Monday, April 28, 2008

India's Liberalization: Is it Helping Reduce Poverty?

So, I've spent the past two weeks under a very large rock, and its name is India. Now, the curious thing about India is that - regardless of the fact that its the world's largest democracy, or the most diverse country in the world, or any number of other things - they only started getting attention in the past five years or so. The economic logic behind that is simple: In 1991, India started opening its economy in response to a financial crisis, beginning a gradual but fairly steady process of liberalization in trade and investment, which has sped up since 2001. So, given lag time, its probably unsurprising that in the past two years India has suddenly joined China as a hotspot of international attention - especially with regard to investing and strategic policy - how to deal with the Elephant's rise.

What hasn't been done enough is an assessment of what the Indian reforms mean to the overall picture within the country (Note, there is one exception, a 2002 study by Jean Dreze and Amartya Sen). Have they helped or have they hurt? After all, liberalization is something of a double-edged sword: if properly harnessed it can bring in needed resources, but if improperly managed, policies often become prey to corporate special interests and countries waste all their resources trying to attract more investment. I spent the past two weeks writing a paper trying to explain what effects liberalization has had on the economic, social, and environmental development for India. Below are a few conclusions.

(1) Economics: Liberalization has been a great boon to overall indicators of economic growth and macroeconomic stability. The Indian government is in a much better position financially than they were 15 years ago, and has begun to accumulate significant international clout. The question is how effective they have been at converting this to social development.

(2) Inequality: Official poverty reduction indicators show continued progress, but the rate hasn't really changed since the 1980s. Plus, the rural-urban inequality divide, and inequality in the country overall, increased by around 20% (Gini coefficient) in the 1990s, and other reports suggest it has continued to increase in the 2000s. Agricultural wages improved by 5% per year in the 1980s, but only 2.5% per year in the 1990s. 60% of India is employed in agriculture - so this is not a good sign.

(3) Health and Education: India's public spending also seems to be co-opted by larger business interests. For example: India spends 2.6% of GDP on health and education combined, yet in the 2000s, spending on IT service infrastructure increased from 3.6% to 6.1% of GDP. India actually spends less on public health, as a percentage of national income, than sub-Saharan Africa, the rest of South Asia, East Asia, North America, or Europe. Mortality and enrollment figures also show that improvements in education and health have stagnated during the post-reform period.

(4) Rural Poverty: Indian policies towards agriculture continue to be focused on providing subsidies and price supports to the wealthiest commercial farmers, hypothetically to ensure adequate foodgrain production. Yet the public food distribution system is overflowing with grain and unable or too corrupt to adequately distribute its surpluses - and year after year the system buys far more grain than is necessary. Yet most of the country continues to be undernourished. The government needs to expand work-for food programming, reduce price subsidies to give poor laborers (including many small farmers) access to cheaper food, target input subsidies to smaller farmers on a scaled basis, and provide agricultural extension services - but these reforms encounter well-connected and entrenched special interests from larger growers who have benefited from scaling-up and food processing in the 1990s (e.g Basmati rice exporters in Punjab).

(5) Environment: As might be expected, the industrial and commercial-farming nature of the Indian development model has had serious environmental repercussions - including overexploitation of groundwater; degradation of water quality from industrial waste, fertilizers, and pesticides; and air pollution in urban centers well in excess of WHO recommended safety limits. Mumbai is now the city with the fifth-most air pollution in the world - behind only the big 3 in China (Beijing, Shanghai, Tianjin) and Mexico City - not the most illustrious company!

In short, liberalization has flooded India with resources and new opportunities - but the government has been slow to adapt and harness those resources to promote socially and environmentally sustainable development (especially in rural areas).

I ended up suggesting the following general policies: (1) a shift in government expenditure from economic infrastructure towards expanded public health and education provisions, (2) convening a task force of experts in rural poverty to suggest how agricultural policy can be rationalized to target the improved welfare of marginal farmers and increased environmental sustainability, (3) enhancing and enforcing pollution laws and investing in clean technology promotion and public transport and (4) imposing targeted restrictions on the most volatile forms and sectors of foreign portfolio investment to guard against sudden capital flight (e.g. South Korea and Thailand in 1997-8).

The policies were intended to be a moderate, generally pragmatic framework to helping the government harness opportunities for its people. In any case, that's a "brief" summary of my life in the past two weeks. Thanks for reading :-).