In an earlier article (August 2002, www.planningcommission.nic.in/artf.html), I showed that India moved from the “Hindu Rate of Growth (HRG)” during the sixties and seventies to a “Bharatriya Rate of Growth (BRG)” of 5.8 per cent during the eighties and nineties. A number of eminent economists have asserted that the growth of the economy during the second half of the nineties was propped up by pay commission related increases in the pay of government/public servants and this artificial increase is unsustainable. Thus the real growth rate of the economy is currently not 5.8 per cent but closer to 5 per cent. Other commentators have gone even further to assert that services growth during the entire nineties, which has kept average growth during the nineties at 5.8 per cent is unsustainable and that the underlying growth rate is currently as low as 4.5 per cent. In this article I address these and other related questions by looking a little deeper into the underlying sector growth rates, particularly the role of services. Such assertions based on short-term movements, are shown to have little relevance to long-term growth trends and prospects.
Role of Administration & Pay Commission
Because of the way in which GDP from administration is measured, it is quite legitimate to question its role in long-term growth. The productive sectors of the economy meet the market test in that the consumer is willing to pay for the goods or services purchased. Thus their value is determined by market prices. As there is no market price for the administrative services supplied by the government, their contribution to GDP is measured by wages etc. incurred in the sector. Thus a rise in the real wages paid raises the value added as measured by the GDP statistics. As long as these services are not produced at rates determined through competitive bidding, there is no other way in which they can be valued. We can, however, get a better fix on the sustainable rate of growth by excluding GDP from administration from our growth estimates.
During the eighties and nineties, average rate of growth of GDP (adj.) i.e. excluding the GDP from administration, was only 0.04 per cent point lower than the growth of conventionally measured GDP. This leaves the Bharatiya rate of growth unchanged at 5.8 per cent. This is not, however, true of the Hindu rate of growth. During the sixties and seventies the average rate of growth of GDP (adj) was 0.13 per cent point lower than for GDP as a whole, so that the HRG is reduced from 3.4 per cent to 3.3 per cent. The picture is quite similar if we take the HRG as applying to three decades including the fifties. In this case the growth rate of GDP (adj.) at 3.4 per cent is lower by 0.11 per cent point than the GDP growth rate of 3.5 per cent. Therefore, if we exclude GDP from administration from our growth estimates, the rate of growth accelerated from 3.4 per cent per annum (HRG) to 5.8 per cent per annum (BRG). Thus there is little factual basis for the statement that the excessive rise in pay of government servants during the nineties distorts the observed growth performance so much that the underlying rate of growth was since 1996-97 (or currently is) between 5 per cent and 5.5 per cent per annum.
Role of Service Sector
As per broad globally accepted definition of goods and services, Agriculture & allied sectors, mining & quarrying and manufacturing sectors produce goods while the output of all other sectors constitutes services. The former are traditionally classified as tradable and the latter as non-tradable, though this is rapidly changing. We can define GDP from Services (adj) by excluding the GDP from administration. A comparison of the growth rate in this with the unadjusted GDP completely contradicts the common assertion that much of services growth was due to the government pay rise. On the contrary the rate of growth of services (adj) during the last two decades was marginally (0.05 per cent point) higher than that for Services as a whole (unadjusted).
In fact, the GDP from administration grew much faster during the sixties and seventies than it grew during the eighties and nineties. Consequently, the growth of GDP services (adj.) is lower than the growth of Services GDP by 0.2 per cent points during the former period and by 0.16 per cent points during 1950-1980. With this background we can re-evaluate the contribution of acceleration in the rate of growth of services to the acceleration in GDP growth between 1950-1980 (HRG period) and 1980-2000 (BRG period). The contribution of acceleration in growth of Services (adj) to overall GDP (adj) growth acceleration (2.4 per cent / 2.5 per cent) was even higher than apparent from the conventional (unadjusted) numbers (2.1 per cent / 2.4 per cent).
It is, however, wrong to conclude, as some have done, that the nineties is the first instance in which services have grown faster than other sectors of the economy. On the contrary in each of the five decades since independence, GDP from Services has grown faster than GDP from the tradable goods sectors of the economy. The gap averaged about 2.2 per cent points in the first four decades but has expanded to 3.1 per cent points in the nineties. If we exclude GDP from administration from our GDP calculations, the gap shows much greater fluctuations; It was 0.8 per cent point in the fifties, rose to 1.3 per cent point in sixties and seventies, fell back to 0.7 per cent point in the eighties and then rose to a peak of 1.7 per cent point in the nineties. Though in absolute terms the last is unprecedented it is worth noting that it is only 30 per cent higher than the GDP (adj) growth rate for the nineties. The 1.3 per cent point gap in the seventies & sixties was respectively 46 per cent & 34 per cent higher than GDP (adj) growth rate.
There are two broad reasons for the higher contribution of non-tradable services to GDP growth during the nineties. The decline in protection for non-tradable sectors arising from the elimination of QRs and reduction in tariffs for mining and manufacturing sectors. This has tended to raise (lower) the relative price of non-tradable services (tradable goods). This coupled with liberalisation of private entry into modern service sectors like communications and finance (banking etc.) has resulted in faster growth of these services. The reduction of public monopoly and more effective competition may also have increased overall productivity in these sectors. Other traditional services like trade, hotels & restaurants and community services have also grown at unprecedented rates, because of combination of rising incomes (restaurants), globalisation (tourism/business travel, hotels) and fall in relative prices & increased variety of consumer durables (trade) and a combination of government failure and democratic initiative (community services).
In conclusion, we find that though the pay commission related pay increases may have distorted estimates of GDP for a few years they do not affect the trend rate of growth of GDP. The “Bharatiya rate of growth” remains at 5.8% per annum even if government administration is excluded altogether. A similar adjustment of services also contradicts the assertion that this factor is responsible for higher service growth. Further, services (adjusted) have always grown faster than overall GDP growth, though their contribution has fluctuated. The contribution of services during the nineties is high only in comparison to the eighties, when their contribution was unusually low.
Sunday, September 1, 2002
Wednesday, August 28, 2002
India and the Global Growth Sweepstakes
In the two decades of the last century India’s growth performance was among the best in the world, making it worthy of being called a “Star performer.” During these two decades (1980 to 1999) per capita GDP growth averaged over 3.8% per annum with GDP growth averaging about 5.8% per annum. GDP growth has however fallen sharply during the last five years, going as low as 4% in 2000-1. Yet many commentators keep saying that India is (currently) one of the fastest growing economies in the World. Is there any factual basis to this assertion or is it merely an example of informational inertia? We use the latest available data on global growth rates for the period 1996 to 2000 to show the large gap between these statements and the data. Our analysis also reveals a paradox: India’s per capita growth rate was marginally higher during this period relative to the two-decade average but our global ranking has deteriorated dramatically.
If we leave out the tiny and small economies, India was during the two decades of the eighties and nineties, one of the fastest growing economies in the world [(Star Performers of the 20th (21st) Century: Asian Tigers, Dragons or Elephants, by Arvind Virmani, Occasional Paper, Chintan, September 1999) http://finance.nic.in/avirmani]. Others in this group of star performers included China, S. Korea, Singapore, Thailand, Ireland, Luxemburg, Hong Kong, Malaysia, Vietnam and Chile. With the possible exception of Ireland and Luxemburg all these countries including India were affected to some extent by global crises such as the “Asian crisis,’ the Russian meltdown & the Brazilian crisis. It would be interesting to know how these “Star performers” did during the global crisis years at the end of the century.
What happened to India and the other star performers during the five-year period 1996 to 2000. India’s per capita growth ranking dropped dramatically from 11th place during two decades, to 27th place during the last five years. Only Ireland, China and Vietnam retain their place among the star performers during these five years. S. Korea is no longer a star performer but is ranked one position above India. It is recognised by most observers of Asian economies to have carried out the widest/deepest reforms among the crises affected countries. For instance it replaced its highly restrictive policy towards FDI and foreign equity flows by a new one, which whole heartedly welcomed both. As a result it moved rapidly up in FDI & equity rankings from a position behind India to one above India with a few years. All the other E & S.E. Asian countries see an even more dramatic fall in their growth ranking than India. Thus Singapore, Chile, Malaysia, Hong Kong and Thailand fall to 29th 38th, 59th, 81st and 110th position.
Malaysia’s per capita growth decline during 1996-2000 (relative to its 2-decade average) was 1.5% compared to a decline of 1.2% for Singapore and 2% for S. Korea. These two Asian crisis countries (& Hong Kong) were shown in Virmani (1999) as free from a euphoria-panic cycle in contrast to Malaysia, Thailand and Indonesia, which suffered from this phenomenon. The latter countries were growing (due to euphoria) above their long term potential and so a period of slower growth was inevitable, though better policies such as a flexible exchange rate would have mitigated the “panic.” The major difference between the three was that Malaysia was able to act quickly and decisively to meet the crisis while the policy response in Thailand and Indonesia was slow and indecisive because of the prevailing political situation. Though Hong Kong was free of “euphoria” before the crisis it was not expected (in the 1999 paper) to do well because its currency board regime and absorption into China reduced policy flexibility, and this is borne out by its 2.5% point growth decline.
What are the reasons for the fall in India’s ranking? Surprisingly the worsening of India’s rank is not due to a worsening of its performance. On the contrary its per capita GDP growth during this period is marginally higher than the average for the two decades. This is so despite the bursting of the Asian bubble and the post-Pokharan sanctions imposed on India. This is consistent with 1999 paper, which identified India and Ireland as the only two countries among the high growth economies whose growth rate could increase in future. The reason for the fall in ranking is that twenty-two countries have strongly improved their performance. Eleven of these are East European (including former USSR), four are from Africa, three are from Latin America and two each are from Western Europe and Asia. Among the larger countries that have improved their performance are Poland, Finland, Hungary and Tunisia. The dramatic liberalisation and opening of the Eastern European economies and their integration with Western Europe has clearly led to faster growth of these economies. Perhaps there is a lesson for those still haunted by nightmares of the East India Company.
In contrast to India, China’s (official) per capita growth rate was lower by 2.5% points during the five-year period under consideration. The 1999 paper had shown that China’s growth rate was decelerating. Its rank, however, declined marginally from 1st to 2nd because its official growth rate for the two decades was very high. Independent economists believe it to be overestimated by about 2%. If China’s growth rate is exaggerated by only 1% point China will, however, still be among the top ten during 1996-2000.
In conclusion we see that India’s growth performance seems to have moved from the “Hindu rate of growth” (about 3.8%) during the seventies to what we may now call the “Bharatiya rate of growth (5.8%)” during the eighties and nineties. While our growth rate is stuck at this level, dozens of other countries have improved their performance during 1996 to 2000 through faster reforms. Our per capita growth ranking has therefore plummeted. It is little consolation that the performance of other high growth economies (HGEs) such as Singapore, Chile, Malaysia and Thailand has deteriorated and their ranking dropped more sharply than ours.
If we leave out the tiny and small economies, India was during the two decades of the eighties and nineties, one of the fastest growing economies in the world [(Star Performers of the 20th (21st) Century: Asian Tigers, Dragons or Elephants, by Arvind Virmani, Occasional Paper, Chintan, September 1999) http://finance.nic.in/avirmani]. Others in this group of star performers included China, S. Korea, Singapore, Thailand, Ireland, Luxemburg, Hong Kong, Malaysia, Vietnam and Chile. With the possible exception of Ireland and Luxemburg all these countries including India were affected to some extent by global crises such as the “Asian crisis,’ the Russian meltdown & the Brazilian crisis. It would be interesting to know how these “Star performers” did during the global crisis years at the end of the century.
What happened to India and the other star performers during the five-year period 1996 to 2000. India’s per capita growth ranking dropped dramatically from 11th place during two decades, to 27th place during the last five years. Only Ireland, China and Vietnam retain their place among the star performers during these five years. S. Korea is no longer a star performer but is ranked one position above India. It is recognised by most observers of Asian economies to have carried out the widest/deepest reforms among the crises affected countries. For instance it replaced its highly restrictive policy towards FDI and foreign equity flows by a new one, which whole heartedly welcomed both. As a result it moved rapidly up in FDI & equity rankings from a position behind India to one above India with a few years. All the other E & S.E. Asian countries see an even more dramatic fall in their growth ranking than India. Thus Singapore, Chile, Malaysia, Hong Kong and Thailand fall to 29th 38th, 59th, 81st and 110th position.
Malaysia’s per capita growth decline during 1996-2000 (relative to its 2-decade average) was 1.5% compared to a decline of 1.2% for Singapore and 2% for S. Korea. These two Asian crisis countries (& Hong Kong) were shown in Virmani (1999) as free from a euphoria-panic cycle in contrast to Malaysia, Thailand and Indonesia, which suffered from this phenomenon. The latter countries were growing (due to euphoria) above their long term potential and so a period of slower growth was inevitable, though better policies such as a flexible exchange rate would have mitigated the “panic.” The major difference between the three was that Malaysia was able to act quickly and decisively to meet the crisis while the policy response in Thailand and Indonesia was slow and indecisive because of the prevailing political situation. Though Hong Kong was free of “euphoria” before the crisis it was not expected (in the 1999 paper) to do well because its currency board regime and absorption into China reduced policy flexibility, and this is borne out by its 2.5% point growth decline.
What are the reasons for the fall in India’s ranking? Surprisingly the worsening of India’s rank is not due to a worsening of its performance. On the contrary its per capita GDP growth during this period is marginally higher than the average for the two decades. This is so despite the bursting of the Asian bubble and the post-Pokharan sanctions imposed on India. This is consistent with 1999 paper, which identified India and Ireland as the only two countries among the high growth economies whose growth rate could increase in future. The reason for the fall in ranking is that twenty-two countries have strongly improved their performance. Eleven of these are East European (including former USSR), four are from Africa, three are from Latin America and two each are from Western Europe and Asia. Among the larger countries that have improved their performance are Poland, Finland, Hungary and Tunisia. The dramatic liberalisation and opening of the Eastern European economies and their integration with Western Europe has clearly led to faster growth of these economies. Perhaps there is a lesson for those still haunted by nightmares of the East India Company.
In contrast to India, China’s (official) per capita growth rate was lower by 2.5% points during the five-year period under consideration. The 1999 paper had shown that China’s growth rate was decelerating. Its rank, however, declined marginally from 1st to 2nd because its official growth rate for the two decades was very high. Independent economists believe it to be overestimated by about 2%. If China’s growth rate is exaggerated by only 1% point China will, however, still be among the top ten during 1996-2000.
In conclusion we see that India’s growth performance seems to have moved from the “Hindu rate of growth” (about 3.8%) during the seventies to what we may now call the “Bharatiya rate of growth (5.8%)” during the eighties and nineties. While our growth rate is stuck at this level, dozens of other countries have improved their performance during 1996 to 2000 through faster reforms. Our per capita growth ranking has therefore plummeted. It is little consolation that the performance of other high growth economies (HGEs) such as Singapore, Chile, Malaysia and Thailand has deteriorated and their ranking dropped more sharply than ours.
Sunday, June 23, 2002
FDI Policy For Media
The public debate on foreign entry into print media largely treats it as a single, broad, undifferentiated sector, even though most discussants seem to be discussing the narrow issue of foreign entry into the newspaper business. A few discussants may perhaps also have newsweeklies in the back of their mind when expounding their views on this subject. The current article tries to put some new ideas into the public arena so that a differentiated FDI policy can be defined for various categories of media.
Ability to compete and to derive the maximum benefit from competition depends on the society’s knowledge base. A closed economy breeds lazy thinking and action. We can only compete at the frontiers of knowledge if we have access to that knowledge and have absorbed, adapted and incorporated into the knowledge base of our society and economy.
The Indian economy can become a Knowledge based economy by 2025 if we can attain universal access to primary and secondary education in the next decade or so and we open our minds to the best and latest knowledge from all over the world. A competitive, wisely regulated media, both print and electronic, has an important role to play in this process.
A couple of decades ago, most services were considered as non-tradable across frontiers as they had to be delivered at the point at which they are consumed/used. The technological transformation of the communication industry coupled with the developments in transport & travel has transformed the picture over the past decade or two. Even greater changes are in the offing in the next decade as previously non-tradable services become tradable.
What has not been fully realised, however, is that there are many services besides ITES where we have a comparative advantage or could create one, to become a significant exporter and player on the world stage. The common strengths that can underlie this success are:
• They are all dependent on communication facilities, even though the precise type of facility may differ. For instance Radio/TV broadcasting stations and telephone exchanges are both communication facilities, though the former is used for public communication and the latter for private communication. With the rapid pace of technology development we should not be surprised to see in the near future, radio/TV facilities being used for private communication and telephone exchanges for public communication (internet news station).
• The use of English in global commerce and trade in services.
• The advantages of free and open society, the freedom of information, thought and expression.
There are also some differences between different services. For instance Software is more dependent on analytical skills while media and entertainment is more culture and society dependent. Nevertheless, with globalisation, cultural diversity is itself an advantage that can be exploited to produce a unique product, if merged skilfully with the basic cultural & society specific characteristics of the target audience (artistic joint product/venture).
Automatic 100% FDI should be allowed in the following activities in the print media:
• Internet Publishing can be carried out from anywhere in the world and its content sent anywhere instantaneously. Any restrictions on this type of publishing are therefore futile.
• India is well placed to be a major exporter of publishing and printing services. It could replicate the success of Hong Kong by allowing free entry of foreign printing and publishing services into the country. This would cover printing facilities as well as associated services like layout design.
• The business of publishing for export on the same basis as the EOU/EPZ policy for industry and the Special Export Zone (SEZ) policy. Material allowed for domestic sale would (of course) be subject to the press and other laws applicable to imported material or incoming media.
• Publishing of commercial or private material such as stationary, brochures, pamphlets, leaflets, diaries, calendars, house magazines, journals & newsletters and all other published matter which is not explicitly restricted by a lower foreign equity limit.
SCIENCE, HUMANITIES & PROFESSIONS
We need to raise the educational and intellectual quality of our entire population and labor force. Foreign competition will reduce prices or increase quality (or both) and help extend the reach of publications to the entire educated population. Automatic 100% foreign approval should be given in areas, which are potentially of the highest benefit to the society and economy. Lower automatic limits could be set in areas in which the benefits are less clear-cut or there is demonstrated possibility of either cultural or nationalistic bias.
Science is universal and common heritage of mankind. It does not belong to any nation or culture. Automatic 100% foreign equity should therefore be allowed in the Publishing of Books and Journals in Science & Technology, Social Sciences, Professional areas (medicine, management, business, accounting, law etc.) and Humanities (Art, literature, geography). This would also apply to “self-help” or “do-it-yourself” books in these areas. It should also cover educational material and topical magazines (e.g. Scientific American, Psychology Today) in the same subjects, with the following proviso:
Possible Exceptions
The 100% automatic approval would not apply to publication of educational material in history, directed at children up to the level of high school. It would also not apply to any literary work that glorifies or justifies violence in any way or makes it attractive by mixing it with sexual titillation. Finally it would not apply to any material containing geographical maps that misrepresent the boundaries of India to show Indian Territory as belonging to another country (we can perhaps take a relaxed attitude if it were shown as Indian Territory which is disputed).
CULTURAL GLOBALISATION
RECIPROCITY PRINCIPLE
We should have no objection in principle to publications on Culture, Society and Entertainment being published and sold in India as long as this is not at the expense of Indian culture, social norms & practices. The basic touchstone for deciding on foreign equity should be a criterion of globalisation. Globalisation of culture must be a two way street, with the rest of the World having the same access to Indian culture as we do to theirs (reciprocity). This has two aspects:
C1 Exports
If a publisher is willing and able to use India as an export base whenever it finds that India is a competitive location we should freely permit foreign entry. The export criteria would be very simple. At least one copy of each book or journal in each language sold in India must be exported as proof of exports. If some language is not considered exportable the publisher must substitute another international language besides English (e.g. Japanese, Chinese), or a more explicit criteria for exports (e.g. 10% of production). If our reasoning that India is or will soon become a very competitive location is correct, the publisher will in due course himself find it profitable to export more from India.
The idea is therefore not motivated by foreign exchange earnings considerations at all but by informational considerations. That is the entrant must after entry seriously consider whether it would be profitable to export from India. If anyone comes to a negative conclusion there must not be any legal pressure to go against a well-informed commercial judgement.
C2: Content
Globalisation of media cannot merely mean that all the existing cultural (e.g. soap operas) and nationalistic (e.g. war news) content created in democratic USA, UK and other English speaking countries is merely transferred to India. Globalisation must also mean that the cultural and nationalistic content created by the 1/6th of humanity living in democratic India is brought to a global audience (in due course).
Two criteria which could define globalisation of publishing are;
C2a: Country Maximum
That content from the USA (22%), Japan (8%), China (11%), Germany (5%) and UK (3%) cannot exceed their respective shares in world GDP measured at PPP. The idea is to ensure cultural diversity and discourage a homogenisation of culture based on World media oligopoly.
Publishers should be allowed to offset any divergence from criterion C2a by a point for point increase in the share of Indian content. For instance if the publication has only 2% content on China, the remaining 11% can be substituted by Indian content.
C2b: India Minimum
That Indian content must be greater than India’s share in world GDP at PPP (about 4.5%) in the third year after entry and rise to India’s share in world population (17%) by the tenth year of production. The content referred to here can be interpreted liberally to include any non-Indian content provided by any author/writer of Indian origin (up to children of parents who once held Indian passports). Again the idea is to ensure cultural diversity and that the Indian cultural perspective is fully reflected in this diversity.
CULTURE, SOCIETY & ENTERTAINMENT
The reciprocity principle outlined above can also be applied to the areas of culture, society and entertainment. In the area of scholarly & semi-scholarly books & journals providing analysis & information, such as books and journals on food, popular music and films, automatic foreign equity up to 74% could be permitted subject to criterion C1 & C2b and up to 51% subject to C1 alone. Higher foreign equity could be considered by the FIPB depending on more formal export commitment or commitment to provide Indian content. In the case of popular novels, magazines & comic books with the primary purpose of entertainment, automatic foreign equity up to 74% could be granted subject to criterion C1 and C2 and up to 51% subject to C1 and C2b. FIPB route would apply if proposal cannot meet condition C2. This condition can be relaxed by substituting it by formal export commitment.
The globalisation criterion enunciated above can also be applied to foreign entrants in the field of current affairs and news programs, along with a third one relating specifically to India (C3). The need for this clause arises because reporting of international affairs is strongly influenced by Nationality, as demonstrated by reporting of the war in Afghanistan and related issues of Pakistani involvement in terrorism in the region.
C3: Editorial Control
Editorial control, in the sense of control over editorial policy and content must vest with Indian nationals. The business managers and those who control commercial decision can, however, be foreigners. There could also be a grace period during which editorial policy is completely under the control of foreign editors.
Foreign entry into publishing of newspapers and news magazines dealing with current affairs and news can be allowed subject to criteria C1, C2 and C3. This could be done through the FIPB route subject to a maximum of 49% foreign equity.
Ability to compete and to derive the maximum benefit from competition depends on the society’s knowledge base. A closed economy breeds lazy thinking and action. We can only compete at the frontiers of knowledge if we have access to that knowledge and have absorbed, adapted and incorporated into the knowledge base of our society and economy.
The Indian economy can become a Knowledge based economy by 2025 if we can attain universal access to primary and secondary education in the next decade or so and we open our minds to the best and latest knowledge from all over the world. A competitive, wisely regulated media, both print and electronic, has an important role to play in this process.
A couple of decades ago, most services were considered as non-tradable across frontiers as they had to be delivered at the point at which they are consumed/used. The technological transformation of the communication industry coupled with the developments in transport & travel has transformed the picture over the past decade or two. Even greater changes are in the offing in the next decade as previously non-tradable services become tradable.
What has not been fully realised, however, is that there are many services besides ITES where we have a comparative advantage or could create one, to become a significant exporter and player on the world stage. The common strengths that can underlie this success are:
• They are all dependent on communication facilities, even though the precise type of facility may differ. For instance Radio/TV broadcasting stations and telephone exchanges are both communication facilities, though the former is used for public communication and the latter for private communication. With the rapid pace of technology development we should not be surprised to see in the near future, radio/TV facilities being used for private communication and telephone exchanges for public communication (internet news station).
• The use of English in global commerce and trade in services.
• The advantages of free and open society, the freedom of information, thought and expression.
There are also some differences between different services. For instance Software is more dependent on analytical skills while media and entertainment is more culture and society dependent. Nevertheless, with globalisation, cultural diversity is itself an advantage that can be exploited to produce a unique product, if merged skilfully with the basic cultural & society specific characteristics of the target audience (artistic joint product/venture).
Automatic 100% FDI should be allowed in the following activities in the print media:
• Internet Publishing can be carried out from anywhere in the world and its content sent anywhere instantaneously. Any restrictions on this type of publishing are therefore futile.
• India is well placed to be a major exporter of publishing and printing services. It could replicate the success of Hong Kong by allowing free entry of foreign printing and publishing services into the country. This would cover printing facilities as well as associated services like layout design.
• The business of publishing for export on the same basis as the EOU/EPZ policy for industry and the Special Export Zone (SEZ) policy. Material allowed for domestic sale would (of course) be subject to the press and other laws applicable to imported material or incoming media.
• Publishing of commercial or private material such as stationary, brochures, pamphlets, leaflets, diaries, calendars, house magazines, journals & newsletters and all other published matter which is not explicitly restricted by a lower foreign equity limit.
SCIENCE, HUMANITIES & PROFESSIONS
We need to raise the educational and intellectual quality of our entire population and labor force. Foreign competition will reduce prices or increase quality (or both) and help extend the reach of publications to the entire educated population. Automatic 100% foreign approval should be given in areas, which are potentially of the highest benefit to the society and economy. Lower automatic limits could be set in areas in which the benefits are less clear-cut or there is demonstrated possibility of either cultural or nationalistic bias.
Science is universal and common heritage of mankind. It does not belong to any nation or culture. Automatic 100% foreign equity should therefore be allowed in the Publishing of Books and Journals in Science & Technology, Social Sciences, Professional areas (medicine, management, business, accounting, law etc.) and Humanities (Art, literature, geography). This would also apply to “self-help” or “do-it-yourself” books in these areas. It should also cover educational material and topical magazines (e.g. Scientific American, Psychology Today) in the same subjects, with the following proviso:
Possible Exceptions
The 100% automatic approval would not apply to publication of educational material in history, directed at children up to the level of high school. It would also not apply to any literary work that glorifies or justifies violence in any way or makes it attractive by mixing it with sexual titillation. Finally it would not apply to any material containing geographical maps that misrepresent the boundaries of India to show Indian Territory as belonging to another country (we can perhaps take a relaxed attitude if it were shown as Indian Territory which is disputed).
CULTURAL GLOBALISATION
RECIPROCITY PRINCIPLE
We should have no objection in principle to publications on Culture, Society and Entertainment being published and sold in India as long as this is not at the expense of Indian culture, social norms & practices. The basic touchstone for deciding on foreign equity should be a criterion of globalisation. Globalisation of culture must be a two way street, with the rest of the World having the same access to Indian culture as we do to theirs (reciprocity). This has two aspects:
C1 Exports
If a publisher is willing and able to use India as an export base whenever it finds that India is a competitive location we should freely permit foreign entry. The export criteria would be very simple. At least one copy of each book or journal in each language sold in India must be exported as proof of exports. If some language is not considered exportable the publisher must substitute another international language besides English (e.g. Japanese, Chinese), or a more explicit criteria for exports (e.g. 10% of production). If our reasoning that India is or will soon become a very competitive location is correct, the publisher will in due course himself find it profitable to export more from India.
The idea is therefore not motivated by foreign exchange earnings considerations at all but by informational considerations. That is the entrant must after entry seriously consider whether it would be profitable to export from India. If anyone comes to a negative conclusion there must not be any legal pressure to go against a well-informed commercial judgement.
C2: Content
Globalisation of media cannot merely mean that all the existing cultural (e.g. soap operas) and nationalistic (e.g. war news) content created in democratic USA, UK and other English speaking countries is merely transferred to India. Globalisation must also mean that the cultural and nationalistic content created by the 1/6th of humanity living in democratic India is brought to a global audience (in due course).
Two criteria which could define globalisation of publishing are;
C2a: Country Maximum
That content from the USA (22%), Japan (8%), China (11%), Germany (5%) and UK (3%) cannot exceed their respective shares in world GDP measured at PPP. The idea is to ensure cultural diversity and discourage a homogenisation of culture based on World media oligopoly.
Publishers should be allowed to offset any divergence from criterion C2a by a point for point increase in the share of Indian content. For instance if the publication has only 2% content on China, the remaining 11% can be substituted by Indian content.
C2b: India Minimum
That Indian content must be greater than India’s share in world GDP at PPP (about 4.5%) in the third year after entry and rise to India’s share in world population (17%) by the tenth year of production. The content referred to here can be interpreted liberally to include any non-Indian content provided by any author/writer of Indian origin (up to children of parents who once held Indian passports). Again the idea is to ensure cultural diversity and that the Indian cultural perspective is fully reflected in this diversity.
CULTURE, SOCIETY & ENTERTAINMENT
The reciprocity principle outlined above can also be applied to the areas of culture, society and entertainment. In the area of scholarly & semi-scholarly books & journals providing analysis & information, such as books and journals on food, popular music and films, automatic foreign equity up to 74% could be permitted subject to criterion C1 & C2b and up to 51% subject to C1 alone. Higher foreign equity could be considered by the FIPB depending on more formal export commitment or commitment to provide Indian content. In the case of popular novels, magazines & comic books with the primary purpose of entertainment, automatic foreign equity up to 74% could be granted subject to criterion C1 and C2 and up to 51% subject to C1 and C2b. FIPB route would apply if proposal cannot meet condition C2. This condition can be relaxed by substituting it by formal export commitment.
The globalisation criterion enunciated above can also be applied to foreign entrants in the field of current affairs and news programs, along with a third one relating specifically to India (C3). The need for this clause arises because reporting of international affairs is strongly influenced by Nationality, as demonstrated by reporting of the war in Afghanistan and related issues of Pakistani involvement in terrorism in the region.
C3: Editorial Control
Editorial control, in the sense of control over editorial policy and content must vest with Indian nationals. The business managers and those who control commercial decision can, however, be foreigners. There could also be a grace period during which editorial policy is completely under the control of foreign editors.
Foreign entry into publishing of newspapers and news magazines dealing with current affairs and news can be allowed subject to criteria C1, C2 and C3. This could be done through the FIPB route subject to a maximum of 49% foreign equity.
Tuesday, June 11, 2002
China, India and the Asian Century?
We have shown in the previous article that India and China are likely to be among the three fastest growing economies in the World in the first decade of the 21st century with a mean growth rate of 7.3% and 7.5% per annum respectively. This has certain implications for the Global Economy.
Over the last two decades or so the important role played by economic factors in international relations has been recognised and appreciated. Prof. Kissinger has written about the emergence of six ‘Great Powers’ in the 21st century (USA, EU, China, Japan, Russia and India). This is particularly so since the disintegration of the USSR, as poor economic performance and growth was a major factor in undermining its stability and power. Prof. Paul Kennedy, in his book, ‘The Rise and Fall of Great Powers’ also gave economics considerable weight in the evolution of the Global balance of power. In the last decade or two fast growing economies have received a lot of attention and importance not only in World Capital Markets but also in World Capitals. Fast growth of East and South East Asian economies between the mid-seventies to the mid-nineties (coupled with the large Japanese economy) led to talk about the 21st century being the ‘Asian Century.’ Others more cognisant about the growth of Latin American countries like Brazil, Mexico, Chile and Argentina (coupled with the largest economy-USA) talked about the ‘Asia-Pacific Century’. The ‘Tequila crises’ along with the more recent ‘Asian crises’ seems to have put paid to such talk. This along with the strong US growth over the last decade has revived talk of a “Second American Century”.
In addition to economic growth, size is another feature of any economy, which determines its international importance. China and India are among the five largest economies in the world, in term of Gross Domestic Product at Purchasing Power Parity (PPP for short), with a growth rate much higher than each of the other three economies in this group. Though their per capita income (PPP) is between 5.5% and 17% of that of the other three economies, or perhaps paradoxically because of it, their future growth is of special interest to the World. This interest arises from the possibility of catch-up and large contributions to world GDP growth in the first two decades of the 21st century. The general consensus is that China’s performance in the late 20th century has been outstanding while that of India has been quite poor (with some exception during a few years in the nineties) and far inferior, to the point of non-comparability, to the (former) “miracle growth economies.” This article uses the growth projections in the last article to draw implications for power relations.
In terms of relative size, measured by GDP in purchasing power parity, the five largest economies in the world in 1998 were the USA, China, Japan, Germany and India. This is a much better way to compare the relative size of different economies than nominal exchange rate based estimates.. By the end of 1999 India will overtake Germany to become the fourth largest economy. Taking the tentative growth projections in Table 2 and estimating a per capita GDP growth rate for the USA, Germany and Japan as 2%, 1.5 to 1.9% and 0.9 to 1.5% per annum over the next decade we make some illustrative projections for the large countries. The Indian economy is projected to be 7-15% larger than that of Japan (in terms of GDP at PPP) in 2010. Thus by 2010 India’s economy will be among the three largest in the world after the USA and China. Its per capita GDP (at PPP) would still however be about one-fifteenth to one-twelfth of Japan’s and about one-tenth that of Germany.
A market exchange based estimate is useful for trade related comparisons, as tradable goods are the ones least affected by the application of PPP measures. The countries with the largest contribution to World GDP growth in 2010, in terms of absolute US $ value of additional GDP (at market exchange rate) will also be China, USA, Japan and India. In that year, China’s contribution is projected to be about 45% and India’s about 18% that of the USA. Japan’s contribution will be 17-24% and Germany’s 13-18% of that of the USA. These increments to GDP would also be an approximate measure of their incremental contribution to World trade in goods and traditional services (e.g. international transport & communication). With a host of newly tradable services likely to enter world trade in the next decade, the PPP based indicators may provide better indicators for the increase in trade in previously non-traded services.
Conclusion
While attention has been focused on the Asian Tigers, Asian NICs and the Chinese dragon during the past two decades, the performance of the Asian Elephant, India went largely unnoticed till 1998. In terms of per capita income the accepted measure of economic performance, India was the eighth fastest growing economy in the world during 1980-98. It was estimated to be the sixth fastest during the last two decades of the 20th century (though this estimate may now have to be revised). Only S. Korea and Singapore among the ‘Asian Tigers,’ Thailand & Indonesia among the NICs (Newly Industrialised Countries) and China (the newest Asian HPE), will have a higher trend growth rate during these two decades.
In the first decade of the 21st century India’s growth ranking is projected to improve further to the top three. In the next decade therefore India is forecast to grow faster than the ‘Asian Tigers’ and the ‘Asian NICs’. Its only Asian (or Emerging market) competitor in the growth sweepstakes will be China the newest Asian entrant to the group of star performers. The cycle of history will after half a century have turned full circle, with these two large emerging economies again engaged in friendly competition for the number two slot in the economic growth and development sweepstakes.
By 2010 India will be the third largest economy (PPP). In that year its contribution to the growth of the World economy in current US $ s will also be the third or fourth largest. Despite its relatively low per capita income, India will therefore be (along with the USA, EU, China and Japan) one of the five most important economies in the world in 2010. Further 11 of the 16 fastest growing economies in the next decade may be Asian countries constituting half the World’s population (in 1998). Though the next quarter century will still be part of the previous American century, the contours of the ‘Asian century’ will be clear even to sceptics by 2025.
A stable ‘Balance of Power’ within Asia will be critical to World peace in the last three-quarters of the 21st century. It is therefore in the interest of the USA to use its position as the sole super power, to help build (during the next decade or so) an internally consistent and stable balance of power within Asia that is sustainable without American military intervention.
Over the last two decades or so the important role played by economic factors in international relations has been recognised and appreciated. Prof. Kissinger has written about the emergence of six ‘Great Powers’ in the 21st century (USA, EU, China, Japan, Russia and India). This is particularly so since the disintegration of the USSR, as poor economic performance and growth was a major factor in undermining its stability and power. Prof. Paul Kennedy, in his book, ‘The Rise and Fall of Great Powers’ also gave economics considerable weight in the evolution of the Global balance of power. In the last decade or two fast growing economies have received a lot of attention and importance not only in World Capital Markets but also in World Capitals. Fast growth of East and South East Asian economies between the mid-seventies to the mid-nineties (coupled with the large Japanese economy) led to talk about the 21st century being the ‘Asian Century.’ Others more cognisant about the growth of Latin American countries like Brazil, Mexico, Chile and Argentina (coupled with the largest economy-USA) talked about the ‘Asia-Pacific Century’. The ‘Tequila crises’ along with the more recent ‘Asian crises’ seems to have put paid to such talk. This along with the strong US growth over the last decade has revived talk of a “Second American Century”.
In addition to economic growth, size is another feature of any economy, which determines its international importance. China and India are among the five largest economies in the world, in term of Gross Domestic Product at Purchasing Power Parity (PPP for short), with a growth rate much higher than each of the other three economies in this group. Though their per capita income (PPP) is between 5.5% and 17% of that of the other three economies, or perhaps paradoxically because of it, their future growth is of special interest to the World. This interest arises from the possibility of catch-up and large contributions to world GDP growth in the first two decades of the 21st century. The general consensus is that China’s performance in the late 20th century has been outstanding while that of India has been quite poor (with some exception during a few years in the nineties) and far inferior, to the point of non-comparability, to the (former) “miracle growth economies.” This article uses the growth projections in the last article to draw implications for power relations.
In terms of relative size, measured by GDP in purchasing power parity, the five largest economies in the world in 1998 were the USA, China, Japan, Germany and India. This is a much better way to compare the relative size of different economies than nominal exchange rate based estimates.. By the end of 1999 India will overtake Germany to become the fourth largest economy. Taking the tentative growth projections in Table 2 and estimating a per capita GDP growth rate for the USA, Germany and Japan as 2%, 1.5 to 1.9% and 0.9 to 1.5% per annum over the next decade we make some illustrative projections for the large countries. The Indian economy is projected to be 7-15% larger than that of Japan (in terms of GDP at PPP) in 2010. Thus by 2010 India’s economy will be among the three largest in the world after the USA and China. Its per capita GDP (at PPP) would still however be about one-fifteenth to one-twelfth of Japan’s and about one-tenth that of Germany.
A market exchange based estimate is useful for trade related comparisons, as tradable goods are the ones least affected by the application of PPP measures. The countries with the largest contribution to World GDP growth in 2010, in terms of absolute US $ value of additional GDP (at market exchange rate) will also be China, USA, Japan and India. In that year, China’s contribution is projected to be about 45% and India’s about 18% that of the USA. Japan’s contribution will be 17-24% and Germany’s 13-18% of that of the USA. These increments to GDP would also be an approximate measure of their incremental contribution to World trade in goods and traditional services (e.g. international transport & communication). With a host of newly tradable services likely to enter world trade in the next decade, the PPP based indicators may provide better indicators for the increase in trade in previously non-traded services.
Conclusion
While attention has been focused on the Asian Tigers, Asian NICs and the Chinese dragon during the past two decades, the performance of the Asian Elephant, India went largely unnoticed till 1998. In terms of per capita income the accepted measure of economic performance, India was the eighth fastest growing economy in the world during 1980-98. It was estimated to be the sixth fastest during the last two decades of the 20th century (though this estimate may now have to be revised). Only S. Korea and Singapore among the ‘Asian Tigers,’ Thailand & Indonesia among the NICs (Newly Industrialised Countries) and China (the newest Asian HPE), will have a higher trend growth rate during these two decades.
In the first decade of the 21st century India’s growth ranking is projected to improve further to the top three. In the next decade therefore India is forecast to grow faster than the ‘Asian Tigers’ and the ‘Asian NICs’. Its only Asian (or Emerging market) competitor in the growth sweepstakes will be China the newest Asian entrant to the group of star performers. The cycle of history will after half a century have turned full circle, with these two large emerging economies again engaged in friendly competition for the number two slot in the economic growth and development sweepstakes.
By 2010 India will be the third largest economy (PPP). In that year its contribution to the growth of the World economy in current US $ s will also be the third or fourth largest. Despite its relatively low per capita income, India will therefore be (along with the USA, EU, China and Japan) one of the five most important economies in the world in 2010. Further 11 of the 16 fastest growing economies in the next decade may be Asian countries constituting half the World’s population (in 1998). Though the next quarter century will still be part of the previous American century, the contours of the ‘Asian century’ will be clear even to sceptics by 2025.
A stable ‘Balance of Power’ within Asia will be critical to World peace in the last three-quarters of the 21st century. It is therefore in the interest of the USA to use its position as the sole super power, to help build (during the next decade or so) an internally consistent and stable balance of power within Asia that is sustainable without American military intervention.
Monday, June 10, 2002
Potential Growth Stars of the 21st Century
This article identifies countries with potential to be the fastest growing ones in the first decade of the 21st century.” An October 1999 paper by the author identified the fastest growing economies of the last two decades of the 20th century, analysed these growth patterns and used these for making projections for the first decade of the 21st century [http://finance.nic.in/avirmani]. The per capita GDP growth forecasts on which the ranking is made, are based on the growth trend analysis.
Three of the eleven high growth economies from the 1980-2000 period, Hong Kong, Malaysia and Indonesia loose their place among the star performers in the 21st century (table 2). In fact Malaysia is no longer in the top ten during 1980-2000. Hong Kong growth has been on a declining trend, which had already taken it to the bottom of the star set during 1980-2000. It seems to have reached the end of its high growth curve. There is a question mark on whether it can even grow at the top of the high-income countries’ growth range, given the change in its political status coupled and its currency board system. The Asian crises coupled with the additional costs imposed by the Euphoria-Panic cycle will push Indonesia down from its earlier 9th position. The political upheaval and transformation may also add to the delay in recovery as the new political system takes time to settle down. Half a decade may pass before Indonesia can hope to get back into the ranks of the star performers.
-------------------------------------------------------
Table 2 : Per Capita GDP Growth Forecast for 2000-10
Country Rank Avg gr rt
Ireland Top 3 6.9%
China* Top 3 5.9(4.9)%
India** Top 3 5.7%
Chile Top 5 4.6%
Korea, S Top 5 4.4%
Vietnam Top 10 3.5%
Singapore Top 10 3.0%
Thailand Top 10 3.0%
X Top 10
X Top 10
-----------------------------------------------
Notes:
1) The forecast for 2000-2010 is based on analysis of past trends.
2) * The forecast for China assumes that past over-estimates of growth by 2% would be gradually corrected over the decade (0.2% point per annum).
----------------------------------------------------------------------------
The top three performers in the first decade of the 21st century are forecast to be Ireland, China and India. Ireland and India share two characteristics. They were the two surprise entrants to the ranks of the star performers in the last two decades of the 20th century, and the only two in the accelerating phase of high growth during these decades. Even if Ireland reaches a plateau, maintenance of this growth rate would make Ireland the fastest growing economy.
China seems to have entered the decelerating phase. Any forecast of China’s growth is, however, complicated by the fact that past growth is over estimated by an average of 1 to 2% per annum. We have assumed an overestimation of 2%, and projected it to be corrected through better statistical systems over the next decade, to become 0% by the end of the decade. This yields an average growth rate of 5.9% (published) per annum which is marginally higher than that estimated for India. If a full correction of 2% is made growth rates of per capita GDP would be 4.9% (actual). This would lower China’s rank below that of India, but still leave China among the top three performers during the next decade.
The China forecast is based on our analysis of euphoria and the possibility of accumulated negatives in a society and polity such as China. Among the inconsistencies or incongruities, which suggest such hidden negatives are:
a) Reports of masses of unemployed people roaming the countryside looking for work. A typical low-income Asian “labour surplus economy” is characterised by disguised unemployment in the rural sector. For such a country to have mass open unemployment after 18 years of 10.6% (or even 8.6%) growth, denotes inconsistency.
b) Low-income countries have relatively low domestic saving rates, higher domestic investment and a corresponding deficit on the current account of the Balance of payments. China in contrast has phenomenal levels of domestic savings and investment coupled with very high levels of FDI and a surplus on the current account for 12 of the past 17 years (with an average surplus about 0.5% of GDP). This historical anomaly is sustainable.
c) China has comprehensive capital controls, a current account surplus and rising foreign reserves for much of the period. Yet the post crisis years have seen repeated discussion/speculation of a Chinese devaluation. With capital account controlled, a devaluation in the presence of current account surplus and rising reserves is a complete violation of market economics.
d) China’s labour intensive exports are highly competitive, not so the capital-intensive exports produced by the state enterprises. Yet a very large variety of such exports at unbeatable prices are increasingly found in developing countries. The possibility that these entail implicit subsidies in the form of losses financed by loans from the State banks is high. Late nineties estimates of non-performing loans of around 24% (50% in 2001) of GDP support this hypothesis. It would also suggest future difficulties with respect to export growth.
Despite these potential negatives our forecast assumes a decline in average real per capita GDP growth of only about 2% points from its performance in the last two decades.
India on the threshold of the 21st century is still a low-income country with an enormous amount of catch up still left. The greatest strength is the free, open and democratic society and polity, which ensures that all weaknesses and problems are fully exposed and debated. The actual growth rate will depend on the pace and depth of reforms that follows from this knowledge. Growth may be slower than projected if some critical reforms such as the reallocating and improving the quality of government expenditure are not undertaken in the next 5 to 10 years. Achievement of per capita GDP growth above the projected 5.7% would require a substantial step-up in the pace of economic reforms. The projected growth rate of 5.7% per annum over the next decade is 1.6 per cent point higher than the trend growth rate during the last two decades. It would move India from 6th rank in 1980-2000 to third or higher rank in 2000-2010. This is a feasible because India will undergo a demographic transition during the next two decades, which will lower the dependency ratio (dependents per worker) and could increase per capita GDP growth rates by about 0.7%.
South Korea is the only other country to retain its position among the 6 fastest growing economies while Chile moves up to this sub-category. Korea has previously had very sharp drops in growth. The current drop is however much sharper and reflects a larger accumulation of negative factors requiring policy reform and new approaches. It is likely to move back towards its long-term trend growth rate, ensuring its position in the top six. Chile has been moving up the growth rankings and appears set to continue on this path even though its past recovery-record is mixed. Several setbacks were semi-permanent and reduced trend growth while others were followed by a renewal of vigorous growth. The growth slowdown this time is relatively minor and therefore expected to be reversed.
Vietnam, Singapore and Thailand are the other three star performers of the last two decades, which may remain stars. Though Vietnam seems to have come to an end of one growth cycle, it has the potential to re-accelerate given sufficiently purposeful reforms. There is however the possibility that such reforms will not take place for political reasons and Vietnam will drop out of the top ten. Thailand still has high growth potential but also an accumulated baggage of un-addressed negatives. The degree of attention and success in dealing with the accumulated problems will determine its growth ranking. In both cases an average pace of reforms is assumed in placing them in the top ten. Singapore will continue on its gradually declining growth trend but likely remain in the top ten during the next decade.
Promising potential candidates for inclusion among the star performers of the 21st century are Sri Lanka, Norway, Laos, Poland, Bangladesh and Uganda. Thus for the two slots vacated by Asian countries in the top ten, three of the six potential candidates are from Asia and four out of six are poor countries in which policy reforms will play an important role. Over a slightly longer horizon Indonesia remains a candidate while Malaysia’s performance could still be in the top 15. Given that 11 of the 16 fastest growing economies in the next decade could well be Asian the possibility of an ‘Asian century’ cannot be ruled out.
Three of the eleven high growth economies from the 1980-2000 period, Hong Kong, Malaysia and Indonesia loose their place among the star performers in the 21st century (table 2). In fact Malaysia is no longer in the top ten during 1980-2000. Hong Kong growth has been on a declining trend, which had already taken it to the bottom of the star set during 1980-2000. It seems to have reached the end of its high growth curve. There is a question mark on whether it can even grow at the top of the high-income countries’ growth range, given the change in its political status coupled and its currency board system. The Asian crises coupled with the additional costs imposed by the Euphoria-Panic cycle will push Indonesia down from its earlier 9th position. The political upheaval and transformation may also add to the delay in recovery as the new political system takes time to settle down. Half a decade may pass before Indonesia can hope to get back into the ranks of the star performers.
-------------------------------------------------------
Table 2 : Per Capita GDP Growth Forecast for 2000-10
Country Rank Avg gr rt
Ireland Top 3 6.9%
China* Top 3 5.9(4.9)%
India** Top 3 5.7%
Chile Top 5 4.6%
Korea, S Top 5 4.4%
Vietnam Top 10 3.5%
Singapore Top 10 3.0%
Thailand Top 10 3.0%
X Top 10
X Top 10
-----------------------------------------------
Notes:
1) The forecast for 2000-2010 is based on analysis of past trends.
2) * The forecast for China assumes that past over-estimates of growth by 2% would be gradually corrected over the decade (0.2% point per annum).
----------------------------------------------------------------------------
The top three performers in the first decade of the 21st century are forecast to be Ireland, China and India. Ireland and India share two characteristics. They were the two surprise entrants to the ranks of the star performers in the last two decades of the 20th century, and the only two in the accelerating phase of high growth during these decades. Even if Ireland reaches a plateau, maintenance of this growth rate would make Ireland the fastest growing economy.
China seems to have entered the decelerating phase. Any forecast of China’s growth is, however, complicated by the fact that past growth is over estimated by an average of 1 to 2% per annum. We have assumed an overestimation of 2%, and projected it to be corrected through better statistical systems over the next decade, to become 0% by the end of the decade. This yields an average growth rate of 5.9% (published) per annum which is marginally higher than that estimated for India. If a full correction of 2% is made growth rates of per capita GDP would be 4.9% (actual). This would lower China’s rank below that of India, but still leave China among the top three performers during the next decade.
The China forecast is based on our analysis of euphoria and the possibility of accumulated negatives in a society and polity such as China. Among the inconsistencies or incongruities, which suggest such hidden negatives are:
a) Reports of masses of unemployed people roaming the countryside looking for work. A typical low-income Asian “labour surplus economy” is characterised by disguised unemployment in the rural sector. For such a country to have mass open unemployment after 18 years of 10.6% (or even 8.6%) growth, denotes inconsistency.
b) Low-income countries have relatively low domestic saving rates, higher domestic investment and a corresponding deficit on the current account of the Balance of payments. China in contrast has phenomenal levels of domestic savings and investment coupled with very high levels of FDI and a surplus on the current account for 12 of the past 17 years (with an average surplus about 0.5% of GDP). This historical anomaly is sustainable.
c) China has comprehensive capital controls, a current account surplus and rising foreign reserves for much of the period. Yet the post crisis years have seen repeated discussion/speculation of a Chinese devaluation. With capital account controlled, a devaluation in the presence of current account surplus and rising reserves is a complete violation of market economics.
d) China’s labour intensive exports are highly competitive, not so the capital-intensive exports produced by the state enterprises. Yet a very large variety of such exports at unbeatable prices are increasingly found in developing countries. The possibility that these entail implicit subsidies in the form of losses financed by loans from the State banks is high. Late nineties estimates of non-performing loans of around 24% (50% in 2001) of GDP support this hypothesis. It would also suggest future difficulties with respect to export growth.
Despite these potential negatives our forecast assumes a decline in average real per capita GDP growth of only about 2% points from its performance in the last two decades.
India on the threshold of the 21st century is still a low-income country with an enormous amount of catch up still left. The greatest strength is the free, open and democratic society and polity, which ensures that all weaknesses and problems are fully exposed and debated. The actual growth rate will depend on the pace and depth of reforms that follows from this knowledge. Growth may be slower than projected if some critical reforms such as the reallocating and improving the quality of government expenditure are not undertaken in the next 5 to 10 years. Achievement of per capita GDP growth above the projected 5.7% would require a substantial step-up in the pace of economic reforms. The projected growth rate of 5.7% per annum over the next decade is 1.6 per cent point higher than the trend growth rate during the last two decades. It would move India from 6th rank in 1980-2000 to third or higher rank in 2000-2010. This is a feasible because India will undergo a demographic transition during the next two decades, which will lower the dependency ratio (dependents per worker) and could increase per capita GDP growth rates by about 0.7%.
South Korea is the only other country to retain its position among the 6 fastest growing economies while Chile moves up to this sub-category. Korea has previously had very sharp drops in growth. The current drop is however much sharper and reflects a larger accumulation of negative factors requiring policy reform and new approaches. It is likely to move back towards its long-term trend growth rate, ensuring its position in the top six. Chile has been moving up the growth rankings and appears set to continue on this path even though its past recovery-record is mixed. Several setbacks were semi-permanent and reduced trend growth while others were followed by a renewal of vigorous growth. The growth slowdown this time is relatively minor and therefore expected to be reversed.
Vietnam, Singapore and Thailand are the other three star performers of the last two decades, which may remain stars. Though Vietnam seems to have come to an end of one growth cycle, it has the potential to re-accelerate given sufficiently purposeful reforms. There is however the possibility that such reforms will not take place for political reasons and Vietnam will drop out of the top ten. Thailand still has high growth potential but also an accumulated baggage of un-addressed negatives. The degree of attention and success in dealing with the accumulated problems will determine its growth ranking. In both cases an average pace of reforms is assumed in placing them in the top ten. Singapore will continue on its gradually declining growth trend but likely remain in the top ten during the next decade.
Promising potential candidates for inclusion among the star performers of the 21st century are Sri Lanka, Norway, Laos, Poland, Bangladesh and Uganda. Thus for the two slots vacated by Asian countries in the top ten, three of the six potential candidates are from Asia and four out of six are poor countries in which policy reforms will play an important role. Over a slightly longer horizon Indonesia remains a candidate while Malaysia’s performance could still be in the top 15. Given that 11 of the 16 fastest growing economies in the next decade could well be Asian the possibility of an ‘Asian century’ cannot be ruled out.
Saturday, June 1, 2002
District Level Poverty: Estimates and Analysis
INTRODUCTION
The Planning Commission prepares State Specific Poverty lines and Poverty levels (head count ratios) by rural and urban sectors. These poverty rates are now available for the 2000-01 NSS 55th round. Poverty rates at a more dis-aggregated level are only available at the level of NSS region for 1993-94 the previous large sample NSS survey. As the NSS does not provide district level data, poverty estimates are not available at the district level.
This paper uses an econometric methodology to provide district level NSS estimates using the region wise poverty data. These estimates are then used to rank the districts by degree of poverty (from highest to lowest). The districts falling outside one standard deviation on the upper side of the ranking can be said to be districts with relatively high poverty, while those outside two standard deviations on the upper side can be said to be those with very high poverty. The list of such districts can be used identify special pockets of poverty for which a geographical approach to economic growth, infrastructure development and poverty reduction is the most appropriate. To the extent that so many of our development programs are directed towards removing the causes and/or consequences of poverty, this can also contribute a better understanding of the micro-determinants of poverty.
METHODOLOGY
This paper uses NSS region data on available district level variables such as urbanisation, labour productivity in agriculture (Value of agricultural output per male agricultural worker), proportion of SC/ST in the district population and infrastructure variables to derive estimates for the district. The district level variables are first averaged across each NSS region. Cross sectional effect of urbanisation, agricultural labour productivity, caste and infrastructure variables on poverty are then estimated. This regression is then used to derive district level poverty based on the variation of the district level variables from their average for the region.
Results
Determinants of PovertyThe estimated equation is as follows (numbers in bracket are t statistics):
(1) Poverty = 60.224 – 0.8232 POPurban – 1.1181 Yag/Lml + 0.4648 POPsc
(13.7) (-11.0) (-10.4) (4.1)
0.3747 POPst + 0.1820 POPmuslim – 0.3843 PostalFac – 0.00003 PHsC
(7.2) (2.4) (-6.7) (-4.9)
Multiple R2 = 0.772, R2 = 0.596, R2 (adjusted) = 0.5235.
Where Yag/Lml is the Value of agricultural output per male agricultural worker (Bhalla et al) POPurban is the proportion of urban population, and POPsc POPst & POPmuslim are respectively the SC, ST & muslim populations as a proportion of the total (1991 census) averaged over the NSS region. PostalFac and PHsC are the proportion of villages with postal facility and Primary Health sub-Centers respectively. Poverty rates are for 1993-94.
The equation shows that agricultural productivity and urbanisation play a strong role in reducing poverty. The former is the key to productive employment in rural areas and the latter plays both a direct role in generating urban jobs and an indirect role in providing the market for agricultural produce. The association of SC and ST population with poverty is also very strong. A one percent point increase in the SC and ST population increases the poverty rate by 0.47 percent point and 0.37 percent point respectively. The effect of Muslim population is smaller (0.18 percent point) though still significant at the 5% level. The effect of unemployment rate on poverty which was significant in the absence of the urbanisation variable is now insignificant.
It has been known for some time that ill health is an important factor in pushing people below the poverty line. Our results show that the existence of Primary health sub-centres in the rural areas has a significant affect on poverty reduction. This is rather remarkable given the absenteeism and poor quality of health care provided in government health centres and the large proportion of consumer expenditures on private health practitioners and facilities. There is generally one Primary health sub-centre per 5000 people. These sub-centers are staffed by an Auxiliary Nurse mid-wife and a male health worker and there primary objective is preventive health. It is known that the attendance record of the latter is not much better than that of doctors posted at Primary health centres. We understand, however that the attendance record of the Auxiliary Nurse Mid-wife (ANM) is the polar opposite, bordering on the perfect. This is perhaps an explanation for the effectiveness in reducing ill health and and poverty.
The only other variable with a significant effect on cross-regional poverty are postal facilities. Postal facilities can be channel for communications between market participants or for the flow of information and money orders from migrant labour. Different aspects could be important in different situations.
Other infrastructure variables like proportions of villages with electricity, pucca roads, drinking water, or primary schools, the density of railway station or bank branches and gross irrigated area have no additional effect on cross-regional poverty (i.e. are not significant when entered in this equation). An important reason for this is the high degree of multi- co linearity among many of these variable with the variables that turn out to be significant.
Agriculture Productivity
Using the same regional data we can also find out the effect of poverty and the available district level variables on un-employment.
(2) Yag/Lml = -6.7528 + 0.0472 UrbanPop + 0.1178 GrIrArea + 0.0977 POPsc
(-5.9) (3.2) (10.8) (4.4)
+0.0839 POPst + 1.4074 BankBrnch + 0.026 ElectVil – 0.0324 DrnkWtr
(4.2) (14.8) (2.3) (-4.8)
-0.035 PuccaRd
(-1.6)
Multiple R2 = 0.791, R2 = 0.626, R2 (adjusted) = 0.619.
Numbers in brackets are t statistics. GrIrArea is Gross Irrigated area, BankBrnch is the number of bank branches per lakh population, ElectVil, DrnkWtr and PuccRd are the proportion of villages that are electrified, have drinking water supply and have Pucca road connection respectively.
Some answers are provided by an examination of the determinants of differences in productivity across regions. Equation (2) shows that urbanisation, gross irrigated area, density of bank branches and electrification have a significant effect on agricultural productivity. The slightly lower level of significance of the last variable is probably due to the fact that the mere existence of electricity connections does not reflect either the amount or quality of electricity supply, and when absent it is probably substituted by use of hydro-carbon fuels. Better irrigation and electricity therefore influence poverty indirectly through their effect on agricultural productivity.
Pucca roads however turn out have no effect on agricultural productivity or poverty. It is possible that the quality of ‘pucca’ roads is not much different from that of ‘kutcha’ ones, while the absence of critical bridges etc. means that this variable is not reflective of good road connectivity. The connectivity provided by roads is probably captured jointly by the agricultural productivity and urbanisation variables, in that surplus agricultural produce arising from high labour productivity has to be transported to and sold in urban areas. The fact that density of bank branches is significant in the agricultural productivity regression but not in the poverty one, reflects the importance of payment mechanisms and perhaps credit in the supply of surplus agricultural produce to urban areas.
The only plausible explanation for the negative effect of drinking water supply on agriculture is that it is capturing the effect of low natural water supply. In other words for any given level of irrigation the lower the natural rainfall the greater is the need for piped drinking water supply. If provision of drinking water to villages has been need based, then this variable will be a good proxy for low rainfall (i.e. inverse correlation). We would expect that rainfall has a positive effect on agricultural productivity and consequently that water supply proportion is negatively co-related with agricultural productivity.
District Poverty Rates
Using the co-efficients estimated in equation (1) we can estimate district level poverty rates for all districts within a given region as follows:
(3) Poverty (district) = Poverty (region) – 1.1181 [Yag/Lml (district) – Yag/Lml (region)] - 0.8232 [POPurban (district) – POPurban (region)] + 0.4648 [POPsc (district) – POPsc (region)] + 0.3747 [POPst (district) – POPst (region)] + 0.182 [POPmuslim (district) – POPmuslim (region)] – 0.3843 [PostalFac (district) – PostalFac (region)] – 0.00003 [PHsC (district) – PHsC (region)]
The results of applying equation (3) to derive the district level poverty estimates for 1993-94 are presented in Table 1. The districts are ordered starting from those with the highest poverty rate to the lowest poverty rate. The mean poverty rate in these districts is 37.3% and the standard deviation is 19.8%. Poverty rates falling within one standard deviation of the mean are within the normal range of variability, and only those lying outside this range on the upper side can be classified as being abnormally high. There are 66 districts with a poverty rate higher than 57.2% (mean plus standard deviation). These can be classified as having a high poverty rate. Of these 66 high poverty districts almost half were in (undivided) Bihar (32). Currently 19 (about 28%) of these will be in Bihar and 13 (20%) in Jharkhand. Undivided Madhya Pradesh had 13 (20%) of the high poverty districts of which 9 fall in current Madhya Pradesh and 5 in Chattisgarh. The remaining high poverty districts are in Uttar Pradesh (9), Orissa (5), Maharashtra (4), West Bengal (2) and Tamil Nadu (1).
There were only four district with a poverty rate higher than two standard diviation above the mean (i.e. 77% in 1993-94). These are Gumla and Lhardaga in Jharkhand and West Nimar and Barwani in Madhya Pradesh.
Bihar (undivided) had high poverty in 58% of its 55 districts. These were situated in the northern, central and southern (Jharkhand) NSS regions. Orissa came next with high poverty in 38% of its 13 districts with the highest concentration in the Southern and Western regions. Madhya Pradesh (udivided) had high poverty in 20% of its 34 districts with the highest concentration in the South Western and Chattisgarh regions. Maharashtra with 12% of its 34 districts, UP with 11% of its 79 districts and West Bengal with also 11% of its 18 districts were in the middle. Tamil Nadu’s single high poverty district constituted 5% of its 18 districts. UP’s high poverty districts were concentrated in the Southern region with a few in the Eastern region , while the high poverty districts of West Bengal were in the Himalayan region. A regional approach could be adopted in most of these states with contiguous high poverty districts developed together in an integrated state sub-plan (s).
We can compare these proportions with the 1993-94 State Poverty rates. The ordering of the States by State poverty level is identical to the ordering of states by the proportion of their districts that have high poverty levels as defined above. Thus there is perfect rank co-relation between the two.
5 CONCLUSION
The paper shows that agricultural productivity and urbanisation have a very significant role in reducing poverty. Districts with higher SC, ST and Muslim population have a larger proportion of poor.
The Planning Commission prepares State Specific Poverty lines and Poverty levels (head count ratios) by rural and urban sectors. These poverty rates are now available for the 2000-01 NSS 55th round. Poverty rates at a more dis-aggregated level are only available at the level of NSS region for 1993-94 the previous large sample NSS survey. As the NSS does not provide district level data, poverty estimates are not available at the district level.
This paper uses an econometric methodology to provide district level NSS estimates using the region wise poverty data. These estimates are then used to rank the districts by degree of poverty (from highest to lowest). The districts falling outside one standard deviation on the upper side of the ranking can be said to be districts with relatively high poverty, while those outside two standard deviations on the upper side can be said to be those with very high poverty. The list of such districts can be used identify special pockets of poverty for which a geographical approach to economic growth, infrastructure development and poverty reduction is the most appropriate. To the extent that so many of our development programs are directed towards removing the causes and/or consequences of poverty, this can also contribute a better understanding of the micro-determinants of poverty.
METHODOLOGY
This paper uses NSS region data on available district level variables such as urbanisation, labour productivity in agriculture (Value of agricultural output per male agricultural worker), proportion of SC/ST in the district population and infrastructure variables to derive estimates for the district. The district level variables are first averaged across each NSS region. Cross sectional effect of urbanisation, agricultural labour productivity, caste and infrastructure variables on poverty are then estimated. This regression is then used to derive district level poverty based on the variation of the district level variables from their average for the region.
Results
Determinants of PovertyThe estimated equation is as follows (numbers in bracket are t statistics):
(1) Poverty = 60.224 – 0.8232 POPurban – 1.1181 Yag/Lml + 0.4648 POPsc
(13.7) (-11.0) (-10.4) (4.1)
0.3747 POPst + 0.1820 POPmuslim – 0.3843 PostalFac – 0.00003 PHsC
(7.2) (2.4) (-6.7) (-4.9)
Multiple R2 = 0.772, R2 = 0.596, R2 (adjusted) = 0.5235.
Where Yag/Lml is the Value of agricultural output per male agricultural worker (Bhalla et al) POPurban is the proportion of urban population, and POPsc POPst & POPmuslim are respectively the SC, ST & muslim populations as a proportion of the total (1991 census) averaged over the NSS region. PostalFac and PHsC are the proportion of villages with postal facility and Primary Health sub-Centers respectively. Poverty rates are for 1993-94.
The equation shows that agricultural productivity and urbanisation play a strong role in reducing poverty. The former is the key to productive employment in rural areas and the latter plays both a direct role in generating urban jobs and an indirect role in providing the market for agricultural produce. The association of SC and ST population with poverty is also very strong. A one percent point increase in the SC and ST population increases the poverty rate by 0.47 percent point and 0.37 percent point respectively. The effect of Muslim population is smaller (0.18 percent point) though still significant at the 5% level. The effect of unemployment rate on poverty which was significant in the absence of the urbanisation variable is now insignificant.
It has been known for some time that ill health is an important factor in pushing people below the poverty line. Our results show that the existence of Primary health sub-centres in the rural areas has a significant affect on poverty reduction. This is rather remarkable given the absenteeism and poor quality of health care provided in government health centres and the large proportion of consumer expenditures on private health practitioners and facilities. There is generally one Primary health sub-centre per 5000 people. These sub-centers are staffed by an Auxiliary Nurse mid-wife and a male health worker and there primary objective is preventive health. It is known that the attendance record of the latter is not much better than that of doctors posted at Primary health centres. We understand, however that the attendance record of the Auxiliary Nurse Mid-wife (ANM) is the polar opposite, bordering on the perfect. This is perhaps an explanation for the effectiveness in reducing ill health and and poverty.
The only other variable with a significant effect on cross-regional poverty are postal facilities. Postal facilities can be channel for communications between market participants or for the flow of information and money orders from migrant labour. Different aspects could be important in different situations.
Other infrastructure variables like proportions of villages with electricity, pucca roads, drinking water, or primary schools, the density of railway station or bank branches and gross irrigated area have no additional effect on cross-regional poverty (i.e. are not significant when entered in this equation). An important reason for this is the high degree of multi- co linearity among many of these variable with the variables that turn out to be significant.
Agriculture Productivity
Using the same regional data we can also find out the effect of poverty and the available district level variables on un-employment.
(2) Yag/Lml = -6.7528 + 0.0472 UrbanPop + 0.1178 GrIrArea + 0.0977 POPsc
(-5.9) (3.2) (10.8) (4.4)
+0.0839 POPst + 1.4074 BankBrnch + 0.026 ElectVil – 0.0324 DrnkWtr
(4.2) (14.8) (2.3) (-4.8)
-0.035 PuccaRd
(-1.6)
Multiple R2 = 0.791, R2 = 0.626, R2 (adjusted) = 0.619.
Numbers in brackets are t statistics. GrIrArea is Gross Irrigated area, BankBrnch is the number of bank branches per lakh population, ElectVil, DrnkWtr and PuccRd are the proportion of villages that are electrified, have drinking water supply and have Pucca road connection respectively.
Some answers are provided by an examination of the determinants of differences in productivity across regions. Equation (2) shows that urbanisation, gross irrigated area, density of bank branches and electrification have a significant effect on agricultural productivity. The slightly lower level of significance of the last variable is probably due to the fact that the mere existence of electricity connections does not reflect either the amount or quality of electricity supply, and when absent it is probably substituted by use of hydro-carbon fuels. Better irrigation and electricity therefore influence poverty indirectly through their effect on agricultural productivity.
Pucca roads however turn out have no effect on agricultural productivity or poverty. It is possible that the quality of ‘pucca’ roads is not much different from that of ‘kutcha’ ones, while the absence of critical bridges etc. means that this variable is not reflective of good road connectivity. The connectivity provided by roads is probably captured jointly by the agricultural productivity and urbanisation variables, in that surplus agricultural produce arising from high labour productivity has to be transported to and sold in urban areas. The fact that density of bank branches is significant in the agricultural productivity regression but not in the poverty one, reflects the importance of payment mechanisms and perhaps credit in the supply of surplus agricultural produce to urban areas.
The only plausible explanation for the negative effect of drinking water supply on agriculture is that it is capturing the effect of low natural water supply. In other words for any given level of irrigation the lower the natural rainfall the greater is the need for piped drinking water supply. If provision of drinking water to villages has been need based, then this variable will be a good proxy for low rainfall (i.e. inverse correlation). We would expect that rainfall has a positive effect on agricultural productivity and consequently that water supply proportion is negatively co-related with agricultural productivity.
District Poverty Rates
Using the co-efficients estimated in equation (1) we can estimate district level poverty rates for all districts within a given region as follows:
(3) Poverty (district) = Poverty (region) – 1.1181 [Yag/Lml (district) – Yag/Lml (region)] - 0.8232 [POPurban (district) – POPurban (region)] + 0.4648 [POPsc (district) – POPsc (region)] + 0.3747 [POPst (district) – POPst (region)] + 0.182 [POPmuslim (district) – POPmuslim (region)] – 0.3843 [PostalFac (district) – PostalFac (region)] – 0.00003 [PHsC (district) – PHsC (region)]
The results of applying equation (3) to derive the district level poverty estimates for 1993-94 are presented in Table 1. The districts are ordered starting from those with the highest poverty rate to the lowest poverty rate. The mean poverty rate in these districts is 37.3% and the standard deviation is 19.8%. Poverty rates falling within one standard deviation of the mean are within the normal range of variability, and only those lying outside this range on the upper side can be classified as being abnormally high. There are 66 districts with a poverty rate higher than 57.2% (mean plus standard deviation). These can be classified as having a high poverty rate. Of these 66 high poverty districts almost half were in (undivided) Bihar (32). Currently 19 (about 28%) of these will be in Bihar and 13 (20%) in Jharkhand. Undivided Madhya Pradesh had 13 (20%) of the high poverty districts of which 9 fall in current Madhya Pradesh and 5 in Chattisgarh. The remaining high poverty districts are in Uttar Pradesh (9), Orissa (5), Maharashtra (4), West Bengal (2) and Tamil Nadu (1).
There were only four district with a poverty rate higher than two standard diviation above the mean (i.e. 77% in 1993-94). These are Gumla and Lhardaga in Jharkhand and West Nimar and Barwani in Madhya Pradesh.
Bihar (undivided) had high poverty in 58% of its 55 districts. These were situated in the northern, central and southern (Jharkhand) NSS regions. Orissa came next with high poverty in 38% of its 13 districts with the highest concentration in the Southern and Western regions. Madhya Pradesh (udivided) had high poverty in 20% of its 34 districts with the highest concentration in the South Western and Chattisgarh regions. Maharashtra with 12% of its 34 districts, UP with 11% of its 79 districts and West Bengal with also 11% of its 18 districts were in the middle. Tamil Nadu’s single high poverty district constituted 5% of its 18 districts. UP’s high poverty districts were concentrated in the Southern region with a few in the Eastern region , while the high poverty districts of West Bengal were in the Himalayan region. A regional approach could be adopted in most of these states with contiguous high poverty districts developed together in an integrated state sub-plan (s).
We can compare these proportions with the 1993-94 State Poverty rates. The ordering of the States by State poverty level is identical to the ordering of states by the proportion of their districts that have high poverty levels as defined above. Thus there is perfect rank co-relation between the two.
5 CONCLUSION
The paper shows that agricultural productivity and urbanisation have a very significant role in reducing poverty. Districts with higher SC, ST and Muslim population have a larger proportion of poor.
Thursday, May 30, 2002
The Greatest Challenge: Criminals
The greatest challenge to India’s future is neither infrastructure nor agriculture it is neither poverty nor inequality it is the deterioration in governance that has taken place over the decades. This deterioration is broad based & universal: Civic amenities, publicly provided utilities, public education and health law & order and justice have deteriorated, in some places beyond belief. Both availability and quality continue to decline. The TV image of Delhi slum roads flowing with sewerage during the monsoon five-six years ago captured this most starkly. What one had heard about law & order in Bihar for several decades and began hearing about UP during the last decade, can strike even in Delhi & its suburbs. The lack of interest and motivation to fulfil the basic functions of government is a more fundamental cause than fiscal bankruptcy.
The underlying problem is distorted incentives and the corruption of power. Existing systems have distorted the incentives for working efficiently & productively and for investment & entrepreneurship. In the case of Public servants (bureaucrats & politicians) the dis-incentive is compounded by the imbalance of Power between the State and the Public: Power corrupts and absolute power corrupts absolutely. As the systems of governance deteriorate under rent seeking, rent creation and corruption, the power to do good falls relative to the power to harm. The result is that today, the latter is much greater than the former, so that the rare employee wanting to do good has the dice loaded against him/her.
The insights of modern economics that incentive structures are important for how economic agents behave, were largely ignored in setting up institutions and in devising economic & other policies. The role of moral & social conventions in ensuring respect for and implementation of law was given undue weight. Though post-independence leaders in India were imbued with ideals that defied economic incentives, this has long since ceased to be true. Countries that built institutions and systems with some recognition of economic incentives have sustained good governance much longer. Unfortunately, this was not so in India, so that we are now faced with comprehensive failure of governance.
There are four related and interconnected dimensions of this government failure that are important in determining the new approach to development policy. These are monopolisation of power, employee privatisation of public services, Over-extension of government and Fiscal mismanagement.
Monopolisation of Power
Though the monopolisation of economic power started from the 2nd Plan, the peak period of monopolisation was from the mid-sixties to the mid-seventies. By the eighties it covered every area of economic activity as well as the related institutions and social activity. It involved excessive and oppressive interference in all areas of private activity including for instance ‘co-operatives’ that were supposed to be an alternative form of private activity. As a consequence the innovative potential and productive genius of the people has been stifled.
Employee ‘Privatisation’
Employee Privatisation of Public Services is an extreme form of the principle-agent problem that has been known to economics for some time but has been largely ignored in India. This is the problem of how large institutions, including the political system and government bureaucracies, can ensure that the workers in these institutions follow the goals of the institution. This problem has reached epidemic proportion with perhaps 80% of ‘public servants’ maximising their own personal interests, rather than working for the professed goals of the organisation in which they are employed. The proportion of such people in the upper bureaucracy, which generally constitutes about 2% of the total, may be around one-third and perhaps fall even further in the top most reaches which are much more in the media spot light.
Leviathan Spread Thin
Buchanan’s analysis of government warned us that the government was a Leviathan whose interest was in expanding and spreading over more and more areas. The Indian government is over extended & spread thin over too many areas and doing things that are beyond its capabilities. While extending itself to newer areas of activity, the government took the basic functions of government for granted, giving progressively less attention to them. In a country that invented planning in a market economy in the fifties, this is best illustrated by the absence of even the most elementary planning in digging & re-surfacing of municipal roads. As a result the provision of public goods & services has suffered and their quality has deteriorated. The untreated sewage pouring into lakes in Nainital & Srinagar and the rivers in Himachal Pradesh and other tourist havens, open sewers running along the roads in towns across the nation, the pathetic state of the sewerage system in the cities (even Delhi slums) are only a few examples.
Broadly speaking the government has three broad functions that it must perform for the economy and society. This is the provision of “Public” goods and services, the correction of “externalities” and “social welfare.” The former has been most neglected over the past three decades.
Public Goods
‘Public good,’ is an economic concept with a precise technical definition, one element of which is “non-excludability” and another is “non-rivalry.” The classic ‘public good’ (actually service) is ‘defence’ where exclusion is literally impossible and once provided everybody shares in it. Other services that meet the definition are general administration, the judicial system, police, roads & prevention/control of communicable/epidemic diseases. Though in principle government could charge individuals for the use of local roads it is prohibitively expensive to do so (economic non-excludability). Rural roads, once built satisfy the non-rivalry condition in that they the traffic is very light (and they are thus empty) most of the time. Inter-city roads have very strong element of externality (marginal cost ~ zero relative to average fixed cost), so that they are also considered ‘public goods.’ Similarly public health measures such as public (not individual) supply of clean drinking water, sanitation & sewerage, population control and public education about nutrition, cleanliness etc. correct negative externalities and are accepted as ‘public’ goods. Similarly literacy & basic education have positive externalities for other educated people and can be similarly classified even though it does not meet the exclusion criteria in urban areas. Because of limits to divisibility and the sparseness of population, many basic infrastructure services (drinking water, primary education) in rural areas have very high average fixed costs relative to marginal costs and can be classified as ‘public goods.’
Fifty years after independence the population coverage and the quality of supply of these basic services is pathetic and globally embarrassing. Much more attention, time and funds need to be spent on these basic public goods & services. Government responsibility for supply means that government must provide the required funds but it need not produce all these services.
Regional Inequality
Though poverty has declined over the past decade, it has declined less in the poorer states, because the latter have grown more slowly than the country as a whole, with the result that inter-state inequality has increased. A number of eminent economists have asked us the question, ‘What is the role of the State in dealing with this issue?’ under the proposed paradigm/approach. Our reading of the ground reality is that most of these States are characterised by pervasive government failure. Consequently, ‘the State is part of the problem and may not be part of the solution.’
The senior most officials of one such State govt. admitted in a meeting with peers from Central and State governments that they were not competent to procure excess production or deliver food to the starving. Hearing this from a member of the elite service, an inheritor of the ‘steel frame of India,’ was a shock. Similarly, the top political leadership of one State admitted the existing State machinery could not spend money productively and that it would be very happy if development activities could be carried out by anyone else, including the provider of the funds.
The only solution to this incredible failure of governance is to create alternative non-State institutions within such States to build physical & social infrastructure and carry out development tasks, perhaps including some of the basic functions of governance. There is an even more urgent need than elsewhere to get the stifling hand of government out of the peoples’ business, by downsizing govt and liberalising State laws, rules and procedures, and focussing whatever positive energy the government is able to muster on the ‘basics of governance,’(the provision of “Public” goods and services, the correction of “externalities” and “social welfare)”
The mammoth State of UP will perhaps also have be broken up into (about four) smaller States so that the span of state govt. control is more suited to the provision of basic public services and rural development.
There is an urgent need to strengthen the checks and balances in the political system. Though the framers of our constitution paid a lot of attention to the potential for corruption in the bureaucracy, they made the fatal mistake of assuming that all future elected representatives would incorruptible and self less like those who fought for independence. They could not imagine that the judiciary could also be corrupted.
Criminal Legislators
There is an urgent need for electoral reform to reduce the currently overwhelming incentive for corruption. If the Neta-criminal nexus is not broken a time will come in the not too distant future when it will become virtually impossible to stop the criminalisation of the entire police force. In our view the minimal elements of a solution are, (a) State funding of elections through a matching funds approach. (b) Freedom to companies to donate funds subject to shareholder approval. (c) Transparent accounting and mandatory auditing of the accounts of political parties that receive State or company funds. (d) Mandatory bar to running for any political office by any one against whom criminal charges have been legally framed, (e) Special courts to try politicians/potential candidates against whom such charges have been framed so that those who are the object of motivated/false charges can be tried and cleared quickly.
Police
The police force has over time become an important instrument of political power. The police are therefore no longer an independent instrument for enforcing and upholding the rule of law and for providing personal security to all its citizens. The misuse of police by the political masters for personal ends as well as the use by the police of state power vested in them, for their own personal ends, is not merely a theoretical possibility but a frightening reality. This enormous power of the police to do harm must be checked before it becomes uncontrollable.
A number of commissions from the Dharam Vira commission to the Law Commission have suggested the creation of a buffer between the political bosses and the day-to-day operation of the police. One approach is to set up an autonomous police commission in each state along with open and transparent process for appointing the senior officers of the commission. There is also need for an independent public prosecutor whose job is to take cognisance of, oversee investigation of and prosecute major crimes (e.g. murder, armed robbery/dacoity, kidnapping, rape, police crimes). To ensure accountability to the public, which has become the object of police harassment, each police commission & public prosecutor would be accountable to an oversight committee of representatives from all walks of life (including the administration & judiciary). This would ensure that the police themselves obey the law and the law-breakers among them are given exemplary punishment.
Conclusion
• Reform the Police system by setting up operationally autonomous Police Commission in each State. A Public oversight committee, with representatives of government and prominent citizens, would also be set up to ensure that the police do not misuse their authority and obey the law that they are charged to uphold. The monitoring/oversight committee should have the authority to ensure that any policeman that misuses his position or violates the law is given exemplary punishment.
• Set up a National Legal commission to provide similar oversight over the legal system and the neutrality and probity of judges at different levels.
• Introduce a law to debar those against whom criminal charges have been framed in a court of law from holding or standing for election to a public office, till such time as the person has been acquitted. Set up a special tribunal for expeditiously trying all such cases in which the person wishes to stand for public office or is holding public office at the time of notification of the new law.
The underlying problem is distorted incentives and the corruption of power. Existing systems have distorted the incentives for working efficiently & productively and for investment & entrepreneurship. In the case of Public servants (bureaucrats & politicians) the dis-incentive is compounded by the imbalance of Power between the State and the Public: Power corrupts and absolute power corrupts absolutely. As the systems of governance deteriorate under rent seeking, rent creation and corruption, the power to do good falls relative to the power to harm. The result is that today, the latter is much greater than the former, so that the rare employee wanting to do good has the dice loaded against him/her.
The insights of modern economics that incentive structures are important for how economic agents behave, were largely ignored in setting up institutions and in devising economic & other policies. The role of moral & social conventions in ensuring respect for and implementation of law was given undue weight. Though post-independence leaders in India were imbued with ideals that defied economic incentives, this has long since ceased to be true. Countries that built institutions and systems with some recognition of economic incentives have sustained good governance much longer. Unfortunately, this was not so in India, so that we are now faced with comprehensive failure of governance.
There are four related and interconnected dimensions of this government failure that are important in determining the new approach to development policy. These are monopolisation of power, employee privatisation of public services, Over-extension of government and Fiscal mismanagement.
Monopolisation of Power
Though the monopolisation of economic power started from the 2nd Plan, the peak period of monopolisation was from the mid-sixties to the mid-seventies. By the eighties it covered every area of economic activity as well as the related institutions and social activity. It involved excessive and oppressive interference in all areas of private activity including for instance ‘co-operatives’ that were supposed to be an alternative form of private activity. As a consequence the innovative potential and productive genius of the people has been stifled.
Employee ‘Privatisation’
Employee Privatisation of Public Services is an extreme form of the principle-agent problem that has been known to economics for some time but has been largely ignored in India. This is the problem of how large institutions, including the political system and government bureaucracies, can ensure that the workers in these institutions follow the goals of the institution. This problem has reached epidemic proportion with perhaps 80% of ‘public servants’ maximising their own personal interests, rather than working for the professed goals of the organisation in which they are employed. The proportion of such people in the upper bureaucracy, which generally constitutes about 2% of the total, may be around one-third and perhaps fall even further in the top most reaches which are much more in the media spot light.
Leviathan Spread Thin
Buchanan’s analysis of government warned us that the government was a Leviathan whose interest was in expanding and spreading over more and more areas. The Indian government is over extended & spread thin over too many areas and doing things that are beyond its capabilities. While extending itself to newer areas of activity, the government took the basic functions of government for granted, giving progressively less attention to them. In a country that invented planning in a market economy in the fifties, this is best illustrated by the absence of even the most elementary planning in digging & re-surfacing of municipal roads. As a result the provision of public goods & services has suffered and their quality has deteriorated. The untreated sewage pouring into lakes in Nainital & Srinagar and the rivers in Himachal Pradesh and other tourist havens, open sewers running along the roads in towns across the nation, the pathetic state of the sewerage system in the cities (even Delhi slums) are only a few examples.
Broadly speaking the government has three broad functions that it must perform for the economy and society. This is the provision of “Public” goods and services, the correction of “externalities” and “social welfare.” The former has been most neglected over the past three decades.
Public Goods
‘Public good,’ is an economic concept with a precise technical definition, one element of which is “non-excludability” and another is “non-rivalry.” The classic ‘public good’ (actually service) is ‘defence’ where exclusion is literally impossible and once provided everybody shares in it. Other services that meet the definition are general administration, the judicial system, police, roads & prevention/control of communicable/epidemic diseases. Though in principle government could charge individuals for the use of local roads it is prohibitively expensive to do so (economic non-excludability). Rural roads, once built satisfy the non-rivalry condition in that they the traffic is very light (and they are thus empty) most of the time. Inter-city roads have very strong element of externality (marginal cost ~ zero relative to average fixed cost), so that they are also considered ‘public goods.’ Similarly public health measures such as public (not individual) supply of clean drinking water, sanitation & sewerage, population control and public education about nutrition, cleanliness etc. correct negative externalities and are accepted as ‘public’ goods. Similarly literacy & basic education have positive externalities for other educated people and can be similarly classified even though it does not meet the exclusion criteria in urban areas. Because of limits to divisibility and the sparseness of population, many basic infrastructure services (drinking water, primary education) in rural areas have very high average fixed costs relative to marginal costs and can be classified as ‘public goods.’
Fifty years after independence the population coverage and the quality of supply of these basic services is pathetic and globally embarrassing. Much more attention, time and funds need to be spent on these basic public goods & services. Government responsibility for supply means that government must provide the required funds but it need not produce all these services.
Regional Inequality
Though poverty has declined over the past decade, it has declined less in the poorer states, because the latter have grown more slowly than the country as a whole, with the result that inter-state inequality has increased. A number of eminent economists have asked us the question, ‘What is the role of the State in dealing with this issue?’ under the proposed paradigm/approach. Our reading of the ground reality is that most of these States are characterised by pervasive government failure. Consequently, ‘the State is part of the problem and may not be part of the solution.’
The senior most officials of one such State govt. admitted in a meeting with peers from Central and State governments that they were not competent to procure excess production or deliver food to the starving. Hearing this from a member of the elite service, an inheritor of the ‘steel frame of India,’ was a shock. Similarly, the top political leadership of one State admitted the existing State machinery could not spend money productively and that it would be very happy if development activities could be carried out by anyone else, including the provider of the funds.
The only solution to this incredible failure of governance is to create alternative non-State institutions within such States to build physical & social infrastructure and carry out development tasks, perhaps including some of the basic functions of governance. There is an even more urgent need than elsewhere to get the stifling hand of government out of the peoples’ business, by downsizing govt and liberalising State laws, rules and procedures, and focussing whatever positive energy the government is able to muster on the ‘basics of governance,’(the provision of “Public” goods and services, the correction of “externalities” and “social welfare)”
The mammoth State of UP will perhaps also have be broken up into (about four) smaller States so that the span of state govt. control is more suited to the provision of basic public services and rural development.
There is an urgent need to strengthen the checks and balances in the political system. Though the framers of our constitution paid a lot of attention to the potential for corruption in the bureaucracy, they made the fatal mistake of assuming that all future elected representatives would incorruptible and self less like those who fought for independence. They could not imagine that the judiciary could also be corrupted.
Criminal Legislators
There is an urgent need for electoral reform to reduce the currently overwhelming incentive for corruption. If the Neta-criminal nexus is not broken a time will come in the not too distant future when it will become virtually impossible to stop the criminalisation of the entire police force. In our view the minimal elements of a solution are, (a) State funding of elections through a matching funds approach. (b) Freedom to companies to donate funds subject to shareholder approval. (c) Transparent accounting and mandatory auditing of the accounts of political parties that receive State or company funds. (d) Mandatory bar to running for any political office by any one against whom criminal charges have been legally framed, (e) Special courts to try politicians/potential candidates against whom such charges have been framed so that those who are the object of motivated/false charges can be tried and cleared quickly.
Police
The police force has over time become an important instrument of political power. The police are therefore no longer an independent instrument for enforcing and upholding the rule of law and for providing personal security to all its citizens. The misuse of police by the political masters for personal ends as well as the use by the police of state power vested in them, for their own personal ends, is not merely a theoretical possibility but a frightening reality. This enormous power of the police to do harm must be checked before it becomes uncontrollable.
A number of commissions from the Dharam Vira commission to the Law Commission have suggested the creation of a buffer between the political bosses and the day-to-day operation of the police. One approach is to set up an autonomous police commission in each state along with open and transparent process for appointing the senior officers of the commission. There is also need for an independent public prosecutor whose job is to take cognisance of, oversee investigation of and prosecute major crimes (e.g. murder, armed robbery/dacoity, kidnapping, rape, police crimes). To ensure accountability to the public, which has become the object of police harassment, each police commission & public prosecutor would be accountable to an oversight committee of representatives from all walks of life (including the administration & judiciary). This would ensure that the police themselves obey the law and the law-breakers among them are given exemplary punishment.
Conclusion
• Reform the Police system by setting up operationally autonomous Police Commission in each State. A Public oversight committee, with representatives of government and prominent citizens, would also be set up to ensure that the police do not misuse their authority and obey the law that they are charged to uphold. The monitoring/oversight committee should have the authority to ensure that any policeman that misuses his position or violates the law is given exemplary punishment.
• Set up a National Legal commission to provide similar oversight over the legal system and the neutrality and probity of judges at different levels.
• Introduce a law to debar those against whom criminal charges have been framed in a court of law from holding or standing for election to a public office, till such time as the person has been acquitted. Set up a special tribunal for expeditiously trying all such cases in which the person wishes to stand for public office or is holding public office at the time of notification of the new law.
Wednesday, May 15, 2002
High Growth Economies of the 20th Century
The answer to the question, “Which are the best performing countries in the World,” varies with the year, the region and the expert to whom this question is addressed. Till the first half of 1997, the consensus among the cognoscenti would have been that the East and South East Asian “Miracle economies” constitute (with perhaps minor exceptions) the star performers of the world. The “Asian Crises” has swept away the paradigm of the “Asian Miracle,” shattering this consensus. Within the limits imposed by availability of internationally comparable data, an October 1999 paper by the author identified the fastest growing economies of the last two decades of the 20th century [http://finance.nic.in/avirmani]. This article presents these star performers.
GDP Growth Trends: End 20th Century
Table 1 shows the ten fastest growing medium-large countries in the world during the last two decades of the 20th century. Among the top 10 there are three broad growth clusters: There are four countries having a trend growth rate of between 5.3% and 5.7%, three between 6% and 6.2% and four having a growth rate of 6.9% or higher. It is interesting that even if we make a downward adjustment of 2% points in the average growth rate of China it would still be the best performer over this period. Out of the 10 High Performing East Asian economies (HPEs), referred to in the World Bank’s Asian Miracle study (1993) only one (Japan) has clearly dropped out of the top 10. Given its poor performance in the nineties, Japan is no longer among the high performers.
Many observers of ‘emerging market’ economies were surprised by the absence of their favoured countries from this list of high growth countries. The greatest surprise was the appearance of India among the top ten performers. Most observers would have stated that India’s performance ranks at the bottom third or at best the mid-range of the entire set of medium-large countries. A few may have been willing to concede that India may have performed a little better during part of the nineties to reach the top half or top third. It would be difficult to find (in 1998) more than a handful of people who could have imagined that for a continuous period of two decades India was the sixth fastest growing economy in the World. One valid reaction of sceptics would be that this is all very well for the GDP growth rate, but India could not possibly have performed so well in terms of growth in per capita GDP. We return to this aspect below.
---------------------------------------------------------------------
Table 1: Growth Trends for Medium-Large Countries: 1980-2000 (est)
Country GDP Per Capita GDP
Gr. Trend Rank Gr. trend Rank
China 10.1(8.1) 1 8.8(6.8)% 1
Korea, Rep. 7.7 2 6.6% 2
Thailand 7.1 3 5.7% 3
Singapore 6.9 4 5.1% 4
Ireland 5.3 10 4.9% 5
India 6.0 6 4.1% 6
Vietnam 6.2 5 4.1% 7
Chile 5.6 9 4.0% 8
Indonesia 5.7 8 3.9% 9
Hong Kong 5.3 11 3.7% 10
Malaysia 6.0 7 3.5% 11
----------------------------------------------------------------------------
Notes:
1) The growth trend for 1980-98 is a log average of the growth trends for 1980-90 &1990-98, from WDR 1999-2000.
2) Population growth trends from WDR 1998-1999 and projections.
3) Forecasts of 1999 and 2000 are from ADB AEO 1999, IMF WEO where available.
---------------------------------------------------------------------------------
Chile is the only country in this group that is not located in Asia. Those dealing with Latin America may be surprised that no other country from their region is represented, while those outside the region may be surprised that it falls in the top ten. The numerous international fans of Chile’s policies may be surprised that India’s trend growth rate of GDP was higher than that of Chile. Those outside Asia may be equally surprised to find Vietnam among the top five performers. Vietnam, India and Chile performed better than Hong Kong, which just makes it into the list at the number 11 position.
Another noteworthy fact about these three countries is that each of them started economic reforms during the eighties and continued it in the nineties. Though the popular perception is that India started its reforms in the nineties, Virmani (1989) had shown that there was a significant improvement (break) in India’s growth performance in the eighties, from its dismal performance from the mid-sixties to the end of the seventies. This paper had also argued that this was due to economic reforms undertaken during the eighties, which started (albeit slowly) reversing the policy distortions introduced in the seventies.
Per Capita GDP Growth
Per capita GDP growth is a better measure of economic performance, viewed from the perspective of the welfare of a country’s people. If both economy and population grow rapidly, the former may be partly a consequence of the latter, while the welfare of the public may not have improved much because of poor growth of per capita income. Table 1 also shows the ranking of medium-large countries in terms of the trend rate of growth of per capita income. For the period 1980-2000 the ranking of the top four is the same as the one for GDP growth. China is the top performer with a trend growth rate of per capita GDP of 8.8% (table 1). If we adjust its growth rate by 2%, then it and S. Korea form one cluster with a growth rate in the range of 6.6% to 6.8%. Thailand is the only country with a per capita GDP growth between 5.5% and 6.5%. The third cluster with a per capita income growth of 4.5% to 5.5%, which includes Singapore, has an interesting addition. Ireland is the fifth fastest growing economy in the world in terms of per capita GDP (10th in GDP growth). There is a fourth cluster with a per capita growth around 4% (3.5% to 4.5%) containing all the other high growth economies. India is the fastest growing economy within this cluster, with its overall rank unchanged at number 6.
Malaysia’s performance appears much worse in terms of per capita income than it does in terms of GDP growth and both Vietnam & Indonesia move down in the ranking. The ranking of Chile and Hong Kong is on the other hand better in terms of per capita GDP than it is for GDP growth. Out of the 10 High Performing East Asian economies (HPEs), referred to in the World Bank’s Asian Miracle study (1993) Malaysia at 11th place would therefore clearly be the second country from among the HPEs to drop out of the set of star performers.
Thus the star performers of the last two decades of the 20th century are China, S. Korea, Thailand, Singapore Ireland, India, Vietnam, Chile, Indonesia, and Hong Kong. Of these only two are from outside Asia, while none are from East Europe. The representation from Latin America and E. Europe is unchanged even when we bring in the next tier of medium-large countries, which have a per capita growth trend of around 3% (2.7% to 3.3%). These are Sri Lanka, Norway, Turkey and Portugal. Thus out of the 15 fastest growing economies during the last two decades of the 20th century 11 were from Asia.
GDP Growth Trends: End 20th Century
Table 1 shows the ten fastest growing medium-large countries in the world during the last two decades of the 20th century. Among the top 10 there are three broad growth clusters: There are four countries having a trend growth rate of between 5.3% and 5.7%, three between 6% and 6.2% and four having a growth rate of 6.9% or higher. It is interesting that even if we make a downward adjustment of 2% points in the average growth rate of China it would still be the best performer over this period. Out of the 10 High Performing East Asian economies (HPEs), referred to in the World Bank’s Asian Miracle study (1993) only one (Japan) has clearly dropped out of the top 10. Given its poor performance in the nineties, Japan is no longer among the high performers.
Many observers of ‘emerging market’ economies were surprised by the absence of their favoured countries from this list of high growth countries. The greatest surprise was the appearance of India among the top ten performers. Most observers would have stated that India’s performance ranks at the bottom third or at best the mid-range of the entire set of medium-large countries. A few may have been willing to concede that India may have performed a little better during part of the nineties to reach the top half or top third. It would be difficult to find (in 1998) more than a handful of people who could have imagined that for a continuous period of two decades India was the sixth fastest growing economy in the World. One valid reaction of sceptics would be that this is all very well for the GDP growth rate, but India could not possibly have performed so well in terms of growth in per capita GDP. We return to this aspect below.
---------------------------------------------------------------------
Table 1: Growth Trends for Medium-Large Countries: 1980-2000 (est)
Country GDP Per Capita GDP
Gr. Trend Rank Gr. trend Rank
China 10.1(8.1) 1 8.8(6.8)% 1
Korea, Rep. 7.7 2 6.6% 2
Thailand 7.1 3 5.7% 3
Singapore 6.9 4 5.1% 4
Ireland 5.3 10 4.9% 5
India 6.0 6 4.1% 6
Vietnam 6.2 5 4.1% 7
Chile 5.6 9 4.0% 8
Indonesia 5.7 8 3.9% 9
Hong Kong 5.3 11 3.7% 10
Malaysia 6.0 7 3.5% 11
----------------------------------------------------------------------------
Notes:
1) The growth trend for 1980-98 is a log average of the growth trends for 1980-90 &1990-98, from WDR 1999-2000.
2) Population growth trends from WDR 1998-1999 and projections.
3) Forecasts of 1999 and 2000 are from ADB AEO 1999, IMF WEO where available.
---------------------------------------------------------------------------------
Chile is the only country in this group that is not located in Asia. Those dealing with Latin America may be surprised that no other country from their region is represented, while those outside the region may be surprised that it falls in the top ten. The numerous international fans of Chile’s policies may be surprised that India’s trend growth rate of GDP was higher than that of Chile. Those outside Asia may be equally surprised to find Vietnam among the top five performers. Vietnam, India and Chile performed better than Hong Kong, which just makes it into the list at the number 11 position.
Another noteworthy fact about these three countries is that each of them started economic reforms during the eighties and continued it in the nineties. Though the popular perception is that India started its reforms in the nineties, Virmani (1989) had shown that there was a significant improvement (break) in India’s growth performance in the eighties, from its dismal performance from the mid-sixties to the end of the seventies. This paper had also argued that this was due to economic reforms undertaken during the eighties, which started (albeit slowly) reversing the policy distortions introduced in the seventies.
Per Capita GDP Growth
Per capita GDP growth is a better measure of economic performance, viewed from the perspective of the welfare of a country’s people. If both economy and population grow rapidly, the former may be partly a consequence of the latter, while the welfare of the public may not have improved much because of poor growth of per capita income. Table 1 also shows the ranking of medium-large countries in terms of the trend rate of growth of per capita income. For the period 1980-2000 the ranking of the top four is the same as the one for GDP growth. China is the top performer with a trend growth rate of per capita GDP of 8.8% (table 1). If we adjust its growth rate by 2%, then it and S. Korea form one cluster with a growth rate in the range of 6.6% to 6.8%. Thailand is the only country with a per capita GDP growth between 5.5% and 6.5%. The third cluster with a per capita income growth of 4.5% to 5.5%, which includes Singapore, has an interesting addition. Ireland is the fifth fastest growing economy in the world in terms of per capita GDP (10th in GDP growth). There is a fourth cluster with a per capita growth around 4% (3.5% to 4.5%) containing all the other high growth economies. India is the fastest growing economy within this cluster, with its overall rank unchanged at number 6.
Malaysia’s performance appears much worse in terms of per capita income than it does in terms of GDP growth and both Vietnam & Indonesia move down in the ranking. The ranking of Chile and Hong Kong is on the other hand better in terms of per capita GDP than it is for GDP growth. Out of the 10 High Performing East Asian economies (HPEs), referred to in the World Bank’s Asian Miracle study (1993) Malaysia at 11th place would therefore clearly be the second country from among the HPEs to drop out of the set of star performers.
Thus the star performers of the last two decades of the 20th century are China, S. Korea, Thailand, Singapore Ireland, India, Vietnam, Chile, Indonesia, and Hong Kong. Of these only two are from outside Asia, while none are from East Europe. The representation from Latin America and E. Europe is unchanged even when we bring in the next tier of medium-large countries, which have a per capita growth trend of around 3% (2.7% to 3.3%). These are Sri Lanka, Norway, Turkey and Portugal. Thus out of the 15 fastest growing economies during the last two decades of the 20th century 11 were from Asia.
Wednesday, February 27, 2002
Fiscal Deficit & The Quality Of Government Expenditure
INTRODUCTION
With the Fiscal Responsibility Bill stalled, the pre-budget time is apposite for taking another look at this issue. Fiscal sustainability has three aspects. One is the trend in the debt GDP ratio as determined by the primary surplus/deficit and the growth rate relative to the real interest rate, second the quality of government expenditure and third the efficiency of the tax system. In this article we focus on the quality of government expenditure. One of the most important implications of the fiscal problem in India is that the government has no money to spend on essentials. The basic problem is therefore of identifying and eliminating wasteful and unproductive expenditures so that the fiscal deficit can be eliminated and more money spent on essential government functions.
INTEREST EXPENDITURE
Interest payments are a major item of expenditure, with about half of total Central government revenue spent on interest payments. They thus “crowd out” other potentially more productive items of government expenditure.
In drawing implications for the present and future it is important to look back into the past. Interest on accumulated debt is the embodiment, as it were, of past sins. That is borrowing to finance past government expenditure. In the past few decades such expenditures consisted of both government consumption (or revenue expenditure) and unproductive investment (or capital expenditure). Thus concern about interest payments is implicitly a concern about the volume and/or quality of expenditures in the past. Some of these past government consumption and unproductive government investments are rightly viewed as crowding out present government expenditures.
One implication of this line of reasoning is that to the extent that this debt was incurred in financing investment or capital it should be allocated and assigned to these investments and the concerned organizations (e.g. PSUs, PSBs, DPEs or administrative departments). A substantial part of the indirect subsidies are the cost to the government of servicing the debt assigned to each of these organizations (organized by sub-sectors & budget heads instead of by organisations). The rest is the depreciation of these assets and their quality because of lack of replacement investment. The net value of these organizations to the government (family silver or copper as it may turn out to be) is therefore the gross value of assets or equity owned by the government in each organization minus the debt incurred by government in setting them up.
The major policy implication is that, if we are concerned about government debt and interest payments, we should sell all units producing “private goods & services” and use the proceeds to repay the debt. Operationally this could be done by creating an independent dis-investment organization and assigning to it both the ownership of the equity and an equivalent amount of debt obligation and giving it the mandate to eliminate both in an efficient way over a fixed period of time. This would reduce government interest payments over time, eliminate the crowding out of current expenditures by interest payment and allow government to focus on essential expenditures.
PUBLIC GOODS
The next question that arises is what are these “essential” government expenditures that have a higher claim on government revenues? One important category consists of Public Goods & Services. Public goods are characterized by an element of non-excludability (e.g. defence, police) or very high transaction costs for pricing (e.g. local roads) so that they cannot be charged for on an individual basis. They (public goods & services) are almost by definition items that must be paid for out of tax revenues.
They include,
i) Roads [excluding major, high density highways] & Water ways [river navigability, drainage systems, flood control]
ii) Legal System [laws, courts, judges]
iii) Public security system [police, prosecutors, jails]
iv) Public Health systems [Communicable diseases, epidemic monitoring & control, Public drinking water, sewerage & sanitation systems]
v) R&D on socially beneficial areas, including tropical diseases, agriculture (e.g. appropriate crops & rotation patterns for different agro-climatic regions), pollution.
vi) Public Education [rights, responsibilities, civic & democratic virtues, public morality, productive knowledge (e.g. agricultural extension), preventive health & population restraint, pollution abatement, water conservation]
vii) Environment & Pollution, forests, parks.
Central and state governments have spread their limited resources too thinly over too many areas and items of expenditure. As a result many of these essentials have suffered from a lack of resources and attention, and the availability and quality of these public goods has deteriorated dramatically. The time taken in court cases is legendary. Those of us who believe that Bihar and Eastern UP is hundreds of miles away may be surprised to know how badly the local/ground level police systems have deteriorated in the heart of the capital of Delhi. In this era of severe fiscal problems it is in my view essential for government to go, “Back to Basics” and refocus its attention on public goods & services.
As most of these public goods will continue to be produced or supplied by government to large extent for quite some time it is essential to improve the efficiency of production in terms of cost & quality. This is considered below
EXTERNALITIES & SUBSIDIES
Degree of Externality
The second essential area of government expenditure is on subsidies for those goods and services that have large externalities. In principle all private (non-public) goods & services can be assigned to three categories: Those with high, medium and low or no externalities. Elementary education, rural water supply, adult literacy, rural secondary education and development of markets in remote, hilly & backward areas have high externalities.
Policy Implications
Two policy implications follow:
a) Phase out subsidies on goods & services with low or no externality such as Industry, power, shipping, road transport, other transport, coal & lignite.
The phase-out schedule must however give sufficient time for,
(i) Developing a clear, transparent and positive framework for private production & supply,
(ii) An independent regulatory framework for natural monopoly segments and
(iii) Consumers to adjust to higher cost-based prices (excluding X-inefficiency costs of monopoly & corruption).
b) Align the actual subsidy ordering with the ordering of degree of externality.
This is implicit in the calculation of financial gains of phasing out subsidy.
PRODUCTION EFFICIENCY
Relative Inefficiency of Public Production & Supply
Even if there is a need for government subsidy, it does not follow that the good or service must be produced and/or supplied by the government. Government should only produce and supply such a good or service if its efficiency is higher than that of the private (individual, co-operative or corporate) sector and non-profit organisations (NPOs).
There are inherent problems in government production and supply of private goods & services. The CAG & other government auditing procedures are not conducive to commercial production and supply, particularly in a highly complex economy subject to myriad risks and shocks. The principle agent problem means that public employees and their overlords have a strong incentive to first create rents & then appropriate these rents for themselves. As a result corruption has gradually become endemic and there is much evidence that government production is less efficient than private. The only profitable government entities are either ones in which resource rents (the difference between world price and the full cost of extraction) can be disguised as profits, or government created monopolies (created by banning private production or investment for decades) with no private benchmarks for comparison.
The production, supply & maintenance of most of the subsidized goods produced by the public sector can and should be progressively opened to the non-profit organisations, co-operatives and private providers. The first step would be to develop a supportive policy framework for private entry. A modern regulatory framework must also be created for social sectors where quality is difficult to judge before purchase but is critical to the future of individuals.
Solution
There are many detailed issues involved in improving the efficiency of government programs. From a broad (macro) perspective, this requires improvement in two areas through dramatic changes:
Public Accountability
The key to public accountability of government agencies supplying goods & services and government servants and political masters overseeing them is the citizens’ right to information. A “Right to Information Act” must be enacted to return this right to the public. The poor in whose name all expenditures are justified must have the right to know all the facts relating to expenditures made/justified in their name. The information needed to be made publicly available includes the names of those who have authorized or spent the money, the purpose for which the money was spent, the names of the companies or individuals who received this money and what they have produced/done for receiving this money.
Issue specific user groups must be empowered to share with Panchayti raj & other government institutions the responsibility for monitoring public activity at the village and local level. For instance, all parents of school age children in the village (or set of villages) must be part of a user group for monitoring the activities of the village primary school, its teacher and the government supplies allocated to it. Similar user groups should be set up for all local public goods and services provided by the government.
Modern Management Practices
A complete and thorough modernization of the systems and procedures for production, supply and procurement of goods & services is needed. Perhaps not more than 25% of government projects use PERT/CPM a technique of project management, a technique that was developed in World War II and taught in US engineering colleges since the sixties. According to an informal survey only a few progressive organisations like NTPC use these techniques. Modern inventory control is a subject I recall discussing with the Navy chief over a decade ago, only to read in the newspaper recently that the armed forces still do not have modern inventory management systems.
INCOME TRANSFERS
Many government expenditure programs are hypothetically directed at the transfer of income to the poor, while several subsidies are justified by such reasons even if the externality is low. An additional consideration enters the picture in this case: The (transaction) cost of direct vs. indirect transfers. Indirect transfers have some self–selecting features but higher transaction costs. We must start experimenting with the use of new smart card technology for providing income transfers to the poor, in place of the plethora of poverty alleviation programs with enormous administrative cost and notorious leakages.
With the Fiscal Responsibility Bill stalled, the pre-budget time is apposite for taking another look at this issue. Fiscal sustainability has three aspects. One is the trend in the debt GDP ratio as determined by the primary surplus/deficit and the growth rate relative to the real interest rate, second the quality of government expenditure and third the efficiency of the tax system. In this article we focus on the quality of government expenditure. One of the most important implications of the fiscal problem in India is that the government has no money to spend on essentials. The basic problem is therefore of identifying and eliminating wasteful and unproductive expenditures so that the fiscal deficit can be eliminated and more money spent on essential government functions.
INTEREST EXPENDITURE
Interest payments are a major item of expenditure, with about half of total Central government revenue spent on interest payments. They thus “crowd out” other potentially more productive items of government expenditure.
In drawing implications for the present and future it is important to look back into the past. Interest on accumulated debt is the embodiment, as it were, of past sins. That is borrowing to finance past government expenditure. In the past few decades such expenditures consisted of both government consumption (or revenue expenditure) and unproductive investment (or capital expenditure). Thus concern about interest payments is implicitly a concern about the volume and/or quality of expenditures in the past. Some of these past government consumption and unproductive government investments are rightly viewed as crowding out present government expenditures.
One implication of this line of reasoning is that to the extent that this debt was incurred in financing investment or capital it should be allocated and assigned to these investments and the concerned organizations (e.g. PSUs, PSBs, DPEs or administrative departments). A substantial part of the indirect subsidies are the cost to the government of servicing the debt assigned to each of these organizations (organized by sub-sectors & budget heads instead of by organisations). The rest is the depreciation of these assets and their quality because of lack of replacement investment. The net value of these organizations to the government (family silver or copper as it may turn out to be) is therefore the gross value of assets or equity owned by the government in each organization minus the debt incurred by government in setting them up.
The major policy implication is that, if we are concerned about government debt and interest payments, we should sell all units producing “private goods & services” and use the proceeds to repay the debt. Operationally this could be done by creating an independent dis-investment organization and assigning to it both the ownership of the equity and an equivalent amount of debt obligation and giving it the mandate to eliminate both in an efficient way over a fixed period of time. This would reduce government interest payments over time, eliminate the crowding out of current expenditures by interest payment and allow government to focus on essential expenditures.
PUBLIC GOODS
The next question that arises is what are these “essential” government expenditures that have a higher claim on government revenues? One important category consists of Public Goods & Services. Public goods are characterized by an element of non-excludability (e.g. defence, police) or very high transaction costs for pricing (e.g. local roads) so that they cannot be charged for on an individual basis. They (public goods & services) are almost by definition items that must be paid for out of tax revenues.
They include,
i) Roads [excluding major, high density highways] & Water ways [river navigability, drainage systems, flood control]
ii) Legal System [laws, courts, judges]
iii) Public security system [police, prosecutors, jails]
iv) Public Health systems [Communicable diseases, epidemic monitoring & control, Public drinking water, sewerage & sanitation systems]
v) R&D on socially beneficial areas, including tropical diseases, agriculture (e.g. appropriate crops & rotation patterns for different agro-climatic regions), pollution.
vi) Public Education [rights, responsibilities, civic & democratic virtues, public morality, productive knowledge (e.g. agricultural extension), preventive health & population restraint, pollution abatement, water conservation]
vii) Environment & Pollution, forests, parks.
Central and state governments have spread their limited resources too thinly over too many areas and items of expenditure. As a result many of these essentials have suffered from a lack of resources and attention, and the availability and quality of these public goods has deteriorated dramatically. The time taken in court cases is legendary. Those of us who believe that Bihar and Eastern UP is hundreds of miles away may be surprised to know how badly the local/ground level police systems have deteriorated in the heart of the capital of Delhi. In this era of severe fiscal problems it is in my view essential for government to go, “Back to Basics” and refocus its attention on public goods & services.
As most of these public goods will continue to be produced or supplied by government to large extent for quite some time it is essential to improve the efficiency of production in terms of cost & quality. This is considered below
EXTERNALITIES & SUBSIDIES
Degree of Externality
The second essential area of government expenditure is on subsidies for those goods and services that have large externalities. In principle all private (non-public) goods & services can be assigned to three categories: Those with high, medium and low or no externalities. Elementary education, rural water supply, adult literacy, rural secondary education and development of markets in remote, hilly & backward areas have high externalities.
Policy Implications
Two policy implications follow:
a) Phase out subsidies on goods & services with low or no externality such as Industry, power, shipping, road transport, other transport, coal & lignite.
The phase-out schedule must however give sufficient time for,
(i) Developing a clear, transparent and positive framework for private production & supply,
(ii) An independent regulatory framework for natural monopoly segments and
(iii) Consumers to adjust to higher cost-based prices (excluding X-inefficiency costs of monopoly & corruption).
b) Align the actual subsidy ordering with the ordering of degree of externality.
This is implicit in the calculation of financial gains of phasing out subsidy.
PRODUCTION EFFICIENCY
Relative Inefficiency of Public Production & Supply
Even if there is a need for government subsidy, it does not follow that the good or service must be produced and/or supplied by the government. Government should only produce and supply such a good or service if its efficiency is higher than that of the private (individual, co-operative or corporate) sector and non-profit organisations (NPOs).
There are inherent problems in government production and supply of private goods & services. The CAG & other government auditing procedures are not conducive to commercial production and supply, particularly in a highly complex economy subject to myriad risks and shocks. The principle agent problem means that public employees and their overlords have a strong incentive to first create rents & then appropriate these rents for themselves. As a result corruption has gradually become endemic and there is much evidence that government production is less efficient than private. The only profitable government entities are either ones in which resource rents (the difference between world price and the full cost of extraction) can be disguised as profits, or government created monopolies (created by banning private production or investment for decades) with no private benchmarks for comparison.
The production, supply & maintenance of most of the subsidized goods produced by the public sector can and should be progressively opened to the non-profit organisations, co-operatives and private providers. The first step would be to develop a supportive policy framework for private entry. A modern regulatory framework must also be created for social sectors where quality is difficult to judge before purchase but is critical to the future of individuals.
Solution
There are many detailed issues involved in improving the efficiency of government programs. From a broad (macro) perspective, this requires improvement in two areas through dramatic changes:
Public Accountability
The key to public accountability of government agencies supplying goods & services and government servants and political masters overseeing them is the citizens’ right to information. A “Right to Information Act” must be enacted to return this right to the public. The poor in whose name all expenditures are justified must have the right to know all the facts relating to expenditures made/justified in their name. The information needed to be made publicly available includes the names of those who have authorized or spent the money, the purpose for which the money was spent, the names of the companies or individuals who received this money and what they have produced/done for receiving this money.
Issue specific user groups must be empowered to share with Panchayti raj & other government institutions the responsibility for monitoring public activity at the village and local level. For instance, all parents of school age children in the village (or set of villages) must be part of a user group for monitoring the activities of the village primary school, its teacher and the government supplies allocated to it. Similar user groups should be set up for all local public goods and services provided by the government.
Modern Management Practices
A complete and thorough modernization of the systems and procedures for production, supply and procurement of goods & services is needed. Perhaps not more than 25% of government projects use PERT/CPM a technique of project management, a technique that was developed in World War II and taught in US engineering colleges since the sixties. According to an informal survey only a few progressive organisations like NTPC use these techniques. Modern inventory control is a subject I recall discussing with the Navy chief over a decade ago, only to read in the newspaper recently that the armed forces still do not have modern inventory management systems.
INCOME TRANSFERS
Many government expenditure programs are hypothetically directed at the transfer of income to the poor, while several subsidies are justified by such reasons even if the externality is low. An additional consideration enters the picture in this case: The (transaction) cost of direct vs. indirect transfers. Indirect transfers have some self–selecting features but higher transaction costs. We must start experimenting with the use of new smart card technology for providing income transfers to the poor, in place of the plethora of poverty alleviation programs with enormous administrative cost and notorious leakages.
Wednesday, February 20, 2002
Capital Account Convertibility: Looking Back and Ahead- Lessons from the Asian Crises
IntroductionThe Asian crises has come and gone. The period in which forecasts of its negative effects were continuously revised upwards was followed by constant downward revision of these effects. The current consensus is that, even though the initial severity of the crisis was surprising (given that it occurred in economies thought to be “miracles”) the recovery was as quick as in other previous crisis. As in the case of our own BOP crisis of 1991 the “Asian crisis” was due to a mix of underlying Structural Problems, increasing Macro-economic Imbalances and Triggering Factors or Events. In a few countries like S. Korea recovery has been as fast as (or faster than) in India, while in others like Indonesia it is likely to be much slower. The speed of recovery has depended on the vigor with which some of the critical structural and macro problems have been tackled. Both the problems and the solutions are by now reasonably well understood.
It is therefore time to put aside some of the irrational fears unleashed by the “Asian Crisis” and resume the process of moving towards capital account convertibility. As has been our practice so far, this should be done with “all deliberate speed,” that is at a speed which is reasonably fast but does not involve excessive risks.
Lessons from Crises: Old & New
Though the Asian crisis has come and gone, the processes of separating the right lessons from the wrong ones, is not complete. More important, the lessons for the crisis countries may differ in important respects from those for India. It is necessary to be clear about the lessons for India, before we start applying them to the issue of Capital Account Convertibility for India.
We had already learned several lessons from our own crisis of 1991 and the Latin American crisis of the previous decade. The Eighth Plan working group on Balance of Payments (1989) had analysed India’s debt profile and suggested two fundamental changes:
a) A decrease in the ratio of short term to total debt as the former was dangerously high.
b) A strong effort to attract Direct Foreign Investment so as to decrease the external debt-equity ratio of the country.
A Planning Commission paper [1989] showed that the Fiscal Deficit had risen in tandem with the current account deficit. It subsequently became clear that the former was a major cause of the latter and several government economists were internally warning about the dangerously rising Fiscal Deficit (before the crisis).
The fixed overvalued exchange rate was also recognised as a major cause of the sharp rise in the current account deficit and the 1991 crisis. Opening of the current account over the next two years was therefore accompanied by a flexible exchange rate policy. Post-crisis it was also recognised that the regulatory system for banks as well as stock markets had to be modernised and strengthened. Efforts in this direction started in 1992 and have continued steadily (though not very fast in some sub-sectors) since then [PC working paper 2001/4].
The Asian crisis did reinforce (and make widely known) the importance of flexible exchange rates and Banking de-control & regulatory reform. It is now more widely recognised that the banking regulations have to be brought up to international standards.
There were, also, a few more specific lessons, which are of relevance to our move toward capital account convertibility. In each of the affected Asian countries the crisis lasted about a year and recovery has taken place in two to three years after onset. Even in Indonesia the basic crisis lasted for about the same time and continuing uncertainty is largely due to political violence and constitutional upheavals. This pattern of crisis and recovery is very similar to the Mexican crisis of 1994. Fixed exchange rates and excessive external short-term borrowing (defined as less than one year) were the two most common macroeconomic culprits. The obverse of this proposition is that external loans with residual maturity of over one year did not add at all to the crisis, as the crisis was over within a year. Portfolio flows proved to be somewhat more volatile than expected, partly because of the fixed exchange rate; nominal exchange rate had not been allowed to appreciate in the preceding period of large inflows. As expected, however, stock market declines from panic sale of foreign portfolio equity proved to be self-correcting. The problem of declining stock prices and capital flight was limited to less than a year, as net inflows re-started as soon as the bottom had been reached. Further there is a strong suspicion that as in the Tequila crisis, capital flight originated from domestic investors and not foreign ones. Conversely FDI again proved to be much more stable with reductions in net inflows but no net outflow even during the crisis year. Overall lessons, namely the need for flexible exchange rates, flexible interest rates, competitive stock markets and open forward markets are both helpful in avoiding crisis and in ending them rapidly.
On the structural side, the greatest underlying problem was the control mentality and subversion of markets by the government, alone or in tacit or open collusion with business and financial institutions. More specifically, excessive lending for real estate, which may have been part of the problem in some countries, represented bad lending practices and poor regulatory systems. The problem was not equity investment (domestic, FDI or portfolio) in real estate firms per se, but excessively risky lending to firms (high debt-equity ratios). This was part of a more general problem of highly leveraged firms obtaining further loans from banks, which modern prudential regulations could perhaps have identified as excessively risky for the financial system as whole.
Capital Account Convertibility Reform
Formally we became convertible on the current account in 1994. There is a need to eliminate the gap between the theoretical position and the reality. All import controls (QRs) imposed on protection grounds were eliminated by April 1st 2001. The lifting or easing of exchange controls has however been very limited. Use & purchase of foreign exchange by individuals to import goods and services into India should be made virtually free by April 1 2003. This can be effectively achieved by allowing individuals to use international credit cards or bank cheques (FE denominated accounts) for purchasing goods & services up to a value of $100,000 per annum. This limit could be phased in over the next year, in two steps, starting with an immediate announcement of a $50,000 per annum (per resident) limit (R1). The credit card records would be available to RBI (as well as to the Income Tax department) and any violation of the provision would attract penalties under FEMA. The limit could be raised to $100,000 within the next 13 months (R1b).
Asset Purchase: Residents
A significant step towards capital account convertibility could be made, by simultaneously allowing individuals, businesses and Corporations to make capital transfers abroad, including for opening current accounts (R2). This would be up to a limit of US $100,000 per annum per resident, to be phased in the same manner as the limit for purchases. Within this limit employees of Indian companies could also invest in the ESOPs of foreign companies. The resident entity would however be required to keep a record of all such transactions and the assets so purchased, for showing to RBI or other designated authority when required to do so. In fact there could be a single overall limit of $100,000 that includes both current and capital account transfers.
These two recommendations can be combined together into the following single one:
Recommendation 1: Every resident individual should be allowed to use up to $50,000 per annum to purchase goods or services abroad, to open a bank account abroad or to purchase assets abroad.
This policy would at one stroke introduce virtually complete convertibility for 99% of our population, without giving rise to a significant increase in either capital outflows or import of goods and services. That is for those operating with tax paid income and assets. Capital account convertibility has already effectively exists and has existed for decades for those operating with so called ‘black money.’
Recommendation 2: Corporations and Businesses be allowed to make financial capital transfers abroad (including opening bank accounts with check facility) up to a limit of $50,000 per annum.
They would be subject to certain transparency requirements such as credit card payment, cheque payment from FE account and record keeping.
GDR/ADR: Resident Companies
Issue of GDRs or ADRs is the least risky form of equity issue from the issuing country’s perspective. It is dollar denominated and trading occurs between non-resident. There is therefore no direct effect on the country’s foreign exchange or equity market at the time of a crisis.
Recommendation 3: Issue of ADRs or GDRs by resident companies (Public or Private limited) should be completely de-controlled.
No prior approval would be required from government (or RBI), but the issue would have to be reported to RBI within a reasonable period after it has been made.
FDI & ESOPs
Foreign Employees should be allowed to participate in the Employee Stock Option Plan (ESOP) of an Indian Company with full repatriation benefits, subject to the FDI rules on aggregate foreign equity holding. Such ESOPs are going to be very important in the development of Knowledge based Industries & Services such as IT and Drugs & Pharmaceuticals. The automatic route would also apply to such ESOPs. For instance a company, in a sector in which automatic 100% foreign equity is allowed as per FDI policy, can issue any amount of ESOPs to foreigners by going through the automatic route to RBI.
Recommendation 4: Indian companies should be allowed to issue ESOPs to foreign employees on the same basis as the FDI policy applicable to the sector in which they are operating.
External Commercial Borrowing
As our analysis of the Asian crisis showed there is little risk to the country in external borrowing of maturity above one year. The only thing to be watched carefully is the amount of loans with residual maturity of less than one year. The two together should be kept well within the foreign exchange reserves. It therefore follows that ECB policy can be drastically liberalised without excessive risk. At present ECB of maturity greater than 10 years is outside the ECB limits (i.e. de-controlled). We should plan for complete de-control of ECB and FCCB of maturity greater than one year by 2003-4. These should be phased in starting with immediate de-control of ECB of average maturity greater than 5 years and above, followed by,
Recommendation 5: De-control of ECB (and FCCB) of average maturity of three years or more by resident companies.
Indian Direct Investment Abroad
True Globalisation requires that Indian companies should go out into the world and compete across the globe. This is the most effective way of learning and developing competitive skills. It is difficult enough for companies that have been protected for long to do so without us creating restrictions and hurdles for them.
Recommendation 6: De-control the flow of Indian Direct Investment Abroad by Indian Companies up to a limit of $50 million per annum. Remove the conditions on repatriation of earning by way of dividends etc.
Recommendation 7: As a corollary to the above policies, a coupling of FDI and Indian Direct Investment Abroad in the form of Swap of Equity between an Indian and a Foreign Company would also be permitted (freed) within the allowed FDI ceilings.
Portfolio Investment
One of the lessons of the Asian crisis is that foreign equity investors can display a herd instinct, when they are confronted with extreme uncertainty and lack of information. This creates volatility in portfolio flows. It is a standard principle of financial markets that the more diverse the set of owners of financial assets the less likely it is that they will have the same expectations and act in the same way. Any decrease in controls on portfolio investment in India by foreign residents, that results in a more diverse set of foreign equity holders, is therefore highly desirable. Thus within the prescribed aggregate equity limits for FIIs , we should encourage all non-residents to invest in the Indian equity market.
Recommendation 8: All non-residents (venture capital funds, insurance companies, pension funds, endowments, wealthy individuals etc.) should be encouraged to make portfolio investment in India through a SEBI registered intermediary (portfolio manager, mutual fund etc.). The direct holding of any non-resident should not exceed 5% of the total shares of any given company.
Recommendation 9: NRI’s, FII’s and other non-residents should be allowed to hold equity up to 100% in listed companies, venture fund companies and in the IPOs of venture fund assisted companies. In the case of listed companies, this will be subject to a board resolution.
It is therefore time to put aside some of the irrational fears unleashed by the “Asian Crisis” and resume the process of moving towards capital account convertibility. As has been our practice so far, this should be done with “all deliberate speed,” that is at a speed which is reasonably fast but does not involve excessive risks.
Lessons from Crises: Old & New
Though the Asian crisis has come and gone, the processes of separating the right lessons from the wrong ones, is not complete. More important, the lessons for the crisis countries may differ in important respects from those for India. It is necessary to be clear about the lessons for India, before we start applying them to the issue of Capital Account Convertibility for India.
We had already learned several lessons from our own crisis of 1991 and the Latin American crisis of the previous decade. The Eighth Plan working group on Balance of Payments (1989) had analysed India’s debt profile and suggested two fundamental changes:
a) A decrease in the ratio of short term to total debt as the former was dangerously high.
b) A strong effort to attract Direct Foreign Investment so as to decrease the external debt-equity ratio of the country.
A Planning Commission paper [1989] showed that the Fiscal Deficit had risen in tandem with the current account deficit. It subsequently became clear that the former was a major cause of the latter and several government economists were internally warning about the dangerously rising Fiscal Deficit (before the crisis).
The fixed overvalued exchange rate was also recognised as a major cause of the sharp rise in the current account deficit and the 1991 crisis. Opening of the current account over the next two years was therefore accompanied by a flexible exchange rate policy. Post-crisis it was also recognised that the regulatory system for banks as well as stock markets had to be modernised and strengthened. Efforts in this direction started in 1992 and have continued steadily (though not very fast in some sub-sectors) since then [PC working paper 2001/4].
The Asian crisis did reinforce (and make widely known) the importance of flexible exchange rates and Banking de-control & regulatory reform. It is now more widely recognised that the banking regulations have to be brought up to international standards.
There were, also, a few more specific lessons, which are of relevance to our move toward capital account convertibility. In each of the affected Asian countries the crisis lasted about a year and recovery has taken place in two to three years after onset. Even in Indonesia the basic crisis lasted for about the same time and continuing uncertainty is largely due to political violence and constitutional upheavals. This pattern of crisis and recovery is very similar to the Mexican crisis of 1994. Fixed exchange rates and excessive external short-term borrowing (defined as less than one year) were the two most common macroeconomic culprits. The obverse of this proposition is that external loans with residual maturity of over one year did not add at all to the crisis, as the crisis was over within a year. Portfolio flows proved to be somewhat more volatile than expected, partly because of the fixed exchange rate; nominal exchange rate had not been allowed to appreciate in the preceding period of large inflows. As expected, however, stock market declines from panic sale of foreign portfolio equity proved to be self-correcting. The problem of declining stock prices and capital flight was limited to less than a year, as net inflows re-started as soon as the bottom had been reached. Further there is a strong suspicion that as in the Tequila crisis, capital flight originated from domestic investors and not foreign ones. Conversely FDI again proved to be much more stable with reductions in net inflows but no net outflow even during the crisis year. Overall lessons, namely the need for flexible exchange rates, flexible interest rates, competitive stock markets and open forward markets are both helpful in avoiding crisis and in ending them rapidly.
On the structural side, the greatest underlying problem was the control mentality and subversion of markets by the government, alone or in tacit or open collusion with business and financial institutions. More specifically, excessive lending for real estate, which may have been part of the problem in some countries, represented bad lending practices and poor regulatory systems. The problem was not equity investment (domestic, FDI or portfolio) in real estate firms per se, but excessively risky lending to firms (high debt-equity ratios). This was part of a more general problem of highly leveraged firms obtaining further loans from banks, which modern prudential regulations could perhaps have identified as excessively risky for the financial system as whole.
Capital Account Convertibility Reform
Formally we became convertible on the current account in 1994. There is a need to eliminate the gap between the theoretical position and the reality. All import controls (QRs) imposed on protection grounds were eliminated by April 1st 2001. The lifting or easing of exchange controls has however been very limited. Use & purchase of foreign exchange by individuals to import goods and services into India should be made virtually free by April 1 2003. This can be effectively achieved by allowing individuals to use international credit cards or bank cheques (FE denominated accounts) for purchasing goods & services up to a value of $100,000 per annum. This limit could be phased in over the next year, in two steps, starting with an immediate announcement of a $50,000 per annum (per resident) limit (R1). The credit card records would be available to RBI (as well as to the Income Tax department) and any violation of the provision would attract penalties under FEMA. The limit could be raised to $100,000 within the next 13 months (R1b).
Asset Purchase: Residents
A significant step towards capital account convertibility could be made, by simultaneously allowing individuals, businesses and Corporations to make capital transfers abroad, including for opening current accounts (R2). This would be up to a limit of US $100,000 per annum per resident, to be phased in the same manner as the limit for purchases. Within this limit employees of Indian companies could also invest in the ESOPs of foreign companies. The resident entity would however be required to keep a record of all such transactions and the assets so purchased, for showing to RBI or other designated authority when required to do so. In fact there could be a single overall limit of $100,000 that includes both current and capital account transfers.
These two recommendations can be combined together into the following single one:
Recommendation 1: Every resident individual should be allowed to use up to $50,000 per annum to purchase goods or services abroad, to open a bank account abroad or to purchase assets abroad.
This policy would at one stroke introduce virtually complete convertibility for 99% of our population, without giving rise to a significant increase in either capital outflows or import of goods and services. That is for those operating with tax paid income and assets. Capital account convertibility has already effectively exists and has existed for decades for those operating with so called ‘black money.’
Recommendation 2: Corporations and Businesses be allowed to make financial capital transfers abroad (including opening bank accounts with check facility) up to a limit of $50,000 per annum.
They would be subject to certain transparency requirements such as credit card payment, cheque payment from FE account and record keeping.
GDR/ADR: Resident Companies
Issue of GDRs or ADRs is the least risky form of equity issue from the issuing country’s perspective. It is dollar denominated and trading occurs between non-resident. There is therefore no direct effect on the country’s foreign exchange or equity market at the time of a crisis.
Recommendation 3: Issue of ADRs or GDRs by resident companies (Public or Private limited) should be completely de-controlled.
No prior approval would be required from government (or RBI), but the issue would have to be reported to RBI within a reasonable period after it has been made.
FDI & ESOPs
Foreign Employees should be allowed to participate in the Employee Stock Option Plan (ESOP) of an Indian Company with full repatriation benefits, subject to the FDI rules on aggregate foreign equity holding. Such ESOPs are going to be very important in the development of Knowledge based Industries & Services such as IT and Drugs & Pharmaceuticals. The automatic route would also apply to such ESOPs. For instance a company, in a sector in which automatic 100% foreign equity is allowed as per FDI policy, can issue any amount of ESOPs to foreigners by going through the automatic route to RBI.
Recommendation 4: Indian companies should be allowed to issue ESOPs to foreign employees on the same basis as the FDI policy applicable to the sector in which they are operating.
External Commercial Borrowing
As our analysis of the Asian crisis showed there is little risk to the country in external borrowing of maturity above one year. The only thing to be watched carefully is the amount of loans with residual maturity of less than one year. The two together should be kept well within the foreign exchange reserves. It therefore follows that ECB policy can be drastically liberalised without excessive risk. At present ECB of maturity greater than 10 years is outside the ECB limits (i.e. de-controlled). We should plan for complete de-control of ECB and FCCB of maturity greater than one year by 2003-4. These should be phased in starting with immediate de-control of ECB of average maturity greater than 5 years and above, followed by,
Recommendation 5: De-control of ECB (and FCCB) of average maturity of three years or more by resident companies.
Indian Direct Investment Abroad
True Globalisation requires that Indian companies should go out into the world and compete across the globe. This is the most effective way of learning and developing competitive skills. It is difficult enough for companies that have been protected for long to do so without us creating restrictions and hurdles for them.
Recommendation 6: De-control the flow of Indian Direct Investment Abroad by Indian Companies up to a limit of $50 million per annum. Remove the conditions on repatriation of earning by way of dividends etc.
Recommendation 7: As a corollary to the above policies, a coupling of FDI and Indian Direct Investment Abroad in the form of Swap of Equity between an Indian and a Foreign Company would also be permitted (freed) within the allowed FDI ceilings.
Portfolio Investment
One of the lessons of the Asian crisis is that foreign equity investors can display a herd instinct, when they are confronted with extreme uncertainty and lack of information. This creates volatility in portfolio flows. It is a standard principle of financial markets that the more diverse the set of owners of financial assets the less likely it is that they will have the same expectations and act in the same way. Any decrease in controls on portfolio investment in India by foreign residents, that results in a more diverse set of foreign equity holders, is therefore highly desirable. Thus within the prescribed aggregate equity limits for FIIs , we should encourage all non-residents to invest in the Indian equity market.
Recommendation 8: All non-residents (venture capital funds, insurance companies, pension funds, endowments, wealthy individuals etc.) should be encouraged to make portfolio investment in India through a SEBI registered intermediary (portfolio manager, mutual fund etc.). The direct holding of any non-resident should not exceed 5% of the total shares of any given company.
Recommendation 9: NRI’s, FII’s and other non-residents should be allowed to hold equity up to 100% in listed companies, venture fund companies and in the IPOs of venture fund assisted companies. In the case of listed companies, this will be subject to a board resolution.
Saturday, February 16, 2002
Universal Primary Education and the Spurious issue of “Privatisation”
The bold move of the Delhi government to hand over about 30 of the worst MCD run schools to “private parties” has raised a storm of opposition. These schools are in slums and peripheral areas, where the need for education is the greatest and the quality of education provided is the worst. Sadly even well-meaning comments reveal a lack of knowledge of basic facts. This article tries to clear the fog of confusion, and goes on to addresses the broader issue of how to ensure universal education in the current environment of fiscal stringency.
The Indian constitution enjoins upon the government to ensure education for all its citizens. The courts have interpreted this provision to say that private commercial schools are not allowed. So how can the Delhi government handover its schools to the “private” sector? What about all those “private” and “government aided private schools” that we read about. The confusion arises from the definition of “private.”
Strictly there are only two types of schools “government schools” and “non-government schools.” In common parlance most of us refer to the latter as “private” schools. The flaw lies in equating “private” with “profit making.” Non-governmental schools can only be set up by non-profit organisations (NPOs) such as societies or trusts under the societies act or relevant trust act. The law as it stands today does not allow the setting up of commercial for-profit organisations to provide schooling, so the question of any school being driven by the “profit motive” does not arise.
The Delhi govt proposes to hand over some schools to non-profit organisations who can run them much better than the governments of the last fifty years have been able to do. It is extremely hypocritical of those who can afford to send their children to good quality “private” schools to rail against this effort to improve the quality of education to poor children on the specious and totally mis-leading charge of “privatisation.”
6.4.1 Universal Primary Education
The union government recently decided to make elementary/primary education a fundamental right, with the operational goal of making it universal and compulsory. Is this merely “pie in the sky” rhetoric or is it a realistic goal. The objective cannot be met by a business as usual approach that pumps more funds into existing systems of government education - namely more funds for more government run school buildings and for hiring more government teachers (who don’t show up to teach). What can a new approach consist of?
Rashmi Sharma has shown that teachers are absent from their work for 14 days a month for officially recognised reasons. Unofficial absence, when added to this, would mean, particularly in rural areas, that teachers are seldom available to do any teaching. Add to this the poor quality of teachers and you may begin to comprehend how uninteresting school is for students in government schools. In fact the teachers themselves are aware of this low quality as demonstrated by the experience of my 17- year old son in a slum in the heart of Delhi last summer. The government teacher there requested him to give her own son lessons.
And all this costs the government upwards of Rs 1000/child /year. Compare this with the cost to NPOs/NGOs of Rs 50 to 65 per child/month. There are now NPOs who have offered to take on the task of teaching at 1/10th the cost incurred by government, with a guaranteed and measurable quality of output (i.e. testable levels of reading, writing and arithmetic ability). One can now begin to get an idea of what can be achieved by a radical new approach.
6.4.2 Rural Schools
In modern economies schooling constitutes one of the most important functions of local government. Primary schooling should be completely de-centralised to Panchayats over the next five years. Each Panchayat should however be required to set up a user group consisting of mothers of young children along with Panchayat officials, the local teacher and a representative of the State education department to monitor and supervise the functioning of the school so as to ensure quality. The funds currently being spent on the primary school system should be devolved to the Panchayats along with the authority to hire and fire teachers. In the transition period the pool of teachers could consist of the currently employed teachers.
Govt should provide a capital grant to any NPO/NGO that wants to set up and run a secondary school in any rural area not currently serviced by a secondary school. Special focus should be on schools for girls so that they do not have to walk unreasonable distance from home (larger grant could be provided in such cases). I understand that the UP education authorities have successfully used this approach to provide a secondary school for girls in every single district of the State. Such an approach is even more important in the poor, badly governed States.
All existing urban primary school facilities should be handed over to Non-Profit Organisations/NGOs on an as is basis. This should be done over a five-year period (say) starting with the worst run schools. The government could provide a one-time grant to those NPOs wanting to set up schools in underserved/slum areas. This would be done on the clear understanding that they would not be entitled to any further subsidies. It would also be made clear that they have to follow some simple basic norms like free education for all those living in the neighbourhood who cannot afford to pay.
The government would focus on training of local teachers (using innovative techniques and communication facilities), and in providing regulatory oversight The laws, rules and regulations relating to setting up and running of non-profit schools must be simplified. This requires a change in attitude from control to modern regulation. Govt. should focus on ensuring transparency to parents of enrolled students and ensure that there is no financial fraud or misleading advertisement of quality of the schooling provided. These changes can transform the educational picture of the country within the next 5 to 10 years.
The Indian constitution enjoins upon the government to ensure education for all its citizens. The courts have interpreted this provision to say that private commercial schools are not allowed. So how can the Delhi government handover its schools to the “private” sector? What about all those “private” and “government aided private schools” that we read about. The confusion arises from the definition of “private.”
Strictly there are only two types of schools “government schools” and “non-government schools.” In common parlance most of us refer to the latter as “private” schools. The flaw lies in equating “private” with “profit making.” Non-governmental schools can only be set up by non-profit organisations (NPOs) such as societies or trusts under the societies act or relevant trust act. The law as it stands today does not allow the setting up of commercial for-profit organisations to provide schooling, so the question of any school being driven by the “profit motive” does not arise.
The Delhi govt proposes to hand over some schools to non-profit organisations who can run them much better than the governments of the last fifty years have been able to do. It is extremely hypocritical of those who can afford to send their children to good quality “private” schools to rail against this effort to improve the quality of education to poor children on the specious and totally mis-leading charge of “privatisation.”
6.4.1 Universal Primary Education
The union government recently decided to make elementary/primary education a fundamental right, with the operational goal of making it universal and compulsory. Is this merely “pie in the sky” rhetoric or is it a realistic goal. The objective cannot be met by a business as usual approach that pumps more funds into existing systems of government education - namely more funds for more government run school buildings and for hiring more government teachers (who don’t show up to teach). What can a new approach consist of?
Rashmi Sharma has shown that teachers are absent from their work for 14 days a month for officially recognised reasons. Unofficial absence, when added to this, would mean, particularly in rural areas, that teachers are seldom available to do any teaching. Add to this the poor quality of teachers and you may begin to comprehend how uninteresting school is for students in government schools. In fact the teachers themselves are aware of this low quality as demonstrated by the experience of my 17- year old son in a slum in the heart of Delhi last summer. The government teacher there requested him to give her own son lessons.
And all this costs the government upwards of Rs 1000/child /year. Compare this with the cost to NPOs/NGOs of Rs 50 to 65 per child/month. There are now NPOs who have offered to take on the task of teaching at 1/10th the cost incurred by government, with a guaranteed and measurable quality of output (i.e. testable levels of reading, writing and arithmetic ability). One can now begin to get an idea of what can be achieved by a radical new approach.
6.4.2 Rural Schools
In modern economies schooling constitutes one of the most important functions of local government. Primary schooling should be completely de-centralised to Panchayats over the next five years. Each Panchayat should however be required to set up a user group consisting of mothers of young children along with Panchayat officials, the local teacher and a representative of the State education department to monitor and supervise the functioning of the school so as to ensure quality. The funds currently being spent on the primary school system should be devolved to the Panchayats along with the authority to hire and fire teachers. In the transition period the pool of teachers could consist of the currently employed teachers.
Govt should provide a capital grant to any NPO/NGO that wants to set up and run a secondary school in any rural area not currently serviced by a secondary school. Special focus should be on schools for girls so that they do not have to walk unreasonable distance from home (larger grant could be provided in such cases). I understand that the UP education authorities have successfully used this approach to provide a secondary school for girls in every single district of the State. Such an approach is even more important in the poor, badly governed States.
All existing urban primary school facilities should be handed over to Non-Profit Organisations/NGOs on an as is basis. This should be done over a five-year period (say) starting with the worst run schools. The government could provide a one-time grant to those NPOs wanting to set up schools in underserved/slum areas. This would be done on the clear understanding that they would not be entitled to any further subsidies. It would also be made clear that they have to follow some simple basic norms like free education for all those living in the neighbourhood who cannot afford to pay.
The government would focus on training of local teachers (using innovative techniques and communication facilities), and in providing regulatory oversight The laws, rules and regulations relating to setting up and running of non-profit schools must be simplified. This requires a change in attitude from control to modern regulation. Govt. should focus on ensuring transparency to parents of enrolled students and ensure that there is no financial fraud or misleading advertisement of quality of the schooling provided. These changes can transform the educational picture of the country within the next 5 to 10 years.
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