GROWTH STORY: GLOBALIZATION AND INEQUALITY

Agenda

• India’s Growth Story• Globalization• Inequality• Correlation between Globalization

and Inequality• Inclusive growth• Excerpt’s from XIth and XIIth Five-

Year Plan• Group’s take

India’s Growth Story

Era• Pre-Liberalization• Post-Liberalization

Global Scenario

Domestic Scenario

Pre-liberalization eraClosed system inspired by the economy of the Soviet Union

Socialist practices, large public sectors, high import duties and lesser private participation

Credit advanced to the industry players ery much regulated and varied a lot in cost

The overall economic and monetary system was very weak with fiscal deficit circles emerging year on year

“Hindu Rate of Growth”- because of the unfavorable comparison with growth rates in other Asian countries

Impacts

Low income growth rate -3.5%

Per capita income averaged-1.3%

Pakistan - 5%, Indonesia-9%, South

Korea-10%, Taiwan-12%

Only four or five licenses would be given for steel, electrical power and communications. License owners built up huge powerful empires

A huge public sector emerged. State-owned enterprises made large losses

Poor infrastructure investment because of the public sector monopoly

License Raj established the "irresponsible, self-perpetuating bureaucracy that still exists throughout much of the country" and corruption flourished under this system

Post-liberalization era

Disinvestment in public

sector firms. Under the

privatization scheme,

most of the public sector undertakings have been/ are being

sold to private sector

Devaluation of Indian currency by 18-19 percent against major currencies in the international foreign exchange market

mainly to resolve the BOP crisis

Dismantling of The Industrial Licensing Regime

Allowing Foreign Direct

Investment (FDI) across a

wide spectrum of

industries and

encouraging non-debt

flow -- Insurance

(upto 26%); defense industry

(upto 26%)

Reforms

Crushed international investor confidence on the economy

lead to serious economic BOP crisis in 1991

Liberalization, Privatization and Globalization (LPG model)

was implemented

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11

1.4

5.4 5.76.4

7.38

4.3 4.355.81

3.84

8.527.5 7.5

9.5 9.6 9.3

6.88 8.5

India's growth rates in GDPIndia's growth rates in GDP

1991-92

1992-93

1993-94

1994-95

1995-96

1996-97

1997-98

1999-00

2000-01

2001-02

2002-03

2003-04

2004-05

2005-06

2006-07

2007-08

2008-09

2009-10

2010-11-

0.600000000000001

45.2

10.211.6

7.1

4.3 4.86.5

3.6

6.6 6.6

10.3 9.7

12.2

9.7

4.4

8 7.9

Industrial GDP GrowthIndustrial GDP Growth

Impact on Economic Indicators

*Reference :http://planningcommission.nic.in/data/datatable/index.php?data=datatab

-1.85

6.224.1 5.1

-1.1

10.1

-2.8

-0.1-0.4

6.5

-8

10.3

0.1

5.1 4.25.8

-0.10.4

6.6

Agricultural GDP GrowthAgricultural GDP Growth

13.7

10.18.4

12.6

8

4.6 4.43.3

7.2

3.6 3.45.5

6.54.4

6.54.8

8.1

3.9

9.6

Rate of Inflation (WPI) - AverageRate of Inflation (WPI) - Average

*Reference :http://planningcommission.nic.in/data/datatable/index.php?data=datatab & *IMF

Global Scenario

India has started falling behind every other South Asian country (except of Pakistan) in terms of social indicators, even as it is doing so well in terms of per capita income

Bangladesh - India Per capita income 60 per cent higher than Bangladesh in 1990, and 98 per cent in 2010. But felt behind during the same period in life expectancy, child survival, fertility rates, immunization rates and even in mean years of schooling. Most social indicators now look better in Bangladesh than in India, despite Bangladesh having barely half of India’s per capita income

Comparing India to the World

If Uttar Pradesh were to declare independence, it would be the world’s fifth most populous country (as the map below shows, it has about the same number of residents as Brazil. Yet its economy would only be the size of Qatar, a tiny oil-rich state of fewer than 2m people. That makes it poor on a per person basis. Despite India’s two decades of rapid growth, Uttar Pradesh’s GDP per head is close to that of Kenya

Globalization at a Glance

The growth story…The integration of the world

economy through the progressive globalization of

trade and finance has reached unprecedented levels.

It is particularly difficult to disentangle the effects of technology and financial

globalization since they both work through processes that raise the

demand for skilled workers.

The limited overall impact of globalization reflects two offsetting

tendencies: whereas trade globalization is associated with a reduction in

inequality, financial globalization—and foreign direct investment in particular—is associated with an increase in inequality

Globalization…In 2000 the IMF identified four basic aspects of globalization : Trade and transactions, Capital and investment movements, Migration and movement of people and Dissemination of knowledge (and technology)

Theory of Comparative Advantage propounds that free access to trade is beneficial for all the parties involved (gains from trade)

Thomas L. Friedman popularized the term "flat world”, arguing that globalized trade, outsourcing had permanently changed the world

Evolution of free trade practices led to the birth of GATT which is now known as WTO

Evolution of bilateral treaties and FTAs

Conflicting views on globalization

The debate on the distributional effects of globalization is often polarized between two points of view.

One school of thought argues that globalization leads to a rising tide of income, which raises all boats and is consistent with Kuznet’s hypothesis

Opposing school argues that although globalization may improve overall incomes, the benefits are not shared equally among the citizens

Trade liberalizations vs Financial liberalization

Trade liberalization and export growth are found to be associated with lower income inequality

Increased financial openness is associated with higher inequality

However, their combined contribution to rising inequality has been much lower than that of technological change, especially in developing countries

• World trade has grown five times in real terms since 1980, and its share of world GDP has risen from 6 percent to 55 percent over

• Trade integration accelerated in the 1990s, as former Eastern bloc countries integrated into the global trading system and as developing Asia—one of the most closed regions to trade in 1980—progressively dismantled barriers to trade.

Trade Globalization

Financial Globalization• Total cross-border financial assets have more than

doubled, from 58 percent of global GDP in 1990 to percent in 2000.

• The advanced economies continue to be the most financially integrated, but other regions of the world have progressively increased their cross-border asset and liability positions

• Of note, the share of FDI in total liabilities has risen across all emerging markets—from 7 percent of their total liabilities in 1990 to 8 percent in 2000 —and far exceeds the share of portfolio equity liabilities, which rose from 2 percent to percent of total liabilities over the same period

• Reduced government borrowing needs have also contributed to changing liability structures, with the share of debt in total liabilities falling across all emerging market and developing country regions.

• The share of international reserves in cross-border assets has also risen, reflecting the accumulation of reserves among many emerging market and developing countries in recent years.

Financial Globalization

Gini Index as a toolThe Gini index captures the range between a perfectly egalitarian distribution in which all income is shared equally (a Gini coefficient of 0) and one where a single person has all the income (a coefficient of ).

Gini coefficients typically range from 0.20 to 0.65.

One major source of variation is that some Gini indices are based on surveys of household consumption expenditure, whereas others are based on income surveys—a difference that can change a country’s observed Gini index on the order of 0. 5 point.

In general, consumption-based Gini indices tend to show lower inequality and are more commonly used in developing countries in which higher rates of self-employment in business or agriculture (where income fluctuates throughout the year

Inequality

Economic inequality

Economic inequality comprises of all disparities in the distribution of economic assets and income.

• Individuals • Groups of people• Countries

Inequality exists among:

• The Gini coefficient (0-1): A value of 0 expressing perfect equality and a value of 1 maximal inequality.

Inequality is most often measured using the Gini coefficient

Inequality across nations

Causes of inequality

Inequality Market

Innovative technologyTaxes

Innate abilities

Racism/ Gender Globalisation

Inequality

• High income groups consumed more

• Urban consumption is more than rural consumption

• Less disparities in rural areas in comparison to urban areas

• Inequality tends to reduce in rural areas and increase in urban areas.

Mitigating Factors

Government Sponsored

•Education•Progressive taxation•Minimum wage•Subsidization

Market driven

•Propensity to spend•Unionization

Effect of liberalisation (1991)

Inequality rose in the post

reform period

Reduction in growth in

agricultural sector

Boom in the service sector

Rise in Gini co-efficient

Variations in ine• Based on observed movements in

Gini coefficients inequality has risen in all but the low-income country aggregates over the past two decades,

• inequality has risen in developing Asia, emerging Europe, Latin America, the NIEs, and the advanced economies over the past two decades, it has declined in sub-Saharan Africa and the CIS countries

• This pattern remains broadly unchanged using population-weighted averages, except for emerging market countries in Latin America, as a

• Among the major emerging market countries, trends are more diverse, with sharply rising inequality in China, little change in India, and falling inequality in Brazil, Mexico, and Russia

Variations in Inequality

Impact of trade liberalization on inequality

The principal analytical link between trade liberalization and income inequality

provided by economic theory is derived from the Stolper-Samuelson

theorem

It implies that in a two country two-factor framework,

increased trade openness (through tariff reduction) in a

developing country where low-skilled labor is abundant would

result in an increase in the wages of low-skilled workers

and a reduction in the compensation of high-skilled

workers, leading to a reduction in income

After tariffs on imports are reduced, the price of the

(importable) high skill-intensive product declines and so does the compensation of the scarce high-

skilled workers, whereas the price of the (exportable) lowskill-

intensive good for which the country has relatively abundant

factors increases and so does the compensation of low-skilled

workers

The opposite effect would be observed in an

advanced economy

Impact of financial globalization on inequality

An increase in FDI from advanced economies to developing economies could increase the relative demand for skilled labor in both countries, increasing inequality in both the advanced and the developing economy.

In addition to foreign direct investment, there are other important channels through which capital flows across borders, including cross-border bank lending, portfolio debt, and equity flows.

Greater capital account liberalization may increase access to financial resources for the poor, whereas others have suggested that by increasing the likelihood of financial crises, greater financial openness may disproportionately hurt the poor.

In the context of strong institutions, financial globalization may allow better consumption smoothing and lower volatility for the poor

Why to thrive for equality?

• All citizen are respected and treated equally• Promotion of equality of opportunityMoral • Promotion of better quality of life• Improved health and sanitationSocial• Better allocation of human resources• Reduction in social and political instability• Reduction in opposition to reforms

Economic

• Limited role of money in politics• Promotion of societal cohesion Political

Globalization and Inequality

Correlation between Globalization and Inequality

Globalization and Inequality

Direct(Anti-Neoliberal

View)Inverse

(Neoliberal View)

Anti-Neoliberal View

International Labor Organization

Real wages grew at only 1.9% when the overall economy grew at 4%

Wage share declined faster in countries with greater

openness to foreign trade

Increasing wage inequality among the working

population

Change in Inequality levels

Anti-Neoliberal View (cont..)

Joseph Stiglitz (2001 Nobel prize) - “Globalization and its discontents” in 2002

• Number of people living in poverty has been increased by 100 million in the 90’s nevertheless the world GDP grew at an average rate of 2.5%

Paul Krugman (American Economist, Nobel Prize winner )

• Domination of unskilled labour force in poor developing countries leads to minimal benefits of globalization

Neoliberal View

World Bank in the report “Globalization, Growth and Poverty” in 2002

• Poverty reduction due to diffusion of growth from growing nations to poor ones• Higher wages to similar skills at different locations

Globalization helping to equalize wages for the similar productivity levels – Surjeet Bhalla

Neoliberal View (cont..)

Competitive cumulative expenditure distribution of agricultural labour households suggests a small improvement in their living standards

No evidence of growing disparity between various groups

Welfare schemes contributing to the bargaining power

Impact of Globalization on Inequality

Channels Through Which Globalization Affects Inequality

• Trade Openness and Stolper-Samuelson theorem• Non-Competing goods

Other factors

• Technology factor• Access to Education• Sectoral Share of Employment

Inclusive Growth

Inclusive GrowthDefining the concept

Significance of Inclusive Growth

Steps to achieve Inclusive Growth: 11th Plan

Future prospects and policy changes: 12th Plan

Sustainable Development

Equity is the guiding principle of development

• Redistribution of power and resources• Trade-offs between equity enhancing and efficiency increasing • Policy for growth versus enhancing equity

Reinforced by “double dividend” for the poor

Major policy concerns in implementation

Inclusive Growth

Rapid

Growth

Sustainable Grow

th

Inclusive Growth

• Perpetual• Broad-

based• Include max

labor force

PovertyReduction

Long Term Development

Towards Inclusive growth: 11th Plan

Goals Reforms Gaps

- Poverty Reduction- Reduction in

Unemployment- Agricultural and Social

Sector Development

- Bharat Nirmaan Yojna- MNREGA

- Food Security Act-Right to Education Act

- Financial Inclusion

- Structural bottlenecks in agriculture sector

- Health goals unmet- Failure to achieve target

in power generation

Problems with:

Poverty & unemployment• More than 300 million

below poverty line• 80% of the poor are

from rural areas• Poverty concentrated

in few states• Concentrated among

agricultural laborers, casual workers, SCs & STs

Agriculture• Yield growth• Land and water

problems• Vulnerability to world

commodity prices• Farmers’ suicides• Disparities in growth

across regions and crops• Steeper decline in per

capita land availability• Shrinking of farm size.

Social Sector Development• Slow progress• Significant regional,

social and gender disparities

• Low level and slow growth in public expenditures particularly on health

• Privatization of Health and Education

Reforms in 11th PlanBharat Nirman Yojana

IrrigationRural Roads, Electrification, Water

Supply, Housing

Telephone Connectivity

Prospects : 12th Plan

Create a regulatory

environment

Introduce employment

linked incentives

Encourage PPP projects in key priority areas

Encourage FDI

Increase government spending on

healthcare sector

Review the current labor law requirements

making them less onerous and flexible

Introduce comprehensive measures to include

socially and economically weaker sections

Group’s Take

Serious steps to improve social indicators

Infrastructure and governance key for heading towards continuous growth

Various factors determines the correlation between globalization and inequality distribution and it is not a necessary linear relation

PPP and encouraging FDI are the way forward for development

Investment and not subsidies and doling out should be encouraged