Growth story globalization and inequality

Growth story globalization and inequality

• 1.
  GROWTH STORY: GLOBALIZATION AND INEQUALITY
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  Agenda • India’s GrowthStory • Globalization • Inequality • Correlation between Globalization and Inequality • Inclusive growth • Excerpt’s from XIth and XIIth Five- Year Plan • Group’s take
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  India’s Growth Story Era •Pre-Liberalization • Post-Liberalization Global Scenario Domestic Scenario
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  Pre-liberalization era Closed systeminspired 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
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  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 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
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  Post-liberalization era Crushed internationalinvestor 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 18-19 Under 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%)
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  Impact on Economic India's growth rates in GDP India's growth rates in GDP Indicators 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
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  Agricultural GDP Growth Rate of Inflation (WPI) - Average Agricultural GDP Growth Rate of Inflation (WPI) - Average 13.7 12.6 10.1 10.3 10.1 9.6 6.22 6.5 6.6 8.4 8 8.1 5.1 5.1 4.2 5.8 7.2 4.1 6.5 6.5 5.5 4.8 4.6 4.4 4.4 3.9 3.3 3.6 3.4 -0.1 -0.4 0.1 -0.1 0.4 -1.85 -1.1 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 -2.8 -8 *Reference : http://planningcommission.nic.in/data/datatable/in dex.php?data=datatab & *IMF
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  Global Scenario India hasstarted 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
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  Comparing India to theWorld
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  If Uttar Pradeshwere 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
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  Globalization at a Glance
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  The growth story… Theintegration 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
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  Globalization… In 2000 theIMF 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
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  Conflicting views onglobalization 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
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  Trade liberalizations vsFinancial 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
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  Trade Globalization • Worldtrade 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.
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  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.
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  Gini Index asa tool The 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
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  Inequality
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  Economic inequality Economic inequalitycomprises of all disparities in the distribution of economic assets and income. Inequality exists among: • Individuals • Groups of people • Countries Inequality is most often measured using the Gini coefficient • The Gini coefficient (0-1): A value of 0 expressing perfect equality and a value of 1 maximal inequality.
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  Inequality across nations
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  Causes of inequality Market Innovative Globalisation technology Inequality Racism/ Taxes Gender Innate abilities
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  Inequality • High incomegroups 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.
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  Mitigating Factors Government Market driven Sponsored • Education • Propensity to • Progressive spend taxation • Unionization • Minimum wage • Subsidization
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  Effect of liberalisation(1991)
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  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
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  Impact of tradeliberalization 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
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  Impact of financialglobalization 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
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  Why to thrivefor 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 resources Economic • Reduction in social and political instability • Reduction in opposition to reforms • Limited role of money in politics Political • Promotion of societal cohesion
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  Globalization and Inequality
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  Correlation between Globalization and Inequality Globalization and Inequality Direct Inverse (Anti-Neoliberal (Neoliberal View) View)
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  Anti-Neoliberal View International LaborOrganization Real wages Wage share Increasing grew at only declined faster wage 1.9% when the in countries inequality overall with greater among the economy grew openness to working at 4% foreign trade population
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  Change in Inequalitylevels
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  Anti-Neoliberal View (cont..) JosephStiglitz (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
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  Neoliberal View World Bankin 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
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  Neoliberal View (cont..) Competitivecumulative 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
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  Impact of Globalizationon 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
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  Inclusive Growth
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  Inclusive Growth Defining theconcept Significance of Inclusive Growth Steps to achieve Inclusive Growth: 11th Plan Future prospects and policy changes: 12th Plan
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  Sustainable Development Equity isthe guiding principle of development Reinforced by “double dividend” for the poor Major policy concerns in implementation • Redistribution of power and resources • Trade-offs between equity enhancing and efficiency increasing • Policy for growth versus enhancing equity
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  Inclusive Growth Poverty Reduction Rapid Growth • Perpetual •Broad-based Inclusive •Include max labor force Growth Sustainable Long Term Development Growth
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  Towards Inclusive growth:11th Plan Goals Reforms Gaps - Structural - Poverty Reduction - Bharat Nirmaan Yojna bottlenecks in - Reduction in - MNREGA agriculture sector Unemployment - Food Security Act - Health goals unmet - Agricultural and -Right to Education Act - Failure to achieve Social Sector - Financial Inclusion target in power Development generation
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  Problems with: Poverty & Agriculture Social Sector unemployment • 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.
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  Reforms in 11thPlan Bharat 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
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  Prospects : 12thPlan Create 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
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  Group’s Take Serious stepsto 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