since 95 per cent of people in the three panchayats surveyed by the speaker were found to be illiterate, a direct consequence was a complete lack of awareness about Government Schemes created for their welfare.  Since the Mahatma Gandhi National Rural Employment Guarantee Act (MNREGA) is a national scheme enacted to guarantee employment to the poorest of the poor, thus, its functioning happened to be of significance in this context. The speaker visited an MNREGA worksite where a pond was being constructed. It was observed that the worksites were dominated by women and small children.The Act guarantees certain basic work conditions such as shelter from the rain and sun and crèche for infants, which were absent. It was noted that a rainy day meant no work could be accomplished and therefore, no income. Thus, the actual working days worked out to be less than those guaranteed.

Corruption was found to be rampant and embedded within the system. The Rozgar Sewak, the person who monitors the MNREGA worksite would only come post-lunch and take attendance and leave. This led to internal quarrels among the workers as to the division of tasks. Due to this coordination failure, the chances were high that the workers would be ‘working’ on the same project at the same site next year too. Another form of corruption was observed with contractors colluding with officials and withdrawing MNREGA funds. That is, the contractors got the work done and workers on the MNREGA roll were denied employment with official records stating otherwise. This example portrays the lack of awareness partly due to their illiteracy and other conditions of exploitation.

The extreme conditions of poverty inspired a general lack of hope among the local populace. This led to social problems of drunkenness and no effective contribution to household income. Further, space was created for newer forces such as SamajParivartan Shakti Sangathan(SPSS) founded by Sanjay Sahni who has devoted himself to the cause of empowering the local population for demanding their rights. SPSS aims at creating more awareness about public services in Muzaffarpur district.

The usual training in economics often abstracts the students from the actual conditions in various segments of the society. This presentation was an essential eye opener giving us a glimpse of contrast between development in theory and practice.

One of the key questions in the discussion following the presentation, we feel was about the higher proportion of women observed at the MNREGA work sites. The response speculated the problem of drunkenness and also migration of men to urban regions. Rest of the discussion only sought to elaborate the nature of exploitation and the living conditions which the speaker witnessed and it was pointed out that these regions need proactive involvement by individuals and organisations in empowering the inhabitants of such impoverished regions than research as an end in itself. While research plays an important social role of knowledge generation but the quality of knowledge depends on the minimisation of ‘information gap’ between reality and development economics theory . This discussion precisely aimed at doing the same.

Words would not be enough to describe what the presented pictures do. Please take a look.  (Picture Courtesy: Pratyoosh)

Dharna organised by Samaj Parivartan Shakti Sangathan

Dharna organised by Samaj Parivartan Shakti Sangathan

Women at MNREGA work site

Women at MNREGA work site

Rozgar Sewak taking a role call

Rozgar Sewak taking a roll call

Experimenting with Contract Design :Moral Hazard outside the Textbook!

Course: Microeconomics-ll (4 credits)

Instructor: Debdatta Saha

Team: Shelly Gulati, Komal Biswal, Prem Kumar, Juhi Jayanandan, Manish Prasad, Sakshi Jindal, Vrinda Gupta

SUMMARY

As a part of our Microeconomics II course (dwelling on the economics of information in detail), we used the experiment provided in Gchter and Knigstein (2006) to understand finer aspects of the moral hazard problem in a principal-agent framework. In the experiment, the principal has to outsource a piece of work to an agent, with the effort put in by the agent unobservable by the principal. The classroom experiment based on this problem comprises of a two-person game. Students first take up the role of the principal and set up a contract which specifies return share and a fixed payment to/from the expert. The contracts are then shuffled and redistributed in the class. The students subsequently play the role of the agent (expert). Ideally, the agent should accept or reject the contract according to the incentives provided in the contract and for each accepted contract; the student should offer a unique effort level.

The purpose of the game here is to make the students come up with a contract which according to them ensures maximum incentives to the agent (more than the outside option) in order to extract the highest possible effort level. This in turn should ensure the maximum surplus is extracted from the expert. Then, on the other hand, while responding to someone else’s contract, the student plays the role of the expert. Now the student should think of the minimum effort level which she/he shall put in for the contract (since effort is a disutility) to maximize his return share. The innate conflict of interest of principal-agent setup is made obvious to the student by the role play on both sides of the transaction.

DESCRIPTION OF THE GAME

A principal wishes to contract with an agent for completing an assignment. The principal does not observe the effort put in by the agent. However, it is common knowledge that the agent’s outside option is $100, whereas the principal gets $0 if the contract is not signed.

The mapping from effort to outputs is common knowledge and is given as follows:

 

Second results sheet (“Optimal effort choice”)

Return share % Payoff maximizing  effort Actual efforts Average efforts
0, 10, 20 1 0,1,1,5,10 3.4
30, 40 4 0,0,2,4,4 2
50 6 0,0,1,1,4,5,6,6,6,6 3.5
60, 70 8 0,0,1,2,3,3,8,10 3.375
80, 90, 100 10 10 10

Reference: Gchter and Knigstein (2006)

The timing of the game is: first, at time period (t=0) the principal offers the contract then at time period (t=1) the agent accepts or rejects the contract, then at time period (t=2) if the agent accepts the contract he then exerts a non-verifiable effort (asymmetric information), at time period (t=3) the outcome is realized and at time period (t=4) the contract is executed. The principal can offer a non-linear contract, with the fixed payment varying between -$700 and +$700 and a return share of the output, varying between 0 per cent to 100 per cent. A negative fixed payment implies a payment made by the agent to the principal, whereas a positive fixed payment implies a salary over and above the return share to the agent. Higher incentives can be passed on to the agent by increasing the return share at the cost of the fixed payment. The trade-off between the return share and the fixed payment is to be exploited by the principal to provide the correct incentives to the agent.

LEARNING OUTCOMES

The experiment proved to be an interesting exercise for the class of 30students present in the class. A total of 29 valid student responses were available. The composition of the class, with students drawn from six different countries of South Asia, adds an interesting dimension to the experiment.

In terms of learning outcomes, the responses from the class indicate that as a principal deciding the optimal return share and fixed payment was the most challenging part of the game. For most students designing the contract was way more difficult than responding to the contract as an agent. This is in conformity with the observation of Gachter and Konigstein (2006). However, one thing that goes amiss is that even though students report that they don’t have any problem while answering the contract as agents, most of them tend to ignore the outside option. The opportunity cost of accepting the contract is $100 (the amount the agent gets if she/he does not work at all). Therefore, they end up accepting contracts that ought to be rejected. This is not a part of rational behavior; however this is what happens actually while people answer contracts in real life. They responded to some notional idea of what is a fair share, rather than noting the given $100 fixed outside option, mentioned at the beginning of the experiment.

A careful analysis of the given data shows us that for various return shares we have various optimum effort levels. The principal who identifies this problem will offer a return share of “at least 80 per cent” to extract the highest effort (e=10) level from the agent. At this optimum level the fixed payment turns out to be -$219 considering that the expert’s outside option was $100. It was also observed in the class that while answering the contracts most of the students choose sub-optimal effort levels, apart from ignoring  the outside option of $100 in deciding whether or not to accept or reject the contract.

It should be noted that the fixed payment is the participation constraint for the expert and the return share is the incentive constraint. This paper claims that the correlation between return share and the effort level is usually highly significantly positive.

The results obtained from our classroom experiment suggest that the correlation is very slight though it is positive (0.23).

Student responses after the experiment reveal that the most challenging part of the experiment was designing optimal incentives (72 per cent of responses as the principal), whereas about 40 per cent of valid responses as agent reported no problems in coming up with their responses.

Capture 6

Capture 2

There was considerable  heterogeneity in responses in the class, where students from six different South Asian countries were present. The composition of the class is shown below:

 

Capture 3                                                Capture 4

Capture 5

An interesting observation is that the identity of the principal did not matter for an agent in deciding whether or not to accept or reject. While answering the contract the agent only focused on giving the optimal share of effort according to his/her own benefits.

All in all the experiment turned out to be a splendid learning experience. We learnt about the choices that people tend to make which are driven not only by profit and loss motives, but also by their expectations and wishes. The paper assumes certain things; however when we actually conduct the experiment in the class we see some assumptions falling apart while a few others were valid. The class thoroughly enjoyed playing and then analyzing the game as well.

RESULTS*

1st data set (Aggregate)

  1. When the return share is 100% the agent who pockets the entire return has an incentive to work at the highest effort level. From the analysis however, we see that the return share of 80% suffices to induce full effort of an optimizing agent. At 80% the fixed payment turns out to be – 219, at 90% it is -259 and at 100% it is -299.
  1. Data from the experiment reveals that this point was not captured by many students. 7 out of 29 agents rejected the contract because they viewed it as “unfair”. So we can say that the agent’s participation constraint is not just his outside option, but also what the agent is willing to accept, on the basis of some notion of “fairness”.
  1. The correlation between return share and actual effort level is marginally positive (0.2251).

2nd data set (Cross-country responses)

  1.  The cross country correlation is the correlation between the return share given by the principal of country 1 and the effort level as a result given by the agent of country 2. It has to be made sure that the principal and agents are of different countries.In our classroom experiment, all the agents who were not from India obtained contracts from principals of a different country. No principal agent pair had to be kept out of the analysis.
  1. The cross country correlation between return share and actual effort level is positive (0.5353).
  1. 6 out of 17 agents (cross country results) viewed this contract as unfair and rejected it. So again the data does not conform to the results that we found in the experiment.
  1. 13 out of 17 agents have chosen sub optimal effort levels.

*The total class size is 32. 30 students were present. 29 responses were there.

Reference

Gchter, S. and Knigstein, M. (2006), Design a contract! : A simple principal-agent problem

as a classroom experiment, , Discussion paper / Universität Erfurt, Staatswissenschaftliche Fakultät, No. 2006,001E

Social Welfare and Household Consumption in India

Faculty Seminar

Speaker:Professor Manoj Panda, Director Institute of Economic Growth

Venue: FSI Hall, South Asian University,

Date : February 28, 2014  (Friday)

Time: 2:30 p.m.

Professor Santosh C. Panda, Dean  & Professor of Faculty of Economics gave a warm welcome to the speaker for coming and invited to deliver the lecture.

The speaker started his lecture by introducing some quick facts about Indian Economy. Indian economy has continued to grow at a rate well above the world average rate during the last three decades. Average growth rate of last three decades was 6.5%, in 2003-07 it was 8.6%. Unless there was a total failure of the trickle down process there should have been a significant reduction in the incidence of poverty.

Then he defined the Lorenz Curve which shows the cumulative percentage of total national income against the cumulative percentage of the corresponding population. The extent to which the curve stays below the diagonal line indicates the degree of inequality of income distribution. Thereafter, he used Gini Coefficient which is commonly used as measure of inequality of income. He spoke about the poverty line in India in which the absolute number of poor was 270 million in 2011-12.  Poverty line is the minimum level of living necessary for physical and social development of a person which includes both food and non-food components.

Then he gave a brief description of the Tendulkar Committee Poverty Line in which it was found that the rural and urban Head Count Ratio (HCR) declined from period 2009-10 to 2011-12.

 He went on explaining generalized Lorenz curve which shows the cumulative income on consumption accruing to the poorest. The World Bank has recently advocated the use of shared Prosperity Index Indicator. NSSO underestimates the line in general. He also compares the rate of growth of per capita consumption expenditure of the bottom four deciles and that of the population as a whole. The scatter diagram of the rates of growth for these deciles and of average consumption shows an upward trend, providing some indication that the trickle-down hypothesis may have worked.

Finally he raised the question that: Has growth pattern covered the poor?

He took on with the measure of pro-poor growth, for measuring absolute shared prosperity index, in which he found that the measure was biased towards the poor. He continued on explaining the differential shared prosperity index and found that there was a high differential in period 1997-99, there was also an evidence of trickle down.

In his concluding remarks he said, if growth is pro-poor then the actual reduction would be greater than the benchmark reduction and so the pro-poor measure will be positive.

Then Professor Panda opened the floor for open discussion. Professor Ahsan, Professor Anirban, Shraddha Jain, Surbhi Kesar, Yashika Sardana and some other students took part in the Q&A session.

Rapporteur : Komal Biswal and Manish Kumar Prasad

Overall Trend in India’s Foreign Trade in the Era of Pre and Post Liberalization      

By Manish Kumar Prasad*

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Indian economy and foreign trade are closely interlinked. The early policy initiatives aimed at liberalization of India’s foreign trade, the outward looking trade policy measures announced in 1991 marks the initiation of a new era in India’s foreign trade. The total value of India’s merchandise exports increased from US $ 1.3 billion in 1950-51 to US $ 251.1 billion in 2009-10. The proportions of high value and differentiated products have increased our export basket. The composition of trade is now dominated by manufactured goods and services. Though the gradual liberalization had picked up trade growth, the trade deficit has widened much more following the reforms. The unprecedented raise in the price of oil in 2008 skyrockets our import bills though the export sector has not been affected so much during the recent face of global slowdown. Thus, India’s potential in trade is great, but the challenges are also plenty.

 Indian economy and foreign trade have come a long way in value terms from the time of gaining independence in 1947.The total value of merchandise exports increased from US $ 1.3 billion in 1950-51 to US $ 178.75 billion in 2009-10. India’s trade growth has been robust at 20 percent plus since 2002-03.Indian economy and foreign trade has shown progress post liberalization. While India’ trade growth has a strong correlation with world trade growth particularly in two time period, first following the 1990 reforms and second after 2003. India adopted import substitution strategy before the reforms to protect its domestic industries by imposing high tariffs and quantitative restrictions on imports. After the post liberalization India adopted export promotion strategy just to promote its export so as to increase its foreign exchange earnings. It was during the eighties that the government undertook expansionary fiscal and monetary policies. But this rapid expansion was supported by a large current account deficit. A mounting deficit, coupled with high inflation (at 13.5 percent) and the Gulf war led India to a balance of payment crisis in 1991. Following the crisis, the Indian economy was opened up to foreign participation for the first time, in an attempt to improve the efficiency and competitiveness of Indian industries. Post 1991, the gradual liberalization of the Indian economy characterized by such policy reforms created a conducive environment for India’s exports to flourish and evolve into an engine of social and economic growth. Hence, the last two decades have witnessed India transform from a closed economy to a considerable player in the global market.

India’s susceptibility to international crises became evident when the financial crisis of 2008 had an impact on India’s economic performance. The financial turmoil had a dampening effect on global demand and slowed down capital inflows which affected India’s export sector. The impact of the crisis was felt most acutely in job oriented sectors which experienced up to a 70 percent fall in their growth rates and affected other segments as well. This had a cascading effect on overall economic growth, as India’s GDP growth rate fell from 9 percent in 2007-08 to 7.1 percent in 2008-09. The impact of this crisis on the export sector was evident as India’s exports which had previously grown at nearly 20 percent between 2002 and 2008 plummeted to a negative 20.3 percent in 2009-10.Though India had previously experienced a negative growth in its exports, such a prolonged period of decline had not been witnessed in over two decades. It is evident from the preceding discussion that India’s export performance and economic growth are closely inter-linked. Over time, the export sector has grown to be a significant earner of foreign exchange and a major contributor to India’s national income. Further, the performance of this sector is highly dependent on domestic as well as global factors. As a consequence of this, domestic as well as international economic policies have a bearing on the overall export performance of India.

In the post liberalization period i.e. post 1991, India followed export promotion strategy which geared up export from 13970 US $ million in 1988-89 to 22238 US $ million in 1993-94 which is around 59.18 percent growth following reforms. Many pro export policies were started after the reforms. The liberalization of the Indian economy following the balance of payment crisis resulted in major policy and exchange rate changes, which had a favourable impact on India’s trade. India’s export performance since 1991 has fluctuated. The East Asian Crisis of 1997 had a serious impact on India’s exports, which registered a negative growth of 2.33 percent in the same year. In 1997, for the first time after liberalization, India’s exports registered a negative growth of 2.33 percent. The situation for India worsened when its competitor countries (in ASEAN) devalued their currencies amidst the crisis, which reduced the competitiveness of India’s exports in the international market for textile and electronics commodities, where India directly competed with ASEAN exports in overseas markets.

In 2001-02, India faced another setback in its exports, at large, due to the semi-recession faced by the US; one of India’s biggest trading partners. The slowdown of the US economy permeated to other economies in the next major setback for India’s exports was the global crisis of 2008. The collapse of large investment banks around the world coupled with high oil prices and rising inflation led to a global recession. The next major setback for India’s exports was the global crisis of 2008. The collapse of large investment banks around the world coupled with high oil prices and rising inflation led to a global recession.

Even though the export sector plays a significant role in the domestic economy by contributing close to 25 percent to India’s GDP (in 2009), its contribution to world exports continues to remain minimal, at a mere 1.5 percent of world exports in 2009 (however, this share has improved since the economic reforms of 1991). Between 1991 and 2009, India’s share in world exports rose from 0.56 to 1.52 percent. But overall, the economic reforms implemented in India did not have a significant impact on India’s position in the world export market, unlike the reforms implemented in countries like China, South Korea or Taiwan.

The share of agriculture has fallen more rapidly post trade liberalization, which may, in part be because an important goal of agricultural policy was to achieve self sufficiency in agriculture and this limited the scope of trade. In 2008-09 agricultural and allied products share had declined to around 9.59 percent of exports whereas manufactured goods share have been around 68.89 percent of exports of which the exports of gems and jewellery has been around 15.08 percent which shows that the diversification in export products has risen rapidly following the reforms.

The Global recession only slightly jolted the continued upward growth in India’s export sector with exports rising at a reasonable rate of 15.6 percent in 2008-09.The compound annual growth rate(CAGR) for India’s merchandise exports for the five year period 2004-05 to 2008-09 increased to 22 percent from 14 percent of the preceding five year period. However in 2009-10 export growth was negative at (-) 3.5 percent, partly reflecting the effect of global recession and partly the higher base effect due to the lagged export data of 2008-09.Despite this negative growth, India’s ranking in the leading exporters in merchandise trade which slipped marginally from 26th in 2007 to 27th in 2008 improved to 21st in 2009.

A drastic fall in the foreign exchange reserves to a level not enough to pay for three weeks of imports bill, a fiscal deficit of nearly 9 percent of GDP and many other factors led to the reforms of 1991.In the post liberalization period i.e. post 1991 import growth picked up. The import to GDP ratio has increased from an average of 7.7 percent for the 1980s to 10 percent in the 1990s as a result of increasing import dependence of the Indian economy in the wake of trade liberalization and changing patterns of development. During the period of 1991-2001 the average growth rate of India’s imports was around 17.1 percent in dollar terms as a percent of GDP. The average weighted tariff rate has come down from 87 percent to 20 percent from the same period. The non-tariff measures for most of the commodities have also been phased from 1st April 2001. The process of trade liberalization is still not completed. Given the fact that demand for many of the items of imports is price elastic, the future tariff reductions may lead to higher imports. In particular, consumer goods imports may be highly sensitive to liberalization.

Import licensing was abolished relatively early for capital goods and intermediates which became freely importable in 1993, simultaneously with the switch to a flexible exchange rate regime. Import licensing had been traditionally defended on the grounds that it was necessary to manage the balance of payments, but the shift to a flexible exchange rate enabled the government to argue that any balance of payments impact would be effectively dealt with through exchange rate flexibility. Removing quantitative restrictions on imports of capital goods and intermediates was relatively easy, because the number of domestic producers was small and Indian industry welcomed the move as making it more competitive. Quantitative restrictions on imports of manufactured consumer goods and agricultural products were finally removed on April 1, 2001, almost exactly ten years after the reforms began, and that in part because of a ruling by a World Trade Organization dispute panel on a complaint brought by the United States. . The government has announced that average tariffs will be reduced to around 15 percent by 2004, but even if this is implemented, tariffs in India will be much higher than in China which has committed to reduce weighted average duties to about 9 percent by 2005 as a condition for admission to the World Trade Organization.

The composition of imports also underwent changes in this decade. The share of food and allied products imports which fell to 2.1 per cent in 2008-09 from 3.3 per cent in 2000-01, increased to 3.7per cent in 2009-10 and fell to 3.2 per cent in the first half of 2010-11 with slight fall in import shares of edible oils and pulses. The share of fuel imports, however, remained at around 33 per cent. The most notable change is the sudden rise in share of capital goods imports from 10.5 per cent in 2000-01 to 15.0 per cent in 2009-10 and again a fall to 13.1 per cent in the first half of 2010-11 due to the See-saw movement in shares of imports of transport equipment. The share of gold and silver and electronic goods in the import basket decreased in the first half of 2010-11 compared to 2008-09 and 2009-10.The share of pearls, precious, and semi-precious stones saw a see-saw movement with negative growth in 2009-10 and very high growth (129 per cent) in the first half of 2010-11.

The country’s trade to GDP ratio hardly changed at all between 1980 and 1990; it remained fixed at a little over 14 percent. Things have moved rapidly since then. Three years into the reforms, the ratio was already above 18 percent in 1993-94. Contrary to what is generally believed this increase was attributable more to an increase in exports than to increased imports. While both exports and imports have grown faster than GDP, thereby pushing the trade-GDP ratio to 25.6 percent for the year 2003-04, the overall growth in exports has outpaced the growth in imports.

The export to GDP ratio almost doubled from a little over 6 percent in 1990-91 to 14.7 percent in 2003-04. The growth in the import to GDP ratio was more moderate, from 8 percent to 14 percent. Imports exceeded exports in 1980 and in 1991, and they continue to do so in 2003-04, by almost 25 percent. But the difference between the two in proportionate terms has been coming down, rather than going up. Indeed, it would be seem that the trade deficit over the period has increased over the years.

*Manish Prasad is a Postgraduate student of Development Economics

  References

  • Ahluwalia, M.S., (2002), Economic Reforms in India since 1991: Has Gradualism Worked?, Journal of Economic Perspectives, Vol. 16, No. 3, pp. 64-88.
  • Commerce Ministry, (2010), Trend in India’s Foreign Trade, Ministry website. (Available at:  http://commerce.nic.in/publications/annual-report-pdf-2010-11/CHAPTER_2.pdf (Accessed on 10th Jan 2014 at 09:32)
  • Pillania, R.K., (2008), An Exploratory Study of Indian Foreign Trade, Journal of Applied Economic Services, Vol. 3, No. 5 pp 281-292.
  • Shinde, B.K. (2009), Trend in India’s Foreign Trade Policy since planning period, SSMRAE website.( Available at:          http://www.ssmrae.com/admin/images/4c2b113d5a8fd4e4372c22b9273e5672.pdf (Accessed on 15th Jan 2014 at 14:13)

A Democratic Policy Regime in South Asia

The allocation of resources, more than the lack of government revenue, is the real problem. Governments must make a commitment towards three major public expenditures.

By Alauddin Mohammad

The visa, travel and trade constraints that exist between the countries of South Asia make it the world’s least connected region. Political insurgencies, fragile democratic institutions, fundamentalism, terrorism and ethnic conflicts all threaten regional peace and prosperity. How do we address these problems? Where is our starting point? What are our priorities, and on what basis?

Let me state an overview of the major prioritized economic sectors of South Asian countries, identify the major problems, and advance an agenda of policy reforms based on factual analysis.

The world’s most populated region is home to 1.62 billion people including half of the world’s poor. Some 87 per cent of its workers will remain poor or near poor until 2017 despite much claimed success in economic growth and poverty reduction, says recent UNDP research. In 2012, 56 out of 1000 children below five years of age died in India, compared to 72 in Pakistan and 101 in Afghanistan, according to the World Bank. The economic realities of this region abound in contradictions, fueling various forms of social unrest and extremism. On the one hand, more and more billionaires are emerging from this region. On the other, millions are starving or leading miserable lives.

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The top five per cent of India’s rich consume 15 times more than the bottom five per cent. In Bangladesh, the top 10 per cent rich have nearly 36 per cent of the country’s total income while the bottom 20 per cent own less than six per cent. This is the worst region after Sub-Saharan Africa in terms of starvation, malnutrition, and stunted human growth.

Some economists argue against taking such inequalities seriously in the early stages of development. Providing incentives to the capitalists to help economy grow will lead to a decline in inequality after a certain income level, they say. However, this approach does not in reality yield optimum results and can actually increase the gap in some cases.

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However, incentive mechanism can be thought in a reverse way. As the consumption elasticity of the poor is high, an increase in income levels will increase the aggregate consumption level of the economy, thus pushing the economy towards a higher growth path. The growing income of the poor will allow them to spend a larger amount on education and healthcare, consequentially improving the capability of their workforce and contributing towards fostering economic growth.

No economy including South Asia can escape from increasing inequality with growth in a neo-liberal regime without adopting some active policy. Governments in the short run must spend enough to ensure the basic needs and amenities of life and in the long run, design such policies to run the system automatically in favour of the poor.

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This is where the question of the governments’ capability comes in. We know that the government’s revenue depends on economic growth and South Asian countries have the lowest direct tax revenue regime in the world. However, the problem lies in the allocation of resources more than the lack of government revenue.

Aside from physical infrastructure, two primary sectors of public expenditure for any government are health and education, the fundamentals of social infrastructure. Public expenditures on these two sectors determine the social progress as well as in the long run.

South Asian governments need to make a commitment towards three major public expenditures.

First, increase the public expenditure on education, currently at abysmal levels. Given the lack of development of the private sector in these countries, public expenditure in education is particularly crucial. Even developed economies spend a substantial share of their GDP on education – the USA and UK spends 5.6 and 6.3 per cent respectively despite a strong private sector in education.

Secondly, public health expenditure as a share of GDP and per capita expenditure in South Asian countries is extremely low (except in Maldives, omitted here to avoid outlier in graph).

Third, major south Asian economies spend a significant amount in military budget, both as a share of GDP and share of government expenditure. Meanwhile, the military expenditure of all these countries is far higher. This implies a priority on security threat perceptions far beyond our fundamental basic needs for survival, unjustified by ethics or efficiency.

If we don’t educate our children or provide healthcare and basic facilities we will create a frustrated generation, leaving to social problems and threatening society.

Indeed, the priority must be to address the problem of underdevelopment and achieve the goal of social welfare. Trying to resolve social problems through military instruments will only exacerbate the problems.

It is not a matter of dearth of resources in the region, but a need to reallocate expenditure to the sectors that need them most. In the process, peoples’ participation in economic policy decision is indispensable. “Unless people can participate meaningfully in the events and processes that shape their lives, national human development paths will be neither desirable nor sustainable,” says the UNDP report 2013.

In that context, we must re-define South Asian economic policies and focus on solving the problem of poverty, inequality and underdevelopment. This can be achieved through a democratic policy regime that can bring peace and prosperity to the region.

This write-up was first appeared in: The News Pakistan & Aman Ki Asha