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Category Archives: economic reforms

So Raghuram Rajan decides to go!

18 Saturday Jun 2016

Posted by paragwaknis in economic reforms, economics and governance, inflation, monetary policy, politics, RBI

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raghuram rajan, RBI Governor, Rexit

So finally what I feared about RBI Governor’s term renewal has come true! Raghuram Rajan put all the speculation about his second term to rest through a letter to his colleagues in the RBI announcing his return to academia at the end of his term. Here is the link to his letter. What stands out of all in the letter is the following statement clearly indicating the role of the government in his exit:

While I was open to seeing these developments through, on due reflection, and after consultation with the government, I want to share with you that I will be returning to academia when my term as Governor ends on September 4, 2016.  I will, of course, always be available to serve my country when needed.

It is really unfortunate that Rajan will not be continuing as he brought about a lot of positive changes in the financial system, contained inflation, established a new monetary policy framework and took firm stand on issues often ruffling feathers of the Modi government. Hopefully, the new RBI governor will continue many of the reforms he initiated. The academic world should be happy as he continues contributing brilliant research papers in future.

PISA Scores and Human Capital in India

04 Wednesday Dec 2013

Posted by paragwaknis in economic reforms, education, growth, socioeconomic perspectives, Uncategorized

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Gustavo Ventura, Human Capital in India, India, Labor Quality, PISA, PISA scores India, Pratham, Schooling in India

I came across this interesting paper by Gustavo Ventura and his coauthors titled “Talent, Labor Quality, and Economic Development” in which they use PISA scores as a measure of quality of labor. They show that there are huge differences between labor quality between rich and poor countries based on these scores and they could explain some of the income differences across the world. Developed countries like the US, Canada and Western Europe have been investing in education for the past 200-300 years. The dividends that are being reaped now are because of this huge investment. Unfortunately, India does not figure into the analysis because we have shied away from taking the test. Only two states, Tamil Nadu and Himachal Pradesh, volunteered and the results are not at all encouraging. You can find some analysis here, here and here.

Employers in India have been lamenting about quality of human capital for a while now. There is an urgent need of reform starting from schooling to address such concerns effectively. Of course there are Indian kids who could surpass the rich country kids in these tests- all the ones who would eventually go to IIMs, IITs, and other elite educational institutions in India for example could do that. Students who come from educated families in general will be also in this list. But all said and done this is still a tiny winy percentage of the population. To reap the demographic dividend for economic growth, skill improvement needs to happen at much broader level than that. One could also argue that PISA tests does not really measure skills. Pratham has been conducting its own tests and the results are not very different!

How are we going to do this? Poor infrastructure, Teacher absenteeism,  and quality are some of the major problems at all levels of education in India. Some of it would need more investment but a lot could be achieved if incentive structures are changed to motivate the stakeholders to improve outcomes. For example, curriculum and school calendars may have to be revised to meet the local constraints and maximize attendance and learning. Research shows that poor quality of schooling reflects on performance in higher education and eventually the job market outcomes. This provides additional rationale for improvement of schooling across the board.

As we are on the topic of unused capacity and perverse incentives it has to be noted that this problem is not only limited to schooling. I know colleges in Pune, India where the classrooms are empty while students pay through their nose for coaching classes. The quality of education provided is overall abysmal. In order to get as many students through the college system as possible, there has been significant dilution of syllabus for almost all the courses through out. Centralized and standardized examination system has only made matters worse. It has taken away the agency from college teachers- no wonder there is huge apathy towards increased effort.

Moral of the story: education in India needs reform! This is one area where government spending and investment could really make a difference. The story about India’s PISA scores only underscores the dangers of continued neglect of such impetus to education.

Economics of Gated Communities: Private Solutions to Government Failures

20 Thursday Sep 2012

Posted by paragwaknis in economic reforms, growth

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gated commuinities, governmetn failures, indian economic reforms

The race is between China and India and the whole world is watching. Well, at least the Western world is definitely watching. The frequency at which articles on India’s progress or lack thereof  are published in the western press is a sure indicator of this. Whatever the perspective, every one seems to be lamenting on how shoddy infrastructure is going to hold back India compared to China. The concern is definitely not misplaced. Up until a decade ago, India did not have a single expressway. Power failures have always been ubiquitous and rampant corruption only makes maters worse. There is no ‘public education’ system as such and wherever there are any signs of it’s existence, it is plagued by scarce resources and teacher absenteeism. So what do Indian people think of this overall state of affairs? There is indeed a tendency to make do. After all life goes on even if you did not have electricity the whole day yesterday. And I believe this is what the politicians count on- that people will either say OK and move on or they will find private solutions to government failures.

People will invest in generators and battery operated fail safe systems to address power failures. They will work hard to put their children through private schools or pay extra for private tutoring. They will dig their own bore wells and make their own access roads so that they are not stranded without water or a dirt road that proves to be a nightmare to navigate during monsoons. All across India, there are emerging scores of new housing complexes with complete amenities of their own so that at least a part of people’s lives is shielded from rampant government failures.

Such gated communities are not only preferred by common people but also by corporates. Take the example of Dhirubhai Ambani Technology Park. It is a complete functioning economy of its own. Pothole free roads, 24 hour electricity and telecommunications, and a clean environment to work. The moment you enter the facility you are transported to a different world! These gated communities remind me of John Galt’s hideout from the Atlas Shrugged! Even though we know much more about the intricacies and nuances of political and social systems than Ayn Rand, there seem to be too many such John Galt getaways that people prefer to flee to.

There is a lot of unhappiness about the state of governance and that might be one of the reasons that we have fractured government at all levels. Parties which either boast of dynastic heritage or of parochial and communal politics are finding increasingly difficult to win a majority to form government by themselves. They have to negotiate their way with smaller parties and independent candidates in exchange for promises to help them do good on their election promises. However, at times such coalition politics takes it own toll when getting one’s act together to push through important reforms becomes impossible. Hence, the political solution to government failure actually looks like a stalemate.

How does this bode for India’s future? Unfortunately, not so well! Having people invest their hard earned money in providing and purchasing goods for which there is a clear rationale for public provision is totally inefficient. This money could have been used for productive and efficient investments instead. So even if individually people seem to be better off, emergence of private solutions for government failures does not reflect well on long run growth of India. Efficient production and provision of public goods is not sufficient for economic growth but is definitely a necessary condition. People still have to work hard to improve their standards but then they are at least not held back because of lack of electricity, roads and good education!

Econmic Liberalization and its effect on Economic Growth

31 Tuesday Jan 2012

Posted by paragwaknis in economic reforms, growth

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economic liberalization policies, indian economy, poverty in india

A quite exhaustive survey of the extensive research on the economic liberalization policies and its effect on economic growth and poverty in India appeared in JEL’s December 2011 issue. Written by Ashok Kotwal, Bharat Ramaswami and Wilima Wadhwa, it is a definite read for anyone interested in current state of the Indian economy.

Economic Reforms and Productivity Growth

06 Sunday Feb 2011

Posted by paragwaknis in economic reforms, growth

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Harrison, Martin and Natraj (2010), Learning Versus Stealing: How Important are Market Share Reallocations to India’s Productivity Growth?, NBER Paper No. 16733

Abstract:

The new trade theory emphasizes the role of market-share reallocations across firms (“stealing”) in driving productivity growth, while the older literature focused on average productivity improvements (“learning”). We use comprehensive, firm-level data from India’s organized manufacturing sector to show that market-share reallocations did play an important role in aggregate productivity gains immediately following the start of India’s trade reforms in 1991. However, aggregate productivity gains during the overall 20-year period from 1985 to 2004 were driven largely by improvements in average productivity. By exploiting the variation in reforms across industries, we document that the average productivity increases can be attributed to India’s trade liberalization and FDI reforms. Finally, we construct a panel dataset that allows us to track firms during this time period; our results suggest that while within-firm productivity improvements were important, much of the increase in average productivity also occured because of firm entry and exit.

 

relative prices and welfare gains

31 Monday Jan 2011

Posted by paragwaknis in economic reforms, macroeconomics

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indian economic reforms

An interesting article on how neglecting relative price changes might lead to misleading conclusions on welfare gain comparisons. It suggests that welfare gains in the post reform era in India might be overstated if we consider the effect of inequality and relative price changes.

Trade Liberalization, Tax Law Changes and Wage Inequality

09 Wednesday Dec 2009

Posted by paragwaknis in economic reforms, legal reforms

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Jagadeesh Sivadasan, Joel Slemrod, wage inequality in India

Public economists love tax law changes. It gives them a setting of a natural economic experiment allowing them to see how people respond to change in incentives. Such experiments are even rare for developing countries, not because nothing changes in these countries but because of unavailability of reliable data. This paper by Sivadasan & Slemrod is an exception. They find that a particular change in tax laws in 1992 explains almost all of the post 1992 wage inequality in India. This is an interesting finding in the context of the debates on trade and wage inequality as well.

Liberalization and Growth of the Indian Economy

19 Thursday Nov 2009

Posted by paragwaknis in economic reforms, growth

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amit khandelwal, indian billionaires, liberalization and Indian companies

Did liberalization hurt Indian companies? A recent paper by Goldberg et. al. suggests that may not be the case. The authors argument is simple. One quarter of India’s manufacturing output growth during the 1990s stemmed from products that were not manufactured prior to the reforms. They argue that this expansion of new products was driven in large part by access of Indian firms to previously unavailable imported inputs. Access to new imported intermediates therefore played an important role in the overall growth of the Indian economy.

A recent report on the growth of Indian billionaires kind of corroborates this story!

Political economy of reforms!

20 Sunday Sep 2009

Posted by paragwaknis in economic reforms, politcal economy

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indian economic reforms, raghuram rajan

When I debate economics with my Chineese friends, the topic of relative performance of China and India invariably corps up. With the obvious observation that China seems to be doing much better than India, the million dollar question that arises is what acoounts for these differences. A reason sighted very often, though in a lighter vein, is that China does not have to worry about ills of democracy! I always wondered if this indeed is one of the factor explaining the differece in performance of these two giant economies.

Raghuram Rajan has an interesting perspective on this. The question that he asks is why does underdevelopment persisit and how do people put up with it. Asked another way, the question invariably points to the slugguish rate at which much needed economic reforms are undertraken in a country like India. The answer according to him is competitive rent preservation. To quote him verbatim:

When citizens in a poor constrained society are unequally endowed, they are likely to find it hard to agree on reforms, even though the status quo hurts them collectively. Each citizen group or constituency prefers reforms that expand its opportunities, but in an unequal society, this will typically hurt another constituency’s rents. Competitive rent preservation ensures no comprehensive reform path may command broad support. The roots of underdevelopment may therefore lie in the natural tendency toward rent preservation in a divided society.

Ref:

Rajan R (2009), Rent Preservation and the Persistence of Underdevelopment, American Economic Journal: Macroeconomics, Vol.1, No. 1, January.

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