The Indian Economy Blog

October 16, 2007

Inequality, Globalization, and Economic Growth

Filed under: China,Growth — Dweep @ 1:01 pm

YaleGlobal Online has an interesting article by Pranab Bardhan (professor of economics at UCB) that puts economic growth and income inequality in India and China under the scanner. It is notable for being an extremely balanced review of the true link to globalization, but is readable for it tests a number of related arguments.

One of the main arguments of those propogating economic growth has been that it reduces poverty. China is a frequently cited example. Yet, as Bardhan shows, economic growth may have less to do with poverty reduction in China than previously imagined, and conversely, that poverty declined less rapidly in India during the period of economic growth:

Estimates made at the World Bank suggest that two-thirds of the total decline in the numbers of poor people – below the admittedly crude poverty line of $1 a day per capita – in China between 1981 and 2004 already happened by the mid-1980s, before the big strides in foreign trade and investment in China during the 1990s and later. Much of the extreme poverty was concentrated in rural areas, and its large decline in the first half of the 1980s is perhaps mainly a result of the spurt in agricultural growth following de-collectivization, egalitarian land reform and readjustment of farm procurement prices – mostly internal factors that had little to do with global integration.

In India the latest survey data suggest that the rate of decline in poverty somewhat slowed for 1993-2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, and that some child-health indicators, already dismal, have hardly improved in recent years. For example, the percentage of underweight children in India is much larger than in sub-Saharan Africa and has not changed much in the last decade or so. The growth in the agricultural sector, where much of the poverty is concentrated, has declined somewhat in the last decade, largely on account of the decline of public investment in areas like irrigation, which has little to do with globalization.

This contradicts what is now taken as an article of faith within the economic liberalization community. However, the article does not give much to the anti-globalization camp either, for it points out that the inequality cannot be directly ascribed to liberalization or globalization.

But it is not always clear that globalization is the main force responsible for increased inequality. In fact, expansion of labor-intensive industrialization, as has happened in China as the economy opened up, may have helped large numbers of workers. Also, the usual process of economic development involves a major restructuring of the economy, with people moving from agriculture, a sector with low inequality, to other sectors. It is also the case that inequality increased more rapidly in the interior provinces in China than in the more globally exposed coastal provinces. In any case it is often statistically difficult to disentangle the effects of globalization from those of the ongoing forces of skill-biased technical progress, as with computers; structural and demographic changes; and macroeconomic policies.

What this seems to suggest may seem obvious, but is often lost. What causes inequality is not globalization. And what will reduce it or save people from poverty is not economic growth. Rather, it is what policies are used to manage either – or both.

14 Comments »

  1. Dweep says “What causes inequality is not globalization. And what will reduce it or save people from poverty is not economic growth. Rather, it is what policies are used to manage either – or both.”

    You are an Iconoclast hell bent on demolishing the dogmas. Where will the demagogues of right and left seek refuge? Bravo!

    Comment by Pragmatic — October 16, 2007 @ 2:05 pm

  2. “Rather, it is what policies are used to manage either – or both.”
    Confused desi !!!

    Comment by Madhavi — October 16, 2007 @ 9:10 pm

  3. Not sure what to make of his post. Does not seem particularly insightful and
    has some non-sequiturs. That globalization does not contribute much less
    cause poverty is obvious to just about everybody except the Arundhati Roys
    of the world. That economic growth will “not” reduce inequality or save
    people from poverty is a complete non-sequitur – just ask the millions who
    have joined the middle class in India. Perhaps, the blog should spend a
    little more time (to the extent its output influences thinking at a
    meaningful level) on topics like a recent news item about a PWC report that
    38% of global companies have been asked to pay bribes in India. That, for sure, would reduce both poverty and inequality

    Comment by Vijay — October 16, 2007 @ 11:02 pm

  4. [...] October 17, 2007 « Inequality, Globalization, and Economic Growth [...]

    Pingback by The Indian Economy Blog » Let’s Go Pick Some Cherries — October 17, 2007 @ 12:45 pm

  5. Thanks Pragmatic for your initial vote of confidence. Not surprisingly, not much hiding going on, but at least this makes “demolishing dogmas” more worthwhile :-)

    Comment by Dweep — October 17, 2007 @ 7:20 pm

  6. “What this seems to suggest may seem obvious, but is often lost. What causes inequality is not globalization. And what will reduce it or save people from poverty is not economic growth. Rather, it is what policies are used to manage either – or both.”

    If economic growth doesn’t save people from poverty, tell us about your policy prescriptions that will save people from it when economic growth is absent.

    As an aside tell us about how economic isolation (of any degree) will increase equality without making everyone equally poverty stricken.

    Comment by Praveen — October 18, 2007 @ 6:28 am

  7. Inequality, (Economic) Globalization and Economic Growth are three separate entities. It is not necessary for one to follow the other although they can as already pointed out.

    Economic growth can follow globalization – money flows, international trade, financial markets get connected etc. But not always. You can have negative growth as well. It is also possible that positive economic growth can be highly localized – to urban areas for example.

    So if inequality increases when the rich get richer, then globalization and economic growth can cause severe inequality. This does not in any way mean that economic growth or globalization are bad. It only points to an inefficiency in spreading the wealth. Which is where policy comes in.

    Apart from policies for infrastructure and manufacturing that can hugely address this inefficiency, there are others like telecom which can unleash tremendous potential. Think of the changes possible if DSL were available at second tier and third tier towns leave alone the villages of India.

    Comment by Nikhil Nayak — October 19, 2007 @ 1:50 am

  8. inequality is a misnomer. if all the people are starving, then there is more ‘equality’ in that nation. whereas if the poorest of poor in a developed nation have a better standard of living, while there is more ‘inequality’ in that nation, then which is more preferable ?

    the concepts of inequality led to the concepts of ‘concentration of wealth’ during our socialistic era, resulting in license raaj and confiscatory tax regime (99 % in 1971) meant to ‘redistribute’ wealth. we know what happened as a result : black economy, corruption and more poverty due to stagnant economy and finally bankruptcy.

    Comment by K.R.Athiyaman — October 19, 2007 @ 12:27 pm

  9. @ K.R.Athiyaman
    “black economy, corruption and more poverty due to stagnant economy and finally bankruptcy”

    But did we hear about farmers committing suicide in large numbers? bankruptcy happened for few Mumbai biz men only…… not for people of India…….

    BTW What do we call fiat(fake) currency system Black or White?

    Indian economy prospered for about 5000 years using food grains as currency? food = energy = currency = no inflation = white economy = prosperity for all (if caste system did not exist)……

    Comment by General P — October 25, 2007 @ 6:38 pm

  10. @ YaleGlobal Online has an interesting article by Pranab Bardhan (professor of economics at UCB)

    It is time to call the bluff of economics professors. Inequalities does not arise from globalization but from impact of fiat currency system.

    When will Economists? acknowledge that tokens used as medium of exchange should have redemption obligation to be valid……. when invalid tokens are used in transactions unfair aggregation of wealth will happen isn’t it obvious…..?

    Comment by General P — October 25, 2007 @ 7:05 pm

  11. Could it be just that economic liberalization have not yet happened for a large majority of the ‘poor’ in India?

    The Dhirubhai Ambani’s of today don’t need a license to open extra businesses, but rickshaw pullers in Delhi cant have more than one rickshaw, auto rickshaws need to be licensed. the license raj is very much present for these people.

    how would they progress in the business they know? a case of capitalism for the rich and socialism for the poor.

    Comment by Deane — October 27, 2007 @ 3:24 pm

  12. //But did we hear about farmers committing suicide in large numbers? bankruptcy happened for few Mumbai biz men only…… not for people of India……./// General P

    General,
    I was referring to the govt of India nearing bankruptcty in 1991 when we had to pledge our gold for USD.

    ///Indian economy prospered for about 5000 years using food grains as ///

    there was no continious prosperity for 5000 years. there was famine, draught and starvation deaths frequently. whenever monsoon failed, or due to wars, etc.

    and cotton farmers sucide occurs now only in AP and Vidharbaa while cotton is grown in many other areas of the nation like in TN, Punjab, , UP, Bihar, etc ; hence more local factors and indebtedness,
    reckless borrowing to sink borewells, etc may be the correct reasons.

    blaming LPG for all this is not rational. the delivery mechanism for farm susidies is lop-sided and leaking like a sieve, where the major portion is siphoned off or is enjoyed by rich farmers…

    Comment by K.R.Athiyaman — October 31, 2007 @ 11:10 am

  13. @Dweep:

    Take a look at this. For all the “right” noises, this is one unpalatable contrarian view, supported only by facts.
    http://endpovertyinsouthasia.worldbank.org/four-incovenient-truths-about-indias-economic-growth

    Comment by Pragmatic — November 2, 2007 @ 10:02 pm

  14. Pragmatic, that graph clearly shows the slope (rate of growth) increasing with reforms. Not only that growth rate now is roughly 4 times as that of the past. To say that growth was there before is really not worth a lot of change.

    Growth today is being enjoyed by the middle class. The poor are still being left out now but this is a whole lot better than in the 80′s where the only people enjoying “growth” were the politically connected.

    Comment by Nikhil Nayak — November 3, 2007 @ 1:48 pm

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