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Category Archives: growth

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.

Unemployment, Poverty Decline, and Inflation.

19 Monday Aug 2013

Posted by paragwaknis in growth, macroeconomics, Unemployment

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Ashok Kotwal, Labor Bureau India, Poverty Decline in India., Unemployment in India

India is quite notorious when it comes to availability of timely and quality data and when it comes to unemployment more so. Till recently, the NSSO conducted the employment-unemployment survey only every five years. The reasons might be many- lack of funding, tailoring the survey dates to five year plans, using it as a report card on government in office, etc. But given that unemployment is an important macroeconomic indicator, you would want it to be available at a much higher frequency. Thankfully, the government seems to have woken up to this reality. Thanks to the Labor Bureau from Ministry of Labor and Employment, we now have an annual survey on employment and unemployment starting from the year 2009-10! You can access the reports here.

Given this late start, we have two rounds of this survey till now. How does the picture look like? In the following table, I have collected data from two rounds for unemployment rate based on the usual status. Note that Unemployment Rate (UR) is defined as the number of persons unemployed per 1000 persons in the labour force (employed & unemployed). The usual principal status approach means asking the question about employment situation in the past 365 days. Accordingly, the major time spent by a person (183 days or more) is used to determine whether the person is in the labour force or out of labour force. A person found unemployed under this approach reflects the chronic unemployment (Labor Bureau 2010).

unempInd

Overall in past two years, unemployment declined from 9.4% to 3.8% and most of this decline seems to be coming from decline in rural unemployment; rural unemployment declined by 66% as against 33% decline in urban unemployment with the total decline in unemployment being 60%. This decline in total unemployment because of a relatively higher decline in rural unemployment may be behind the recent decline in poverty. In a recent article, Kotwal and Sen argue that this poverty decline might be because of the success of Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA) and Pradhan Mantri Gram Sadak Yojana (PMGSY). This is not only because of improved employment opportunities from the scheme but also that the offered wage under the schemes pushed the rural wage up ensuring improved terms of trade for agriculture. So the decline in poverty story seems to be going hand in hand with the phenomenal decline in rural unemployment. 

It might be tempting to put the blame for higher inflation on increased government spending under the above mentioned schemes, but the causality does not seem to be that clear. The increase in the rural wage and the beneficial effects of better rural roads may have opposite effects on inflation. We will have to wait for more research on these links as data becomes available.

References:

Labour Bureau (2010), Report on Employment- Unemployment Surveys 2009-2010, Ministry of Labour and Employment, Government of India.

Labour Bureau (2012), Report on Employment- Unemployment Surveys 2011-2012, Ministry of Labour and Employment, Government of India.

Habit Persistence, Undernourishment and Gains from Trade

24 Sunday Feb 2013

Posted by paragwaknis in diverse perspectives, growth, macroeconomics, socioeconomic perspectives

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david atkin, food preferences in India, gains from trade, habit persistence

While I was studying in New Delhi, I used to pine for food from my homestate (may be even hometown or just homefood!). That is what migrants usually do and you find great markets in some pockets of bigger cities which cater to migrants preferences for certain kinds of food. This explains why there is a China Town, a Little India or a Little Italy in almost all bigger cities in North America. Hell, there is even little Madras in an area called Rasta Peth in Pune! New Delhi’s Delhi Hat has food stalls from all over India, but I am pretty sure most of the visitors flock to their state’s food stall. Does such kind of food preference have any economic implications at large? The answer is yes according to David Atkin from Yale.

In an innovative paper, he shows that habit persistence in food preferences among people from different regions in India imply much lower gains from trade than otherwise, should we decide to allow a freer movement of commodities between states. It also might illustrate how our somewhat fixed preferences for certain kinds of food may hold us back from getting the necessary nutrition for a healthy life!

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.

Hindu Rate of Growth or Nehruvian Rate of Growth?

22 Thursday Dec 2011

Posted by paragwaknis in growth, socioeconomic perspectives

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hindu growth rate, India, Nehruvian, Socialist

The decades before 1980-2000, when the growth rate of the Indian economy hovered around 3%, it was termed to be growing at the Hindu rate of growth. Now that the growth rate is around 6%, what do we call it? Well, technically it is still the Hindu rate of growth as the dominant population of India has not changed during this time! The more important question however is,  how come the same people are growing twice the rate now than earlier?

According to me, this doubled growth rate is a clear evidence that people in India responded to changed incentives and institutions.  Clearly, the rules and regulations we see now are more successful in fostering growth than the ones that were in place prior to 1980. Before 1980, the Indian economy was still characterized by the License Raj that was the result of the socialist (Nehruvian) policies. But later, the economy was slowly liberalized and moved towards a more market based economy. Thus, calling the lower growth rate as Hindu growth rate seems to be a misnomer as the people under the both regimes are still the same. I think it is high time we change the nomenclature to “Nehruvian growth rate” or ” a Socialist growth rate”!

Impact of the British Colonial Rule

02 Saturday Apr 2011

Posted by paragwaknis in economic history, growth, regional imbalance

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British colonial rule, Lakshmi Iyer

There is a lot of debate on what exactly was the impact of the British colonial rule on the Indian economy. Usually, the literature can be broadly divided into two camps. One camp is of the opinion that the British colonial rule not only affected India but also Britain, albeit in a positive way in case of the later. The other camp is on the opposite spectrum associating the failure of the Indian economy during the British period to causes like rainfall shortages and famines.

Yet another way of looking at the impact of the colonial rule is tie it to the current outcomes of different regions or countries. Lakshmi Iyer’s recent article belongs to this category. It “compares economic outcomes across areas in India that were under direct British rule with areas that were under indirect colonial rule.” She finds that areas that experienced direct rule have significantly lower levels of access to schools, health centers, and roads in the post colonial period.

 

Iyer Lakshmi, Direct versus Indirect Colonial Rule in India: Long-Term Consequences, The Review of Economics and Statistics, 92(4), November 2010, 693-713.

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.

 

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!

Education and Growth

20 Thursday Nov 2008

Posted by paragwaknis in education, growth

≈ 2 Comments

Peter Lindert argues that there is a relationship between democracy and economic growth. However, very few studies confirm this link empirically. One of the reasons why this is the case is that they do not specify the political process in enough details. The nature of policies that will be chosen and implemented in equilibrium will depend on whether voters have ‘voice’ or not. If voters have voice then government will spend more on public goods that benefit masses rather than elites. Does having a democracy or extensive franchise ensure that voters will have voice? Not necessarily.

Let us measure the elitist bias in government spending policies. If voters have voice then the government will spend more schools than on higher education and we will find the proportion of spending on schools in total spending higher relative to a situation where voters do not have voice. Thus, higher voice means more spending on primary education and hence lower elitist bias. How do various democracies fare on this count? All the economically successful democracies spend significant portion of their education expenditure on primary education than higher education. This signifies lower elitist bias and hence better human capital and hence growth. What is the catch? Yes, you got it right-its India.

India is the biggest but also poorest democracies in the world. It turns out that among million reasons why India is poor, the elitist bias in its spending policies infact might be a significant one. We have an impressive list of higher education institutions but our primary schools remain of abysmal quality and quantity. As a result we have some 200 million people with access to somewhat decent higher education but remaining 800 million or so have to survive on schools with one class room and absent teachers!

Lindert argues that even though India is a full fledged democracy by all standards, its voters do not have voice or voice is distributed more unequally than votes. So while other economically successful democracies got it right in terms of primary education, India lags behind because of a massive illiterate and undereducated human pool. So whats the moral of the story? Massively expand and improve schooling in India.

This is important because all other policies of ensuring equal access do not work or work only in the limited sense if basic education is not right. For example in a recent article in EPW, Chakravarty and Somananthan found that SC/ST students earn significantly lower wages in IIMA’s placements. However, the difference between the wages of SC/ST and open category candidates vanishes once controlled for the GPA. Thus, the wage differentials account for differences in human capital endowments of the SC/ST versus the open category students. These inequalitties in endowments can be taken care of only if all the castes have access to quality education and a way to do that is to spend more on schools than on universities and colleges.

Chakravarty S and S Somanathan (2008), Discrimination in an Elite Labor Market? Job Placements at IIM-Ahmedabad, Economic and Political Weekly, November 1.

Lindert P (2003), Voice and Growth: Was Churchill Right?, The Journal of Economic History, 63, 2, 315-350.

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