Pre-liberalization eraClosed system inspired by the economy of the SovietUnion 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 Pakistan - 5%, Low income growth Per capita income Indonesia-9%, South rate -3.5% averaged-1.3% Korea-10%, Taiwan-12%Only four or five licenses would be given for steel, electrical power andcommunications. License owners built up huge powerful empiresA huge public sector emerged. State-owned enterprises made large lossesPoor infrastructure investment because of the public sector monopolyLicense Raj established the "irresponsible, self-perpetuating bureaucracy that stillexists throughout much of the country" and corruption flourished under this system
Post-liberalization eraCrushed international investor Liberalization, Privatization confidence on the economy and Globalization (LPG model)lead to serious economic BOP was implemented crisis in 1991 Disinvestment in public sector firms. Devaluation of Indian currency by 18-19Under the privatization scheme, most of percent against major currencies in the the public sector undertakings have international foreign exchange market been/ are being sold to private sector mainly to resolve the BOP crisis Reforms Allowing Foreign Direct Investment (FDI) Dismantling of The Industrial across a wide spectrum of industries and Licensing Regime encouraging non-debt flow -- Insurance (upto 26%); defense industry (upto 26%)
Impact onEconomic Indias growth rates in GDP Indias growth rates in GDPIndicators 9.5 9.6 9.3 8 8.52 8 8.5 7.3 7.5 7.5 6.4 6.8 5.4 5.7 5.81 4.3 4.35 3.84 1.4 Industrial GDP Growth Industrial GDP Growth 11.6 12.2 10.2 10.3 9.7 9.7 8 7.9 7.1 6.5 6.6 6.6 5.2 4 4.3 4.8 3.6 4.4 *Reference : http://planningcommission.nic.i -0.6 n/data/datatable/index.php?da ta=datatab
Global ScenarioIndia has started falling behind everyother South Asian country (except ofPakistan) in terms of socialindicators, even as it is doing so well interms of per capita income Bangladesh - IndiaPer capita income 60 per cent higher thanBangladesh in 1990, and 98 per cent in2010. But felt behind during the sameperiod in life expectancy, childsurvival, fertility rates, immunization ratesand even in mean years of schooling.Most social indicators now look better inBangladesh than in India, despiteBangladesh having barely half of India’sper capita income
If Uttar Pradesh were todeclare independence, itwould be the world’s fifthmost populous country (asthe map below shows, ithas about the samenumber of residents asBrazil. Yet its economywould only be the size ofQatar, a tiny oil-rich stateof fewer than 2m people.That makes it poor on aper person basis. DespiteIndia’s two decades ofrapid growth, UttarPradesh’s GDP per head isclose to that of Kenya
The growth story…The integration of the world economythrough the progressive globalization of trade and finance has reached unprecedented levels. It is particularly difficult to disentangle the effects of technologyand 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, Capitaland investment movements, Migration and movement of people and Dissemination ofknowledge (and technology)Theory of Comparative Advantage propounds that free access to trade is beneficial for all theparties involved (gains from trade)Thomas L. Friedman popularized the term "flat world”, arguing that globalizedtrade, outsourcing had permanently changed the worldEvolution of free trade practices led to the birth of GATT which is now known as WTOEvolution of bilateral treaties and FTAs
Conflicting views on globalizationThe debate on the distributional effects ofglobalization is often polarized between two pointsof view.One school of thought argues that globalizationleads to a rising tide of income, which raises all boatsand is consistent with Kuznet’s hypothesisOpposing school argues that although globalizationmay improve overall incomes, the benefits are notshared equally among the citizens
Trade liberalizations vs Financial liberalizationTrade liberalization and export growth are found to beassociated with lower income inequalityIncreased financial openness is associated with higherinequalityHowever, their combined contribution to rising inequalityhas been much lower than that of technologicalchange, especially in developing countries
Trade Globalization• 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.
Financial 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.
Gini Index as a toolThe Gini index captures the range between a perfectly egalitarian distribution in whichall income is shared equally (a Gini coefficient of 0) and one where a single person has allthe 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 ofhousehold consumption expenditure, whereas others are based on income surveys—adifference 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 morecommonly used in developing countries in which higher rates of self-employment inbusiness or agriculture (where income fluctuates throughout the year
Economic inequalityEconomic inequality comprises of all disparities in thedistribution of economic assets and income.Inequality exists among:• Individuals• Groups of people• CountriesInequality is most often measured using the Ginicoefficient• The Gini coefficient (0-1): A value of 0 expressing perfect equality and a value of 1 maximal inequality.
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.
Variations in Inequality 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
Impact of trade liberalization on inequality It implies that in a two country two-factor framework, increased trade openness (through tariff The principal analytical link reduction) in a developing country between trade liberalization and where low-skilled labor is income inequality provided by abundant would result in an economic theory is derived from increase in the wages of low-skilled the Stolper-Samuelson theorem 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 The opposite effect would be of the (exportable) lowskill- observed in an advanced economy intensive good for which the country has relatively abundant factors increases and so does the compensation of low-skilled workers
Impact of financial globalization on inequalityAn increase in FDI from advanced economies to developing economies couldincrease the relative demand for skilled labor in both countries, increasinginequality in both the advanced and the developing economy.In addition to foreign direct investment, there are other important channelsthrough which capital flows across borders, including cross-border banklending, portfolio debt, and equity flows.Greater capital account liberalization may increase access to financial resources forthe poor, whereas others have suggested that by increasing the likelihood offinancial crises, greater financial openness may disproportionately hurt the poor.In the context of strong institutions, financial globalization may allow betterconsumption smoothing and lower volatility for the poor
Why to thrive for equality? • All citizen are respected and treated Moral equally • Promotion of equality of opportunity • Promotion of better quality of life Social • Improved health and sanitation • Better allocation of human resourcesEconomic • Reduction in social and political instability • Reduction in opposition to reforms • Limited role of money in politicsPolitical • Promotion of societal cohesion
Correlation between Globalization and Inequality Globalization and Inequality Direct Inverse(Anti-Neoliberal (Neoliberal View) View)
Anti-Neoliberal ViewInternational Labor Organization Real wages Wage share Increasing grew at only declined faster wage1.9% when the in countries inequality overall with greater among theeconomy grew openness to working at 4% foreign trade population
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, NobelPrize winner )• Domination of unskilled labour force in poor developing countries leads to minimal benefits of globalization
Neoliberal ViewWorld 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 locationsGlobalization helping to equalize wages forthe similar productivity levels – Surjeet Bhalla
Neoliberal View (cont..)Competitive cumulative expenditure distribution ofagricultural labour households suggests a smallimprovement in their living standardsNo evidence of growing disparity between various groupsWelfare schemes contributing to the bargaining power
Impact of Globalization on InequalityChannels Through Which Globalization AffectsInequality• Trade Openness and Stolper-Samuelson theorem• Non-Competing goodsOther factors• Technology factor• Access to Education• Sectoral Share of Employment
Inclusive GrowthDefining the conceptSignificance of Inclusive GrowthSteps to achieve Inclusive Growth: 11th PlanFuture prospects and policy changes: 12th Plan
Sustainable DevelopmentEquity is the guiding principle of developmentReinforced by “double dividend” for the poorMajor policy concerns in implementation• Redistribution of power and resources• Trade-offs between equity enhancing and efficiency increasing• Policy for growth versus enhancing equity
Inclusive Growth PovertyReduction Rapid Growth • Perpetual •Broad-based Inclusive •Include max labor force Growth Sustainable Long TermDevelopment Growth
Towards Inclusive growth: 11th Plan Goals Reforms Gaps - Structural- Poverty Reduction - Bharat Nirmaan Yojna bottlenecks in- Reduction in - MNREGA agriculture sectorUnemployment - Food Security Act - Health goals unmet- Agricultural and -Right to Education Act - Failure to achieveSocial Sector - Financial Inclusion target in powerDevelopment generation
Problems with:Poverty & Agriculture Social Sectorunemployment • Yield growth Development• More than 300 million • Land and water problems • Slow progress below poverty line • Vulnerability to world • Significant regional, social• 80% of the poor are from commodity prices and gender disparities rural areas • Farmers’ suicides • Low level and slow growth• Poverty concentrated in few • Disparities in growth across in public expenditures states regions and crops particularly on health• Concentrated among • Steeper decline in per capita • Privatization of Health and agricultural laborers, casual land availability Education workers, SCs & STs • Shrinking of farm size.
Reforms in 11th PlanBharat Nirman Food Security Right to Financial MNREGA Yojana Act Education Act Inclusion Enhancing livelihood security Targeted Public Distribution Free and Compulsory No structured payment Irrigation of households System education (6-14 yrs) system Rural Providing at least one Credit to weaker section at Roads, Electrification, Water hundred days of guaranteed Antodaya Anna Yojana No Capitation fees exorbitant rates Supply, Housing wage employment Integrated Child Reduce the productivity of Telephone Connectivity No Screening for admission Development Scheme liquid fund specifies Infrastructure, teaching Mid Day Meal Scheme standard, student teacher Endanger social security ratio and formation of school management committee
Prospects : 12th PlanCreate a regulatory Introduce employment Encourage PPP projects in environment linked incentives key priority areas Review the current labor Increase government law requirements making Encourage FDI spending on healthcare them less onerous and sector flexible Introduce comprehensive measures to include socially and economically weaker sections
Group’s TakeSerious steps to improve social indicatorsInfrastructure and governance key for heading towards continuous growthVarious factors determines the correlation between globalization andinequality distribution and it is not a necessary linear relationPPP and encouraging FDI are the way forward for developmentInvestment and not subsidies and doling out should be encouraged