The Indian Economy Blog

October 17, 2007

Let’s Go Pick Some Cherries

Filed under: Basic Questions,Economic History — Ravikiran Rao @ 12:45 pm

Praising Dweep’s post, Pragmatic asks “Where will the demagogues [sic] of right and left seek refuge? Bravo!”

I don’t know about the demagogues of the right or left, but this ideologue of the right seeks refuge in logic and data – and he doesn’t cherrypick data to find what suits him.

First, Dweep has managed to confuse economic growth and globalization when he interprets Prof. Bardhan as saying that “economic growth may have less to do with poverty reduction in China than previously imagined…”.  What Bardhan is saying is that globalization has less to do with poverty reduction in China than commonly believed. This is not surprising. The China of 1978 did not  require globalization as much as it required sound economic policies. Mao’s policies had reduced pretty much the entire country to starvation and occasional cannibalism. Getting out of it was not rocket science. Deng’s policies caused economic growth – and it brought a huge chunk of people out of poverty.

Next Bardhan says that “the rate of decline in poverty [in India] somewhat slowed for 1993-2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, …”   

Let’s see the poverty figures between 70 and 74:

55

52

53

54

Now let’s see the poverty figures between 74 and 87:

48

43

37

And between 87 and 93?

38

38

34

35

36

40

I have not got the figures for all years – the years between 74 and 87 are quite sparse, but I hope you can see what I am seeing. Before 74, there is no trend of poverty reduction. The number of poor people was entirely dependent on the monsoon. Between 74 and 87, you saw a real decline in poverty, and you can guess why – we enjoyed the green revolution. By the mid 80s, the revolution had run out of steam. The country settled back to its old pattern, albeit at reduced poverty rates, till the crisis of 91.

With these figures, is it fair to say that  ”the rate of decline in poverty somewhat slowed for 1993-2005″, implying that we had a high rate of decline earlier? The blame for this misrepresentation, incidentally, does not lie completely with the professor – he just chose one word poorly. In other parts of the article, he agrees with what I am saying. It is Dweep who uses the figures to declare that the figures contradict “what is now taken as an article of faith within the economic liberalization community.” I am keenly interested in knowing which article of faith that is. The story the figures tell is clear enough for me. When the economy does well, the poor do well. When it does badly, the poor do badly. The growthless year of 1991 was terrible for the poor – their proportion went up from 36% to 40% in a space of two years.

Is it true that the green revolution has done more for the poor than economic reforms? I can accept that.  The green revolution was a pragmatic step which cannot be slotted into the ideologies of the right or left. The ideologues of the left hate it, because where it was carried out, it involved junking land ceilings and letting farmers own as much land as they could and plough it with tractors. They also hate it because it is supposed to have hurt the environment.

This ideologue of the right has misgivings about the Minimum Support Price mechanism, which is an illiberal policy. Yes, it gave farmers an incentive to produce more, but it also made food more expensive. I have read glib comments on this blog saying that we shouldn’t care about food prices because rich software engineers can afford to pay a bit more for food. I am sure they can, but it is a pity about the landless labourers, who constitute 40% of the poor. They  work on land, but they also have to buy their food.

The bottomline is that the gains made from the green revolution could not have continued for ever. If the productivity gains from the revolution had continued, the government would have had to increase its subsidies to unsustainable levels. Also, we’d have the difficult question of what to do with all those mountains of food. The only way out would have been to reduce the number of people working on land, and we could have sent them… where?

I will not dwell too much on the rest of Bardhan’s article, which is a shameful apologia for China’s inequality. He thinks up convoluted statistics to claim that China is less unequal than India. Why does he use the Gini coefficient for land distribution in rural areas? Because if he had used the Gini coefficient for consumption inequality – which is the standard, China would have come way worse. China’s consumption inequality is 44% – much, much worse than India’s 32%. Also, when it comes to China, inequality is apparently a positive force. The fact that the queue is moving for others is reason for the poor to hope that their time will come. It is not clear why the same logic cannot apply to India.

What are we left with once the fog of fuzzy thinking clears? Free market fundamentalism is the only sustainable and reliable way to ensure growth. Economic growth is the only way to reduce poverty. Globalization  is a part of free markets, not a substitute for them. The fundamental things apply.

(Updated to add  a clarification for better readability) 

43 Comments »

  1. While I appreciate your attempt to reclaim the words “Free Market Fundamentalism” from the Great Jagadguru, surely we don’t need to word it as such?

    Anyways, kudos for a good, logical fisking! :-)

    Comment by TTG — October 17, 2007 @ 1:12 pm

  2. Ravi:

    I meant demagogues only – politicians swayed by popular sentiments and not intellectuals of any persuasion.

    Demagogue – A political leader who seeks support by appealing to popular passions and prejudices.

    Ideologue – An advocate of some ideology.

    Free markets, globalisation, inequality, poverty reduction are all matters of policy and their implementation – not of faith and dogma. To quote your examples, Green Revolution and Minimum Support Price are two issues where ‘ideologues’ of same ilk may have varying opinions.

    Comment by Pragmatic — October 17, 2007 @ 2:10 pm

  3. Pragmatic,

    Not to nit-pick but are there any demagogues in Indian right, can you name them ? For that matter is there anything called Indian right ?

    Comment by Gaurav — October 17, 2007 @ 2:28 pm

  4. Thanks Ravikiran for your response.

    In responding, I could take two tacks. The first is to point out that you’ve simply missed the gist of the original article and my post, both of which talk about globalization and economic growth in the context of inequality. Since you don’t even mention that, nor care to place your arguments in that context, you’re essentially comparing your apples to my oranges.

    In that vien, two points are worth noting. First, you say I have “managed to confuse economic growth and globalization” by paraphrasing Prof. Bardhan. If you read the article carefully, Bardhan is talking not of globalization per se, but the resulting trade and investment, which followed closely on economic liberalization in China after 1984. I am indeed guilty of using the term “economic growth” instead of “economic liberalization”. But you make the mistake of treating globalization and economic liberalization as two separate phenomena that cannot occur together.

    Second, the article of faith can be clarified thus – that a) inequality is irrelevant, and b) economic growth brings people out of poverty.

    Your post seems to suggest that a) is indeed true, since you simply dismiss the issue of inequality. Or, as Bardhan would say, the “free market fundamentalist” response, “puts aside the issue of inequality and points to the wonders that globalization has done to eliminate extreme poverty, once massive in the two Asian giants, China and India.”

    This brings us to point b) Bardhan’s argument here is simply that poverty can be reduced in the absence of “free market fundamentalism”. He uses China to illustrate his point – and once again, you dismiss it, focussing on India instead. If you really want to provide a “logical fisking”, please say something more substantial than “getting out of it was not rocket science.” After all, even free “market fundamentalism” isn’t rocket science – does that mean it is meaningless, or irrelevant?

    If anybody is “cherrypicking”, it is you. To your credit, you do so at a grand scale, dismissing not only statistics but also examples and trends that do not suit you. Most of all, you simply ignore the point of rising inequality, which was what Bardhan – and I – started off with. Perhaps you can expound on your view on that?

    The other response I can provide is to point out that you are talking of fundamentals that do not matter by themselves. To put in words you’ll find less difficult to manipulate, let me put it thus: Yes, economic growth is a useful condition for poverty reduction. Is it a necessary condition? Perhaps. Is it a sufficient condition? Certainly not. I suggest you move on from fundamentals and focus on that last question.

    Comment by Dweep — October 17, 2007 @ 2:39 pm

  5. Dweep,

    In the first place, you say that \”you make the mistake of treating globalization and economic liberalization as two separate phenomena that cannot occur together.\” I am baffled how you could accuse me of such a mistake, because I presume that you have read the last paragraph, where I have mentioned something about globalization and free markets.

    In the second place, you say that I am missing your point because you were talking of economic growth and poverty reduction \”in the context of inequality\”. I haven\’t the vaguest idea what you are trying to say there. You\’ve spent most of your post trying to refute the idea that economic liberalization is linked to reduction in poverty. You mention in your post that you are doing this to answer the arguments of people like me who say that as long as the poor are better off, inequality does not matter. If your refutation falls apart, it seems obvious to me that my argument will stand. It is disingenuous of you to now turn around and ask me to justify my stand that as long as the poor are better off, I don\’t care about inequality.

    I am further puzzled by your claim that I am dismissing China\’s policies. I thought most readers of this blog would be knowledgeable enough to know, broadly, what Deng did after 1978. He ended the disastrous collectivization policies, reintroduced a form of private property in agriculture, introduced the profit motive in industries, etc. By any definition, these would be called \”economic liberalization\”. These led to economic growth and pulled out millions of Chinese from poverty. He did these before going in for trade liberalization and embracing globalization, which is perfectly fine as a sequence. I\’d like to know what, if anything, is the point you think this proves.

    Now, I happen to think that economic growth, as long as it happens via free market reforms, is necessary as well as sufficient to bring people out of poverty and any deviation from that path is sub-optimal. But I will not get drawn into a defence of that here. The subject of the post is Bardhan\’s article and your interpretations of them, so here are my questions:

    1) Please justify Bardhan\’s claim that China\’s growth has caused less inequality than India\’s, when the evidence clearly indicates that China is more unequal than India when the consumption Gini is used.
    2) Please justify Bardhan\’s use of Gini for land ownership in rural areas as a measure of inequality. What has that got to do with the inequality and growth that is being caused by industrialization?
    3) Do you agree with Bardhan\’s bizarre statement that inequality between China\’s rural and urban areas does not matter? Do you agree with his reliance on government-sponsored surveys and his decision to discount the real evidence of disturbance in China\’s countryside?

    Please note that if these three questions are not satisfactorily answered, the whole case falls apart. What we have is an adequate explanation for the fact that China has fewer poor people than India – i.e. that they started liberalizing a decade and a half earlier.

    Comment by Ravikiran Rao — October 17, 2007 @ 3:51 pm

  6. Even I would be interested in knowing who are the demagogues of the Indian (economic) right. We know there are dime a dozen demagogues of the social right, but economic right? Surely you jest.

    Comment by Gaurav Sabnis — October 17, 2007 @ 4:23 pm

  7. Ravikiran,
    Perhaps you have seen the movie Thank You for Smoking? The star of that movie does something much as you do – prove himself right by proving himself wrong. From a purely theoretical perspective, that is, however one of many logical fallacies you employ.

    Another perhaps, would be to ascribe to me the negative of my statement. I note that poverty in China reduced significantly prior to the liberalization era. You say that I “refute the idea that economic liberalization is linked to reduction in poverty.” I do no such thing. I only suggest that economic liberalization need not be the only one true god. Nor do I suggest that China’s inequalities are lower than India’s – or do you forget your equally agitated response to my previous post, which argued that China’s inequalities are higher?

    A third logical mistake would certainly be to presume what you’d like to prove, by concluding: “What we have is an adequate explanation for the fact that China has fewer poor people than India – i.e. that they started liberalizing a decade and a half earlier”. What “adequate explaination”, when 2/3rd of those that were poor grew rich prior to economic liberalization?

    Some of the questions you ask are answered by Bardhan’s references. Others by an informed Google search – no I do not rely on government surveys, any more than I rely on predictions of doom and gloom provided by economists sitting half a world away with their own agenda. Do you? On China’s rural disturbances, please look up the latest issue of the Harvard International Review, and read up on the “tunnel syndrome”.

    I could hardly have stated my point more clearly. Since by your admission you don’t get it, it is unlikely you will now. Then again, you seem only interested in protecting your ideological turf. In that, at least, the title of your post is apt.

    Comment by Dweep — October 17, 2007 @ 6:48 pm

  8. “I note that poverty in China reduced significantly prior to the liberalization era.”

    You do not. You note that poverty in China reduced significantly prior to the *trade liberalization* era. Economic liberalization started much earlier. Trade liberalization is part of Economic liberalization, but is not synonymous with it.

    Comment by Ravikiran Rao — October 17, 2007 @ 7:26 pm

  9. OK, I checked the references you speak of. We have a reference for the claim that the poor in China are not worried about inequality because they think their time will come. Assuming that holds up, what we have is:
    1) Economic liberalization started in 1978 in China. Poverty reduced hugely.
    2) Trade liberalization started in the 80s. Poverty reduced further.
    3) There are huge inequalities in China. Consumption Gini is 44%. But people are happy because they think their time will come.

    Conclusion: Free markets and globalization are good at reducing poverty.

    Comment by Ravikiran Rao — October 17, 2007 @ 7:38 pm

  10. I have not read Prof Bardhan’s paper, but have been following the discussion here. It seems to me, though, that there is some confusion in the way Dweep has understood the point Bardhan made. I don’t think there is any doubt vis-a-vis the simple fact that China doubled it’s GDP in 5 years since Deng’s reforms in 1977/78 and tripled GDP by 1987. Now, let’s look at the reforms itself. The reforms were started with Deng permitting provinces to dismantle collective farms and communes and in general, freeing the price system. This was followed in the early to mid-80′s by the opening up of the trade doors, which led to even more furious economic growth.

    I think you can see if you look at China’s GDP numbers over the years, there is no doubt that GDP has grown startlingly fast from 1977/78 onwards. And when GDP triples in a period of 10 years, chances are that it will drag a lot of people out of absolute poverty. These numbers are pretty much the same no matter where you look, so the fact that China’s GDP grew rapidly after Deng’s reforms is unquestionable.

    That seems to leave the question of Deng’s reforms. I agree fully with Ravikiran that dismantling the commune system and reinstating the price system is as much part of economic reforms as opening doors to trade are, if not important, because in the absence of the price system’s role as information aggregators, no economic system can survive for very long. So, why would anyone argue that economic reforms did not play a role in the rapid economic growth of China, which then by everyone’s admission led to a reduction of absolute poverty?

    I am not getting into the gini debate since practically every source that you look has China’s gini considerably higher than India’s. I am sure there’s all kinds of statistical voodoo one can perform to reduce Brazil’s or South Africa’s Gini to less than that of India, but let’s not go there.

    Comment by Reuben Abraham — October 17, 2007 @ 10:32 pm

  11. Are inequality comparisons really relevant? Wouldn’t the absolute increase in the income levels of the poorest few be a more valuable statistic?

    In the developed countries, there appears to be a vast inequality ratio, but the poorest have an absolute income level much greater than what they had when the inequality was less?

    I wouldn’t be really surprised if that is an indicator of the economic growth of a nation… possibly to indicate that there is really no constraints on anyone to make money. :)

    Or am I just talking hot air?

    CR

    Comment by CraniumRat — October 17, 2007 @ 11:18 pm

  12. No, Cranium, you’re absolutely right since relative poverty will NEVER go away. Absolute poverty, on the other hand, is something we have a remote chance of getting rid of. Sure, there are lots of poor in the United States, but would you rather be poor in the U.S. or in Bihar? I think the answer is fairly obvious and that’s why this obsession with relative poverty before you get rid of absolute poverty sounds a bit absurd to me.

    Comment by Reuben Abraham — October 17, 2007 @ 11:38 pm

  13. The so-called “statistical voodoo” is actually a more thorough reading of the aggregate figures. All that the Gini index is a measurement of is deviation from a mean, in this case being per capita consumption. A broader national estimate hides as much as it reveals.

    I don’t have the latest figures but in 2000 the gini coefficient for Urban China was lower than that of India. In a reversal, at the same time the gini coefficient for Rural China was higher than Rural India.

    Likewise measureing gini coefficients on a provincial basis will give lower results. However aggregating Ningxia, Qinghai, and Gansu with Zhejiang, Jiangsu, and Shandong will give vastly different results.

    Also there is one further issue someone had mentioned to me in that India’s GINI measurement is deflated in that the consumption measurement omits key expenditure data that would throw off the results. Primarily, I was informed that in measuring

    Comment by Jing — October 18, 2007 @ 12:45 am

  14. whoops my comment got cut off there.

    As I was saying, the consumption inequality measurement for India omits data on spending on housing which I would assume for most households is a key if not the largest expenditure. (FYI this is part of the Chinese measurement)

    Comment by Jing — October 18, 2007 @ 12:56 am

  15. Another China vs India debate. Please stop. To understand China, you have to go to visit and see by yourself. Most posters on this board probably never see China in person and yet everyone had tried hard to be the smartest for offering useless opinions. Please go and visit. If you visit, go to poorest regions like Gansu province, and you will get first hand information on why China has developed fast. Prepare to be shocked by what you see… A recent Pakistan delegation as well as a Japanese delegation visited Gansu and they all expressed their disbelief because they thought Gansu should be poorer than Pakistan… A hint: The Gansu province capital, Lanzhou (please google for pictures), has developed into a major modern city with skylines that can rival any major western cities. Gansu’s highway network is now among the very best in China.

    Like building Great Wall, step-by-step development takes time and asks for sacrifices. First coastal areas, and then central, and now poorest northwest regions, most Chinese do accept the fact that some areas should be developed first. The mentality that why you have to develop first (why not me first?) never be an issue in Chinese culture. The GINI debate is purely useless for Chinese situation.

    Comment by thecupgr — October 18, 2007 @ 6:09 am

  16. Over at the Becker-Posner blog, they write that globalisation improves return to capital; and inequality is the result of a difference in the rate of return to human capital. That’s saying that globalisation improves the incomes of the higher educated/skilled vs the lower educated/skilled. So if you are worried about inequality address education first! They write that there are limitations to this, but I think in India’s case, this holds true.

    Comment by Nitin — October 18, 2007 @ 9:00 am

  17. From the blog of Shanta Devarajan, the Chief Economist of the South Asia Region at the World Bank [http://endpovertyinsouthasia.worldbank.org/how-end-poverty-generation]

    The basic message is that the main obstacles to ending poverty in South Asia — infrastructure deficits, widening inequality, poor delivery of basic services, weak governance — are all associated with government failures, often the result of trying to overcome market failures. Overcoming government failures can be very difficult — not least because they are deeply political. But evidence-based policy debates about these issues can help move things in the right direction. As Praful says in his conclusion, “The remaining obstacles to ending poverty – inequality, infrastructure, lagging human development, weak governance – are all man-made. If we erected them, surely we can also dismantle them.”

    More from Praful’s speech -
    As I have said, policy and institutional changes will be necessary to address the key obstacles facing South Asia if eliminating poverty is a dream that can be realistically achieved within a generation. “Strong growth will help, but it won’t be enough.” This can only be done if we recognize that policy and institutional changes are a highly political affair. They emerge from complex policy reform processes.

    Comment by Pragmatic — October 18, 2007 @ 11:33 am

  18. There was a recent article from the Center for Policy Research with statistics on poverty reduction and inequality with respect to economic growth. The whole document is available from their website (http://www.cprindia.org/). There is a whole slew of statistics on it (mostly statewise in India) that you may find useful.

    Comment by Prakash — October 18, 2007 @ 3:16 pm

  19. Just saw following paper on Rediff by Managing Editor Sheela Bhatt: An Indian in China

    Talk about to have a first hand look on China, this one truly standout: Before and after, things became very simple. If Bhatt never made the trip, her writing will be same as most posters on this board.

    http://specials.rediff.com/news/2007/sep/22sl1.htm

    An Indian in China

    September 22, 2007

    Excerpt of the paper: Managing Editor Sheela Bhatt was on an 11-day visit to the People’s Republic of China. Bhatt, who was part of the 17-member Indian Women’s Press Corps that went to China, visited Shanghai and Beijing and also took the breathtaking 4,000-km train journey from Beijing to Lhasa. In a series starting with her first impressions, she will give you a ringside view of the China that she saw, and what it means for India.

    · Before visiting Beijing, Shanghai and Lhasa my idea of China was that of a country without democracy and leaders without hearts.

    · The Chinese had cheap and poor labour exploited by the owners of manufacturing units set up mainly for exports, I thought.

    · Their managers were robots and not as creative as our Gurucharn Das or Jaithirth Rao, I thought.

    · The Chinese professionals follow discipline on job and the Chinese, always, obey their government. How terrible, I thought.

    · The Chinese have a historical dislike for Japanese and they are doubtful of whatever America does in and around the world, I thought.

    · Then, in just over a week’s time, China went about dismantling all my preconceived notions and smashing my theories.

    Comment by thecupgr — October 19, 2007 @ 8:09 am

  20. My two cents on this great India/China debate is that, somehow in the celebration of the economic rise of China, we all tend to forgive it for the costs millions of Chinese paid for this growth – political and social freedom. If economic growth and freedom comes through increased social unrest and lower political freedom, it is probably not sustainable in the long run. What is happening in China in my opinion is some form of social engineering – forced seeding of the countryside with industrial growth, the implications of which are not very clear in the short term. Therefore, no matter, what the GDP growth numbers tell me, I am always skeptical of China’s growth.

    Secondly, it seems to me that if India manages to drag its millions through slow growth,reduces absolute poverty at least (Reuben’s point), and yet manages to keep its democractic ideals intact – then it has done something that China could not or probably dared not.

    I don’t see how one can correct for the bias in currnt economic models which ignore the social and political costs of achieving such fantastic results.

    Comment by Girish Mallapragada — October 19, 2007 @ 11:29 am

  21. Rueben, while you summarize the argument well, I must take exception to the dismissal of relative poverty for absolute. First, note that the point of relative poverty is not to eliminate it but to reduce it, to a point where upward mobility is possible. Second, I hope you recognize that absolute poverty levels are so arbitrary as to be meaningless – I mean you can reduce absolute poverty today, simply by setting the benchmark lower! And finally, being indigent in America can be rather bad, so I will not presume to know what fate these two would prefer.

    Prakash/Pragmatic, excellent references – thanks! And Pragmatic, I could not have summed up the argument I made in my original post, better: “Strong growth will help, but it won’t be enough.” As you point out, the key to growth AND poverty reduction is to ensure positive policy and governance changes.

    One point that economists here seem to miss about China’s growth process is that it has been largely possible BECAUSE of the government. It is fashionable these days to blame government for everything, and to ask for it to stay away (including from education and health). Yet, China is – if anything – a perfect example to invalidate that argument, because China has provided high levels of primary education and facilitated a “free-market” THROUGH public policy (this follows my own visit to China, and discussions with educationists there). Just goes to show that economic growth and a free market won’t get you anywhere without a good government.

    Comment by Dweep — October 19, 2007 @ 1:23 pm

  22. You do realize that Reuben has contradicted all your points, not “summarized the argument”?

    Comment by Ravikiran Rao — October 19, 2007 @ 3:11 pm

  23. Krish has Cranial Rectal Syndrome.

    Comment by Jim Watson — October 19, 2007 @ 3:59 pm

  24. The problem with Bardan’s paper is not the conclusion he draws (which is basically that you can’t draw conclusions) as much about the data he uses. For eg. to measure China’s poverty reduction he uses no. of people earning $1 day or less… he knows it is flawed because yuan about halved in its value between 1990-04 alone thanks to China buying $s to sustain its exports. Land distribution is more unequal in India he says… thats baffling China does not have property rights or its peasants… they can only lease land… so how does it match with Gini coefficient data? we cannot verify… he has not refered its source.

    Comment by SRK — October 19, 2007 @ 8:12 pm

  25. Girish, your views about China’s GDP and other social issues sound familiar. Recall a few years ago, one professor at University of Pittsburg made a similar argument about China’s GDP and he concluded that the power consumption did not match the GDP growth number. He even suggested that the real GDP growth should be close to zero or negative.

    It migth well be that a new development model is forming because China’s development could not be explained by current western models.

    In China, the real development story is not in Beijing & Shanghai. It’s the remote Northwest with Gansu province as the best exmaple because it has THE poorest among the poor regions in China. If you visit China and want to find out how the poverty reduction is being done, Gansu is the place (sand, barren mountains, no water, no trees, etc). In last five to ten years, Gansu has made unbelievable progress (we visited last year), please see following site (english) for its capital city (~ 3 million people, ranked ~ 100th in China regarding its local GDP and city size), which is as modern as any US city:

    http://english.cri.cn/725/2005/12/05/Zt202@34428.htm)

    If you have a chance, have a visit and you may find something new that might be applicable to India’s poverty reduction.

    Comment by thecupgr — October 20, 2007 @ 7:53 am

  26. @cupgr

    My point is beyond economic development. Economic freedom does not need necessarily mean social and political freedom, although it might have a positive correlation. I do not want to take-away anything from what China has achieved as an economic super power. It is just that, variables such as power consumption or whatever, fail to capture what the populace rally lacks in what a true democracy would have brought to China. These are mere surrogates that “reflect” growth. If such measures are complemented by independent assessments of Chinese perceptions about their development and satisfaction with what goes on in their country, I would probably begin to believe. But, we can never get such independent assessments can we? Even if we do, I would have a few reservations.
    Again, my intention is not to hijack this economic conversation to a socio-political cost discussion of achieving such freedom. But, I believe too much attention is paid to the economic factors at the cost of other important dimensions. Moreover, much of the discussion seems to consider the socio-politics as being exogenous to economic development, while in reality it is endogenous to the argument.

    Comment by Girish Mallapragada — October 20, 2007 @ 11:44 am

  27. @Girish:

    Well said and lucidly put forth. But then, wouldn’t you expect an Economy blog to pay more attention to economic conversations and not to its socio-political components? More so, when China (with all its socio-political knottiness) tends to hijack all discussion at this blog pertaining to India’s economic pursuits.

    Indian security discussion have finally been dehyphenated from Pakistan. When will we dehyphenate our economic discussions from China?

    Comment by Pragmatic — October 20, 2007 @ 12:04 pm

  28. Pragmatic & Girish, let’s stop before this goes out of hand. The messages are not to boast China, but truly intend to provide a different view. One senario is this: Like Managing Editor Sheela Bhatt of Rediff, if she never made her trip and continue to hold her past views about the development stages of India and China, she may not think differently on suggesting new ideas or new ways to help India’s economy. Does this thinking makes sense to both of you?

    Comment by thecupgr — October 20, 2007 @ 8:25 pm

  29. Dweep, I will not engage on the argument vis-a-vis relative poverty because it will go nowhere. I do, however, believe that social mobility is first and foremost enabled by the reduction of absolute poverty.

    However, I will respond to your point about the Chinese government. Yes, Chinese growth has been mostly state-led and investment driven. Now, why don’t you stop for a moment and ask yourself why this is possible in China? Well, the leaders have vision and are planning 50 years ahead, for one. There is also a second reason, namely that the Chinese government does not have to answer to the people, so building spanking new infrastructure (of all sorts) while exercising unquestioned powers (for the most part) of eminent domain is a lot easier. As I pointed out in an earlier post on IEB, India is the first reasonably sized country in history that is going through the industrialization process while guaranteeing every person the vote. That alone guarantees that the Chinese state-led model will not work here. And in a political environment where the government is short-sighted as in India due to electoral pressures, I cannot see why the government cannot be anything but a hindrance to rapid economic growth.

    I think the labour laws of India are a classic illustration of the problems faced by India. I think everyone, including most sensible people in government, realize that they’re doing enormous harm to the country by not reforming labour laws, which enable companies to scale rapidly, generate much-needed employment etc etc. However, the electoral realities force the government to remain hostage to organized labour, which constitutes less than 10% of the workforce.

    Comment by Reuben Abraham — October 20, 2007 @ 11:00 pm

  30. Two extremely thoughtful posts on globalization and inequality at the Becker-Posner blog.

    Gary Becker — http://www.becker-posner-blog.com/archives/2007/10/globalization_a_1.html

    Richard Posner — http://www.becker-posner-blog.com/archives/2007/10/globalization_a.html

    Comment by Reuben Abraham — October 21, 2007 @ 11:27 pm

  31. Dweep, I suggest that economic growth *is* sufficient for poverty reduction in a free market society. And before anybody says “Oh, but there is no such thing as a perfectly free market society anywhere in the world, nor is there likely to be” I will agree with them. Perfection is the enemy of the good. Markets can be more or less free than other markets, and we call the more free ones “free markets”. The more free a market is, the better it works to reduce poverty. The more a government intervenes, the less markets work to reduce poverty. For example, except in the unproven case of low-wage workers having a vertical demand curve, minimum wages ALWAYS raise some people’s wages, and destroy other people’s jobs, with the total effect being to move the employment rate away from a market-clearing price.

    Comment by Russell Nelson — October 22, 2007 @ 4:11 am

  32. @Pragmatic:

    Point taken. End of the day, this is an economic blog – and just like the mainstream classical economic view, it ignores the social embeddedness of all economic activities (that’s not a peeve of mine).

    @cupgr:

    Many Indians are much more aware than what reporters write about China. I am pretty sure that 6 years in the US and hours of discussions with Chinese students and faculty have enlightened people like me about the true China (throw in all the well written editorials in the Times, Post and Economist). I can safely say, although I have not visited China personally, that my opinions are not as biased as mainstream Indian media, and I am sure many readers of this blog go beyond the usual know-how about China.

    Having said that, I do understand, it is tough to appreciate a country’s situation unless you belong to that country and have seen at close hand how things are playing out.

    Peace.

    Comment by Girish Mallapragada — October 22, 2007 @ 7:30 am

  33. Rueben,
    Everything you say about China’s political system is largely true. My point was not to say that China’s speed of reform could be matched in India. I simply wish to point out that there is a role for the state that cannot be wished away.

    Often in these arguments, free market proponents seem to suggest that the government is nothing but a problem, with past Indian failures used as justification. You yourself suggest as much. But China illustrates that there is a role for the state, that cannot be wished away – both in the reform process and social provision. Clearly, the problem in India is not in the theory of governance, but in its practice. Yet, your own diagnosis falls short of providing a solution. Do you suggest that we do away with government altogether? If not, one must work to reform and inform it. While I do believe free markets are good, I see this as a necessary step to advancing social priorities including poverty reduction. That was the original point I was making in my post.

    I’d also like to point out a striking aspect of this discussion – that free markets and growth are increasingly being viewed as ends in themselves. Hence Ravikiran’s suggestion that “economic growth, as long as it happens via free market reforms…” is good, and Russell’s note about minimum wage intervention. I understand the economic case for avoiding minimum wages, but if a society decides that workers should get a minimum wage, is the beauty of economic theory a sufficient reason to abolish it? Instead, the end should be upward mobility or equality of opportunity or a decent wage, or whatever – economic theory of free markets and growth should only be the instruments of choice.

    Comment by Dweep — October 22, 2007 @ 6:55 pm

  34. Girish, like your comments. Put politics and historical factors aside, such discussions are very helpful.

    For China’s political system, like Dweep said, has its own merit, otherwise one can not make the economy grow for thirty years at ~10%.

    One way to look at this is to compare China as a major corporation. Every major company, if you have worked in one and should agree, is a defacto dictatorship although it has board to oversee the operations (but the board members are often appointed by CEO, just like China’s one party system and parliament). If China is viewed as a corporation, which is largely true nowadays, the problems associated with China and its economic development can be easily understood.

    We already know that most dictatorships will fall sooner or later, but for every 100 failed companies, there is a GE or P&G that can manage its long term planning well and survive through difficult times. GEs or P&Gs can also implement comprehensive leadership programs to spot and train future company leaders (which like what China is doing nowdays). The corporation governing mechanisms, if managed properly, actually can have best people on top in orderly fashion and keep company running smoothly without disruptions. If you compare demacratic systems, elections can replace governments and development may become the second thought because you have to get the power first to do anything. But imaging a corporation make such changes and can one expect it still run the business smoothly?

    Chinese system has experienced fundamental changes in last thirty years. If anything, it’s definitely no longer a traditional dictatorship. Rather it’s gradully envolved into a non-traditional corporate-type dictatorship. The good part of this change is that it may develop into a new model that can combine two good things together: corporate governance and also demacratic pricinples (let’s all hope).

    Business Week featured a China article recently and it showed five new faces in leadership and most of them have Ph.D. degrees in economics, so you can see that the system did select people who are the experts in economics. The selection system on these new faces can be compared to a corporation succession process(People at the top must know both economics and politics).

    Recall Jim Collins said in his book “From Good to Great” that most great companies pick their leaders from inside the organization. China, if you view as a corporation, certainly follows his advice.

    For last 30 years, China has indeed growed like GE or P&G. But at sometime in the future, a major internal adjustment will come, but one should not assume that such adjustments will come soon because current leadership changes seem to become routine and this will allow the government to focus more on poverty reduction and make longer term planning.

    Comment by thecupgr — October 23, 2007 @ 4:52 am

  35. @thecupgr:

    Appreciate your viewpoint.

    Comment by Girish Mallapragada — October 23, 2007 @ 8:33 am

  36. @thecupgr:

    A very interesting viewpoint indeed. However, you might like to look at the extracts from John Lee’s paper at
    http://www.theaustralian.news.com.au/story/0,25197,22614110-28737,00.html

    Social unrest in China: Officially reported instances of social unrest (involving 15 or more people) have risen from 8700 in 1993 to 87,000 in 2005 (the latest available figures). This is about 240 instances each day.

    …although indicators are that millions have been saved from poverty under World Bank standards of $US1 a day, this statistic must be tempered by the fact social and financial safety nets (such as health, education and welfare) have been greatly reduced during the reform period….Meanwhile, government spending in the same period has been reduced from 32 per cent to 15 per cent.

    Much progress was made from 1979 to the mid-1980s. Since then, of the approximately 900 million peasants, about 400 million have seen their incomes stagnate or decline during the past decade.

    … the size of instances of unrest is growing and can be frightening. For example, in cases recently documented for 2003, a mob of 50,000 torched police cars in Chongqing to protest against the beating of a migrant worker; 100,000 stormed a government building and forced the postponement of a dam project in Sichuan due to inadequate compensation; 20,000 miners and their families rioted against lay-offs and the loss of their pensions.

    Other recent instances of unrest include 80,000 retired workers who protested in China’s northeast over unpaid pensions in 2002; 30,000 rioting over exorbitant bridge tolls issued by local authorities in 2004; 7000 textile workers protesting after being forbidden to form their own union in the Shaanxi province in 2004. Of the 74,000 instances recorded in 2004, 17 involved 10,000 or more people, 46 involved 5000 or more people and 120 involved 1000 or more people. That order was restored only after martial law was implemented in many of these cases highlights the seriousness of the problem.

    Comment by Pragmatic — October 23, 2007 @ 10:07 pm

  37. Girish & Pragmatic, Thanks for the kind words.

    For social unrest, it can also be framed under a corporate development model (or theory) to explain. Major corporations, as we all know and might have experienced, have tight control and operational structures. They have good and bad managers. Periodically, corporations will do lay-offs, which nowadays is so common and can be done wothout any condition. So you hear often about worker rights lawsuits and even strikes for making a better contract deal.

    For looking China (also India) as a corporation, social unrest should be expected. Regardless how sound the government policies are, you have bad and corrupted officials. You have social issues at every level. Actually, it’s abnormal if such unrest are not existed. The key here though is to see if governments (local and central, like corporations) have effective mechanisms to address these issues. In China’s case, it seems that overall conditions on living standards, education, and poverty reduction have dramatically improved, partially because of the response to the pressure of equality and social stability.

    Using a corporate analogy to explain why China has developed fast in last thirty years makes a lot of things easy to understand. There are so many corporations out there, but only a limited number of them can deliver long-lasting growth. In Jim Collin’s “From Good to Great” book, he compared ten great companies to ten comparison comapnies (with similar products mix) under similar operational conditions, ten great companies delivered an astonishing performance while their comparison companies stayed almost at the same place.

    You can even put a number on China’s development compared to other developing nations. In growth rate alone in last thirty years, you can see the difference. For one thing, the corporate-style dictatorship has helped China for building its infrastructures. Most people in the west nowadays promote a full demacratic idealogy for economic growth, but the reality is that United States’s infrastructures were built by government planning and oversight after WWII. For developing countries, the demacratic election process is often good on the paper, but has proving to be ineffective for building infrastructures.

    The bottomline is this: any model, if put politics and prejudice aside, has its own merit. An open mind approach is the best way to see through the differences.

    Comment by thecupgr — October 24, 2007 @ 6:19 am

  38. Following video and paper (with real pictures) can show you the China’s poorest Dingxi county at Gansu Province. Yes, this is THE poorest place in China you will be able to see if you travel out of the cities: people’s homes, their living conditions, food, and environment. According to Chinese publications and history, Dingxi is the king of the poor regions in China. One of the India journalist delegation visited Gansu last year and one of them wrote about the comparison between Bihar and Gansu. In his paper, he stated that Gansu’s per capita GDP is about 10 times of Bihar. But he might well overstate it.

    http://english.aljazeera.net/NR/exeres/1522979B-107E-46C8-A84E-7425F60C3EE9.htm

    http://www.youtube.com/watch?v=L-G5KiYAly4&mode=user&search=

    Comment by thecupgr — October 25, 2007 @ 8:19 am

  39. Dweep… your point about how the role of the government can not be wishes away… has not been made sufficiently. What exactly is this role, beyond internal law and order, infrastructure and defense? Or is that all you speak of? Could you please be more specific than just saying there is a role?

    China is a communist country, and as such state is always going to play a role there. Using it as an example to make your point does not seem convincing. It is equivalent to pointing out the improvement in Pakistan’s economy since Musharraf took over and saying that there is a role for the miltary to play in running a country and the role of the military can not be wished away.

    Comment by Gaurav Sabnis — October 25, 2007 @ 7:33 pm

  40. One interesting document . http://stage6.divx.com/user/fmn/video/1743448/Why-Democracy—Please-Vote-For-Me .Why Democracy – Please Vote For Me . A documentary following the elections for class monitor in a 3rd grade class in Wuhan, China. Please Vote for Me gives a glimpse into China’s contemporary urban middle classes. It won the Sterling Feature Award at Silverdocs in 2007.

    Comment by budu — October 26, 2007 @ 6:55 am

  41. Dweep,
    I don’t know if you’re deliberately avoiding my point. Yes, the government has played a major role in China, but it’s almost inevitable the government would platy that role given the political system there (there is no other option available).

    I go back to my point about industrialization in a fully democratic context where the governments/politicians will be subject to electoral pressures and will therefore ALWAYS choose the expedient over the right option. Short-termism is inevitable in such a situation and even politicians who know better have no option if they want to remain in power or be re-elected. How many times have you seen this situation play out in the last few years?

    Given the short-termism at work (and it’s not going away anytime soon), I would suggest that the government should really withdraw from sectors where their presence is merely distortionary, creates inefficiencies and cause a massive waste of tax-payer money (NREG anyone?).

    Comment by Reuben — October 26, 2007 @ 12:11 pm

  42. @Reuben

    Given that the government has indeed messed up areas such as primary education and health for many decades and that the consequences of such a socialistic approach are primarily felt in the rural areas, are you suggesting that a complete free market solution will now solve the problem?

    Would private enterprise have provided a suitable alternative to solving say India’s education and primary health care problems during the sixties and the seventies? If someone insists it would have, they can do so because they don’t have the burden of evidence weighing against them, as it never happened. I do understand that a minimal role of the government is prudent when it comes to spending the tax payer’s money on “developmental” projects. However, it also seems to me that much of what has been learnt from the growth of western economies where the differences in population (to begin with) were not as great as in India, is being applied to the Indian context through the rubric of free-market economics. A more rational approach that takes into account the fact that the barriers for social and economic mobility in India are higher and stronger(due to the historical baggage), would probably be a slower, yet better approach to solving this problem. Your first two lines almost provide a justification for sacrificing political and social freedom for economic growth, and I apologize if I have read it the wrong way.

    Finally, I have issues when economists praise China for its seering growth, neglecting the costs that have come with the increases in bank balances and downplay India’s when in my view we have managed to do it with a democratic backdrop.

    Comment by Girish Mallapragada — October 26, 2007 @ 11:00 pm

  43. Reuben/Gaurav – Apologies for the late reply. Have been traveling.

    To return to your two points, I cannot agree more in theory that the state should stay away from sectors where its presence is merely distortionary and creates inefficiency. Our disagreement comes, however, when we must choose between distortion by the state or inherent distortions in a free market, or between inequality and inefficiency. You seem to prefer the latter option, while I seem to prefer the former. Does this address your point?

    Gaurav, elaborating further on the role of the state would require pondering too much on specific sectors. Suffice to say that even the creation of a dynamic private sector with light regulation and low levels of corruption requires action the concious adoption of positive policies by the state. And no, your example of Pakistan does not follow from mine on China – the latter illustrates simply that a state CAN play a positive role, contrary to the arguments of many (and has nothing to do with the type of government).

    Girish, I must support your note – free markets are great at some thing, but not at others. Accounting for non-economic barriers to mobility is one of the problems they, and economists, do not factor in. Presuming that theory will work in practice, or even presuming that we have the same needs/objectives as other countries, is to miss the point.

    Comment by Dweep — November 7, 2007 @ 8:28 pm

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