U.S. chairmanship in the Arctic Council will receive a needed boost from the upcoming conference in Anchorage, which President Barack Obama is due to address on August 31. His message is predictable: He’ll talk about climate change. Russia has received an invitation to the conference, but decided to send a fairly low-level delegation. Russia certainly has important interests in the Arctic region and even higher ambitions, but its Arctic agenda has little to do with climate change. Instead, it can be best described in the old-fashioned and often quite unhelpful terms of geopolitics.

An Arctic superpower stymied

By just about any measure, Russia is an Arctic superpower. It has an enormous coastline, a significant number of people living above the Arctic Circle, six nuclear-powered icebreakers in the region, and industrial centers in Nikel and Norilsk (which produce a high volume of industrial pollution). 

Russia used to play up this status, staging large-scale annual conferences, graced by President Vladimir Putin’s presence. Not anymore, and it is not just the fallout from the Ukraine crisis that has poisoned that climate of cooperation. Russia has experienced two major setbacks in its vision for “conquering” the High North.

The first setback came from the seriously reduced value of the natural resources that are presumed to be hidden in the depths of the Arctic shelf. Putin’s lieutenants—including Nikolai Patrushev, the secretary of the Security Council of Russia—loved to engage in speculations about the fierce competition for access to the rich oil and gas fields that were certain to be discovered there. The problem is not only that the U.S. and EU sanctions have made it impossible for the state-owned oil giant Rosneft to continue the exploration of Arctic seas. (Sanctions prevent the import of technology and know-how, and U.S. companies—such as Exxon Mobil—who had worked in partnership with Rosneft have left.) The real problem is that estimated production costs and low oil prices add huge liabilities to any off-shore project. 

The second disappointment has to do with international maritime transit along the Northern Sea Route (called Sevmorput in Russian). Many politicians in Moscow expected that climate change would shrink the Arctic ice, increase the commercial viability of a shorter connection between China and Europe, and provide useful employment for Russian icebreakers. The problem is that the old Soviet infrastructure along the Sevmorput is so rotten that navigation in the difficult northern waters remains too risky. Egypt, in the meantime, has swiftly constructed the New Suez Canal, which offers a far more reliable route for tanker and container traffic.

Military means for geopolitical ends

As the economic rationale for high political attention to the Arctic disappears, Moscow focuses on the game it knows best: military power plays. As the crowd of environmentalists and climate-concerned politicians prepare to gather in Anchorage, a Russian navy squadron executed a large series of exercises along the Sevmorput. Although the ships are 30-plus years old and their hulls have no ice protection, Russia is determined to show readiness to deploy the newly-created Arctic brigade to any desolate shore in the northern seas. This follows the revised Maritime Doctrine that Putin approved a month ago, which places a heavy emphasis on protecting Russia’s interests in the Arctic.

It takes a lot of strategic imagination to construct threats to these interests. Aleksandr Bortnikov, the director of the Federal Security Service (FSB), has argued that there is an urgent need to upgrade defenses against terrorist attacks. In fact, the only challenge Russia has encountered in the area was the Greenpeace protest against Gazprom’s drilling platform in the Pechora Sea in September 2013. The FSB launched a swift operation to arrest the eco-activists and their ship Arctic Sunrise on the charge of piracy. The permanent court of arbitration in The Hague then ordered Russia to pay damages for that harsh arrest, much to the consternation of Russian authorities. 

What Moscow really worries about is the examination of its claim for expanding the continental shelf under its control all the way to the North Pole (a claim currently sitting with the U.N. Commission on the Limits of the Continental Shelf, or CLCS). After many years of preparation, this revised claim was finally submitted on August 3, and the success is a matter of high political prestige. But it is very doubtful that demonstrations of military might would help that process. Further complicating matters is that Denmark has submitted an overlapping claim and Canada is finalizing its own—and the CLCS cannot make a recommendation on competing claims unless parties agree on a compromise.

Russia appears firmly set on its course of militarization of the Arctic. In a region where economic activities are mostly declining and where environmental challenges are on the rise, Russia appears to be engaged in a one-sided arms race. It is glaringly obvious to observers outside the Kremlin that Russia’s severe economic recession makes this course unsustainable. Russia may aspire to Arctic greatness, but there is little there to achieve and Russia is unlikely to be able to achieve it. 

       

Event Information

Register for the Event

Japan’s presence in the Arctic is not new, but it has been limited mostly to scientific research. Japan has stepped up its engagement after it gained observer status to the Arctic Council and appointed its first Arctic ambassador in 2013. However, Japan has yet to flesh out a full-blown Arctic strategy that identifies the range of its national interests in the polar region and actionable strategies to achieve them. The Arctic offers Japan an opportunity to expand cooperation with the United States in an uncharted area, poses hard questions on how to interact with Russia in the post-Ukraine era, and creates the interesting proposition of whether China and Japan can cooperate in articulating the views of non-Arctic states.

On October 19, the Center for East Asia Policy Studies at Brookings hosted a panel of distinguished experts for a discussion on what components should be included in Japan’s Arctic strategy, ranging from resource development, environmental preservation, and scientific research, to securing access to expanding shipping lanes and managing a complex diplomatic chessboard. 

Join the conversation on Twitter using #JapanArctic

Video

• Charting Japan's Arctic strategy

Event Materials

• taisaku ikeshima presentation

       

The growth of suburban poverty over the past two decades raises questions about the ability of nonprofit organizations to adapt to this relatively new geography of metropolitan poverty. These organizations play multiple roles, including providing basic safety net services, connecting residents to new opportunities, and serving as advocates (and sometimes as organizers) for low-income communities.

Although federal, state, and local governments are often the primary funders of nonprofits, governments do not often take the lead in creating new organizational capacities or in coordinating capacity across political jurisdictions. In many regions, the local philanthropic community has become aware of these gaps in services for the poor and has sought to assist the nonprofit community in building capacity and expanding activities. Local foundations are experimenting with various strategies to address the growing dispersion of poverty.

This analysis combines an original data set of foundation grants for social services with in-depth interviews to assess the role of foundations in supporting the suburban social safety net in the Atlanta, Chicago, Denver, and Detroit regions. It finds that:

Suburban community foundations in the four regions studied are newer and smaller than those in core cities, despite faster growth of suburban poor populations. In the regions studied, most suburban community foundations began operating in the 1990s, and have not accumulated significant asset bases. Some larger city-based foundations have taken a regional approach, but face restrictions on the extent to which they can address growing need in poor suburban communities.

The share of foundation dollars targeted to organizations serving low-income residents varies widely across regions, but relatively few of those dollars are devoted to building organizational capacity in the suburbs. Chicago saw the largest share of foundation grant dollars go to organizations serving low-income people (60 percent), while Atlanta posted the lowest share (19 percent). Detroit was the only region where total grants to suburban-based human service providers were relatively comparable to their city-based counterparts.

Suburbs with high rates of poverty have substantially fewer grantees and grant dollars per poor person than either central cities or lower-poverty suburbs. Though metropolitan Atlanta has the highest rate of suburban poverty among the regions studied, it has the lowest rate of suburban grant-making per poor person. Denver’s results are a mirror image of Atlanta’s, with the lowest poverty rate and highest suburban grant-making per poor person.

Four types of strategies to build and strengthen the capacity of the suburban safety net are showing promise in these regions. Each region is engaging in four types of capacity building strategies: supporting existing regional organizations, creating new regional organizations, supporting regional networks, and establishing new suburban community foundations.

Downloads

• Download the Full Paper
• Media Memo

       

       

This inaugural issue of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, includes papers on the trade policies that would do the most to enhance India’s future growth prospects, analyses of recent developments in India’s balance of payments and an examination of the performance of the Indian banking system. The editors' summary appears below, and you can download a PDF version of the volume, purchase a printed copy, or access individual articles by clicking on the following links:

Download India Policy Forum 2004 - Volume 1 (PDF) »
Purchase a printed copy of India Policy Forum 2004 - Volume 1 »

Download individual articles:

• India's Trade Reform, by Arvind Panagariya
• Should a U.S.-India FTA Be Part of India's Trade Strategy, by Robert Z. Lawrence and Rajesh Chadha
• Foreign Inflows and Macroeconomic Policy in India, by Vijay Joshi and Sanjeev Sanyal
• India's Experience with a Pegged Exchange Rate, by Ila Patnaik
• Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy, and Gradual Reforms, by Kenneth Kletzer
• Banking Reform in India, by Abhijit Banerjee, Shawn Cole and Ester Duflo

 

---

EDITORS' SUMMARY

The India Policy Forum (IPF) is a new journal, jointly promoted by the National Council of Applied Economic Research (NCAER), New Delhi, and the Brookings Institution, Washington, D.C., that aims to present high-quality empirical analysis on the major economic policy issues that confront contemporary India. The journal is based on papers commissioned by the editors and presented at an annual conference. The forum is supported by a distinguished advisory panel and a panel of active researchers who provide suggestions to the editors and participate in the review and discussion process. The need for such real-time quantitative analysis is particularly pressing for an economy like India’s, which is in the process of rapid growth, structural change, and increased involvement in the global economy. The founders of the IPF hope it will contribute to enhancing the quality of policy analysis in the country and stimulate empirically informed decisionmaking. The style of the papers, this editors’ summary, and the discussants’ comments and general discussions are all intended to make these debates accessible to a broad nonspecialist audience, inside and outside India, and to present diverse views on the issues. The IPF is also intended to help build a bridge between researchers inside India and researchers abroad, nurturing a global network of scholars interested in India’s economic transformation.

The first India Policy Forum conference took place at the NCAER in Delhi on March 26–27, 2004. In addition to the working sessions, the occasion was marked by a public address given by Stanley Fischer, vice chairman with Citigroup International and a member of the IPF advisory panel. This inaugural issue of the IPF includes the papers and discussions presented at that conference. The papers focus on several contemporary policy issues. The first two papers provide alternative perspectives on the trade policies that would do the most to enhance India’s future growth prospects in the context of ongoing developments in the global trading system. The three papers that follow are devoted to an analysis of recent developments in India’s balance of payments and their implications for the future exchange rate regime, the integration of exchange rate policy with other aspects of macroeconomic policy, and capital account convertibility, respectively. The sixth paper is devoted to an examination of the performance of the Indian banking system and the implications of the dominant role of government-run banks.

India's Trade Reform, by Arvind Panagariya

The first paper, by Arvind Panagariya, provides a broad review of India’s external sector policies; the impact of these policies on trade flows, efficiency, and growth; and the future direction trade policies should take. Since trade policies are a means to an end, namely faster growth and improved efficiency, and since trade policies support other domestic policies, Panagariya’s review necessarily ranges into these areas as well. Finally, to place India’s performance in perspective, Panagariya makes extensive comparisons throughout between Indian and Chinese outcomes over the past two decades (1980–2000), a period when both economies have chosen to reintegrate into the world economy.

India’s growth experience since 1950 falls in two phases. The first thirty years were characterized by steady growth of around 3.5 percent; thereafter growth has tended to stay in the 5 to 6 percent range. Panagariya links this differential growth performance with the imposition and subsequent relaxation of microeconomic controls, particularly in the external sector. In turn he divides these external sector policies into three phases. Between 1950 and 1975 the trend was toward virtual autarky, particularly after a balance of payments crisis in 1956–57. This was succeeded by a period of “ad hoc liberalization” starting around 1976, when reform of quantitative restrictions on trade was complemented by deregulation of industrial licensing in certain sectors. A further balance-of-payments crisis in the period from late 1990 to early 1991, concurrent with a general election, provided the background for a switch to deeper and more systematic liberalization, which, in fits and starts, continues today.

In the merchandise trade area the focus of reform has been to reduce tariff levels, particularly on nonagricultural goods. This has been done by gradually reducing the peak rate and reducing the number of tariff bands. In 1990–91 the peak rate stood at 355 percent, while the simple average of all tariff rates was 113 percent. By early 2004 the peak rate on individual goods was down to 20 percent, though there were notable exceptions, such as chemicals and transport equipment. Similarly, there has been less than ideal progress in reducing end-user and other exemptions. In nonindustrial areas there has been substantial liberalization of trade (and investment) in services, but following the OECD example, less in agriculture.

Panagariya next reviews the impact of this liberalization on trade flows, on efficiency, and on growth, in many cases using China as a benchmark. India’s share in world exports of goods and services—which had declined from 2 percent at Indian independence in 1947 to 0.5 percent in the mid-1980s—bounced back to 0.8 percent in 2002, implying that for roughly twenty years India’s trade has grown more rapidly than world trade. In addition, the deeper reforms of the 1990s yielded a pick-up of almost 50 percent over the previous decade, from 7.4 percent to 10.7 percent. Encouraging though these numbers are in light of India’s past performance, they pale in comparison with the Chinese record over the same period. Aside from any issues that may arise in the measurement of Chinese GDP at a time of rapid institutional and economic change, the combined share of exports and imports of both goods and services rose in China from 18.9 percent in 1980 to 49.3 percent in 2000, according to World Bank data. For India, the comparable numbers were 15.9 percent (in 1980) and 30.6 percent (in 2000).

The increase in India’s trade intensity has been accompanied by significant shifts in composition. The most dramatic has been the increased share of service exports in the 1990s. Within industry, exporting sectors with above-average growth tended to be skill- or capital-intensive rather than labor-intensive, while on the import side the share of capital goods imports declined sharply. In the area of services, rapid growth was exhibited by software exports and recorded remittances from overseas Indians. However, tourism receipts remain below potential. With regard to trade partners, the main shift over the 1990s was a move away from Russia toward Asia, particularly developing Asia. An interesting recent development has been the rapid expansion of India’s trade with China.

Panagariya then reviews the evidence on the impact of liberalization on static efficiency and on growth. One common approach is to use a computable general equilibrium (CGE) model to estimate the effects of the removal of trade distortions. The one study cited estimates the impact as raising GDP permanently by 2 percentage points. Additional domestic liberalization could raise this figure to 5 percentage points. Panagariya argues, however, that such models miss some key sources of gains. He cites two in particular: the disappearance of inefficient sectors and improvements in product quality. In addition, disaggregated analysis at the five-digit SITC level reveals far more dynamism in product composition of both exports and imports than is revealed at the two-digit level. This suggests greater gains from trade and improved welfare from enhanced choice than is captured in more aggregate models.

The links between liberalization and aggregate growth—or growth in total factor productivity (TFP)—have been controversial both in India and elsewhere in the emerging economies of Asia. In the case of India, the focus has been almost exclusively on manufacturing. After reviewing several studies, which admittedly differ in methodology and data quality, Panagariya judges that the weight of the evidence indicates that trade liberalization has led to productivity gains. Notwithstanding this reasonably positive assessment, Panagariya reminds us that overall, Indian industry’s performance in the 1980s and 1990s has been pedestrian, particularly compared with that of services.

The poor performance of Indian industry and the stronger growth performance of Chinese industry form the backdrop for Panagariya’s final section, on future policy. He discusses four issues: domestic policies bearing on trade; autonomous liberalization; regional trade agreements; and India’s participation in multilateral negotiations. With regard to the first, the central question for Panagariya is why Indian industry’s response to liberalization has been more sluggish than China’s. Panagariya attributes this in part to differences in economic structure but also to differences in the two countries’ domestic policies. He argues that it is easiest to expand trade in industrial products, and it is easier to do so if the industrial sector represents a large share of national value added. As far back as 1980, the share of industry in China was 48.5 percent, while in India it was half that, at 24.2 percent. Two decades later things are not very different. Panagariya makes a further interesting point: a relatively small industrial sector also reduces the capacity of the economy to absorb imports, leading to a tendency toward exchange rate appreciation (although even China has not been immune from this tendency). He concludes that it is imperative to stimulate industrial growth and cites reform in three areas as being essential: reduction of the fiscal deficit; reduction and ultimately elimination of the list of manufactured products “reserved” for small-scale industry; and reform of the country’s labor laws, which make reassignment or retrenchment of workers prohibitively difficult in the so-called formal or organized sector.

Turning next to autonomous trade reform, Panagariya is critical of the view, widely held in India, that the tariff structure ought to favor final goods over intermediates. He also notes that the current tariff structure remains riddled with complexity. He urges the authorities to move quickly to a single uniform tariff of 15 percent for nonagricultural goods and to move to a uniform tariff of 5 percent by the end of the decade. With regard to agriculture, Panagariya points out that India stands to gain from autonomous tariff liberalization given its potential as an agricultural exporter. He also addresses the issue of “contingent protection,” wherein India’s liberal use of antidumping regulations has clearly had protectionist intent. Panagariya urges changes in the antidumping procedures currently in place and also greater use of safeguard measures, as they are applied on a nondiscriminatory basis to all trading partners.

While India has traditionally taken comfort in a multilateral rule-based system of international trade, it has more recently embarked on an ambitious program of regional trade negotiations. It has signed free trade area (FTA) agreements with Sri Lanka and Thailand and is in the advanced stages of negotiating an FTA with Singapore. Panagariya analyzes the global, regional, and domestic factors that have brought about this shift in strategy—essentially the weakening of the U.S. commitment to multilateral negotiations, together with political imperatives. Panagariya observes that for a relatively protected economy, trade diversion and the associated revenue loss should be important concerns. He is also concerned that preoccupation with FTAs diverts attention from both unilateral liberalization and multilateral negotiations, each of which yields greater return for the effort expended. However, Panagariya concedes that there is a strategic case for FTAs, both to exert leverage in the multilateral sphere and to create a template that reflects India’s interests in future bilateral and multilateral negotiations. In this context he is critical of the template developed in the agreement on the South Asian Free Trade Area (SAFTA), which, in his view, is cluttered with many nontrade issues. In the specific case of a U.S.-India FTA, he believes that there is a strong case for an agreement in services, with mutually beneficial exchange of market access.

The paper ends with a discussion of India’s interests in ongoing multilateral trade negotiations. Panagariya’s main point is that India has a strong interest in successful conclusion of the Doha Round and could agree to the U.S. proposal aimed at eliminating tariffs on industrial goods by 2015. As noted before, India also has interests in improved market access in agriculture; given the considerable water in its bound tariffs, some concessions should be possible, particularly if accompanied by reductions in subsidies by rich countries.

Should a U.S.-India FTA Be Part of India's Trade Strategy, by Robert Z. Lawrence and Rajesh Chadha

The 1990s and the new millennium have seen a massive proliferation of preferential trade arrangements (PTAs), which typically lead to free trade among two or more countries, as, for example, under the North American Free Trade Agreement (NAFTA). Until recently, Asian countries had more or less stayed away from these arrangements, but this is changing rapidly, with many countries in the region now forging free trade areas. In their paper, Robert Lawrence and Rajesh Chadha assess the likelihood and benefits of the negotiation of a free trade area between India and the United States. Like Panagariya, Lawrence also embeds his discussion of India’s trade policy within the framework of the larger Indian reform effort.^[1] Following Ahluwalia, he characterizes Indian reform since 1991 as incremental, not radical.^[2] While there has been deepening consensus about the broad direction of reform within the policy elite, excessive clarity on endpoints and on the pace of transition is seen to be politically risky. Trade policy reform has been an important part of this liberalization effort, and it has been similarly characterized by a clear direction but fitful implementation and shifting promises as to endpoints.

Lawrence accepts that this strategy has been relatively successful in producing steady growth without major policy reversals or financial crises over the last decade. Yet, like Panagariya, he notes that trade reform is a job only half done. India’s tariff rates remain among the world’s highest, and there remain significant barriers to foreign investment. Within India, there continues to be political resistance to liberalization. Lawrence asks what the best trade and reform strategy for India is now, given the tasks yet to be accomplished.

Lawrence articulates three options available to India at this time: continued incremental unilateralism dictated, as in the past, by domestic concerns and feasibility; more active engagement with multilateral negotiations through the World Trade Organization (WTO); and what he calls a multitrack approach, whereby deeper bilateral free trade agreements complement the first two channels. Within this larger context the specific question he explores in depth is what role might be played by an FTA between India and the United States. He recognizes that consideration of such an FTA is at best at a nascent stage in official circles and that it is far from being an idea whose time has come. Nonetheless, his core thesis is that given India’s domestic reform goals, a multitrack approach centered on a U.S.-India FTA would be superior to excessive reliance on the WTO, given likely outcomes under the ongoing Doha Round. This is the argument that the paper attempts to substantiate.

Lawrence first considers a purely defensive motive for such a FTA. From this perspective, the key issue is to establish a legal and institutional framework for keeping trade in information technology (IT) services free. Noting the rapid growth in India’s export of such services, Lawrence cites studies that suggest that this trade is still in its infancy. Given that the United States is currently the destination of two-thirds of India’s IT services exports—and that this share could well be maintained—trade between the United States and India has the potential to become one of the most dynamic examples of trade in global commerce.

Will this growth be allowed to take place? Protectionist pressures in the United States already are strong. Outsourcing is headline news in the United States, and federal and state governments are taking politically visible stands to restrict the practice under government contracts. While some of this is undoubtedly election year politics, preserving access for India in the U.S. market is a genuine challenge. Lawrence explores various options available to India to preserve its access, including through the General Agreement on Trade in Services (GATS) agreement within the WTO. He notes that GATS operates on a positive list approach, which can create some ambiguity as to what forms of market access have been bound. By contrast, services liberalization in U.S. bilateral agreements already uses a negative list approach: trade is allowed unless it has specifically been prohibited.

Lawrence then explores the possibility, from the U.S. perspective, of an FTA with India. He notes that the United States first moved away from exclusive reliance on multilateral negotiations as far back as the 1980s, when it signed FTAs with Canada and Israel, followed by NAFTA in 1993. Under the Bush administration the pace of negotiation of bilateral agreements has accelerated dramatically. Agreements with Chile, Singapore, and Jordan have been implemented; those involving the Central American Free Trade Area (CAFTA), Morocco, and Australia have been completed; and numerous others are either under active negotiation or planned.

In this environment Lawrence believes that an FTA with India would be seen by the U.S. authorities as being of great strategic interest in the larger U.S. negotiating strategy but also politically difficult to achieve, given the current mood in Congress. But he is skeptical of the possibility that such an agreement could be restricted to services alone—as proposed, for example, by Panagariya and by a recent task force of the Council on Foreign Relations. The United States is unlikely to forgo the opportunity of obtaining preferential access for the exports of its goods to the Indian market. In addition, dropping all goods trade in an agreement with India would create a difficult precedent for the United States in its other FTA negotiations, in which, with few exceptions, there have not been sectoral opt-outs.

Accordingly, in his discussion Lawrence deals with the case for a comprehensive U.S.-India FTA with most of the features of those that the United States already has concluded. These include a negative list for services; investment provisions with a few sectoral exclusions; full national treatment for U.S. companies; intellectual property rules that might be more comprehensive than those in the WTO; and additional provisions relating to labor, environmental standards, technical barriers, and government procurement. While the phase-in periods may differ for the two sides, once the agreement was fully implemented (generally in fifteen years), the obligations would be symmetric.

Lawrence readily concedes that willingness to sign an FTA agreement of this scope with the United States would be a radical departure for India in a number of respects. While much Indian trade liberalization has been unilateral, India has so far been a strong advocate of multilateral trading rules, but there too its efforts have concentrated on obtaining special and differential treatment for developing countries. As Panagariya has also noted, India has only lately entered the game of bilateral FTAs, so far with countries in Asia, but even in terms of goods trade these have not been comprehensive. A U.S.-India FTA would have major implications for India’s trade and domestic policies. It is the positive (or offensive) case for such a radical shift that Lawrence next examines.

He starts by offering some hypotheses on the political economy of liberalization. At the beginning, an opportunistic and piecemeal approach may be necessary to create constituencies for liberalization. But unilateralism carries the risk of reversal, and such policy uncertainty can inhibit the private investment decisions needed to shift the economy in the direction of its comparative advantage. Trade agreements, whether bilateral, regional, or multilateral, can impart credibility to commitments by the home government, making it more likely that liberalization will be successful. Such enhanced credibility is not costless, however. In contrast to an incremental approach, a comprehensive agreement means that many political battles have to be conducted simultaneously. This drawback can be offset by the fact of reciprocity, which can be used to develop coalitions of exporters who favor the trade reform. A further set of allies is provided by proponents of domestic reform, who can argue that the domestic reforms necessary for domestic growth can also deliver improved access to international markets. Lawrence believes that such a strategy was followed by the Chinese in connection with their accession to the WTO.

If these are some of the benefits of comprehensive reciprocal agreements, the question of what type of reciprocal agreements, multilateral or bilateral, remains. This is the choice addressed by Lawrence in the remainder of the paper. In making his assessment, Lawrence uses as a yardstick the impact of each of the two routes in assisting India to undertake changes in its own interest while avoiding constraints that have the potential to damage its welfare.

In order to assess the impact of a U.S.-India FTA, Lawrence examines some of the FTAs that the United States has recently negotiated. His review makes it clear that the institutional changes needed in the Indian economy would indeed be deep but in most areas they would prod Indian policymakers to move in directions that are inherently desirable. A particular concern of Indian policymakers is the introduction of labor and environmental standards through an FTA, and Lawrence clears up several misconceptions in this area. Recent bilateral agreements place the emphasis on each government enforcing its own domestic environmental and labor laws and not weakening those laws or reducing protections to encourage trade or investment. While these obligations are backed by the dispute settlement provisions of the agreements, trade measures may not be used to retaliate. On balance, implementing a U.S.-India FTA at this time would probably help to bolster and accelerate many dimensions of economic reform, but Lawrence notes that the benefits depend crucially on taking a range of complementary actions. Failure to do so could lead to conditions that were worse than before.

Lawrence then examines whether a successful conclusion to the Doha Round could deliver equivalent benefits to the cause of Indian reform. In so doing he notes that those who argue for exclusive reliance on multilateral liberalization compare actual FTAs with an idealized version of multilateral liberalization. But actual achievement under multilateral liberalization is heavily conditioned by the specific rules of trade negotiations, which may not actually result in significant domestic liberalization at all. As a developing country, India benefits from the “special and differential treatment” provisions of the General Agreement on Tariffs and Trade (GATT), while benefiting from the most-favored nation provisions of the multilateral system. An additional institutional feature is the gap between applied and bound tariffs, which is particularly large where agricultural goods are concerned. A final feature is what Lawrence (following Jagdish Bhagwati) calls “first difference” reciprocity, where the offers made by each nation are measured against their protection levels at the beginning of the round.

Taking these elements into account and reviewing the actual performance of past rounds in reducing industrial tariffs, Lawrence comes to the strong conclusion that the current WTO system actually impedes a developing country like India from using WTO agreements to support meaningful liberalization; he also believes that the diffuse reciprocity involved in the most-favored nation system is not a strong catalyst for rallying exporter interests in favor of import liberalization.

Having provisionally concluded that an FTA would be of greater assistance than exclusive reliance on multilateral negotiations, Lawrence then explores the benefits to India of blending the two approaches in what he calls a multitrack approach. In his view, a U.S.-India FTA would certainly make India a more attractive negotiating partner for third countries hoping to match the access obtained by U.S. firms. Equally, assuming that it preceded the conclusion of the Doha Round, willingness to sign an FTA with the United States would also improve India’s negotiating credibility in the multilateral sphere. India could then challenge developed countries to improve their own offers dramatically by indicating a willingness to engage in extensive multilateral liberalization itself. A comprehensive FTA with India would also be of strategic importance to the United States in its current policy of competitive liberalization. This would strengthen India’s hand in its negotiations with the United States, while strengthening the U.S. hand in negotiating with other significant but reluctant partners.

The paper ends with some quantitative welfare simulations undertaken by Lawrence’s coauthor, Rajesh Chadha of the NCAER, using a computable general equilibrium model of world production and trade developed by the NCAER and the University of Michigan. The simulations deal only with the impact of liberalization on trade in goods. The model is designed to capture the long-run impact of an agreement. More crucially, it is a real model that holds employment and the trade balance constant; as such it captures the second-round adjustments needed to restore full employment in the economy following an initial trade shock.

A U.S.-India FTA is compared first with the current situation and then with a number of counterfactuals. The results reveal that aggregate welfare gains are greatest under multilateral liberalization, next greatest under unilateral liberalization in each country, and least under a bilateral FTA, but they note that even in the last case the effects are positive. The results also point out asymmetries between the United States and India in unilateral and multilateral liberalization, given the differences in the openness of the two economies. Indian and world welfare both rise significantly when India liberalizes unilaterally, while for the United States the greatest welfare gains flow from multilateral liberalization.

Lawrence concludes that the more difficult decision facing India today is whether to opt for reciprocal approaches in lieu of the unilateral approach that it has traditionally pursued. There are gains in credibility to be achieved, but these could entail reduced policy space and require a significant agenda of complementary reform to achieve their full effect. Should India choose to pursue the reciprocal route, he suggests a U.S.-India FTA as worthy of serious consideration, precisely because of its comprehensive and deep character.

Foreign Inflows and Macroeconomic Policy in India, by Vijay Joshi and Sanjeev Sanyal

India has had a turnaround in its balance of payments in recent years, with a swing in the current account from a deficit to a surplus and rapid growth in the capital account surplus. It has used those inflows to build up substantial holdings of foreign exchange reserves that now stand at $120 billion. While the initial reserve accumulation was welcome insurance against the risk of unanticipated future outflows, the current level is adequate to meet any foreseeable challenge, and policymakers need to develop an exchange policy that goes beyond simple reserve accumulation. Should India accelerate the process of capital account liberalization, perhaps allowing the export of capital by residents? Should it allow an appreciation of the exchange rate or speed up the liberalization of the trade regime? Above all, how should the exchange policy be integrated with the broader concerns of domestic economic policy?

In their paper, Vijay Joshi and Sanjeev Sanyal provide a broad review of the external aspects of Indian macroeconomic policy over the past decade. They use that review as the backdrop for a discussion of the policy options open to India in the future, posing the question of how economic policy should respond to the continuation of the strong balance-of-payments position of recent years. In their answer, they argue in favor of a combination of accelerated import liberalization on the external side and domestic fiscal consolidation. In particular, they view trade liberalization, which provides a means of absorbing continued capital inflows without constraining the competitiveness of the export sector, as an alternative to exchange rate appreciation.

In reviewing the economic events of the 1990s, they emphasize the degree to which India relied on an extensive system of capital controls. Foreign direct investment and portfolio investment inflows were gradually liberalized and foreign investors could freely repatriate their investments, but capital outflows by residents were prohibited. Offshore borrowing and lending by Indian companies and banks were also strictly limited. The capital controls allowed Indian monetary policy to maintain a relatively fixed exchange rate regime with minimal conflict with domestic economic policy. India’s restrictive measures on the capital account, reluctance to permit short-term foreign borrowing, and strong accumulation of foreign exchange reserves allowed it to escape any serious consequences from the Asian financial crises.

By accumulating foreign reserves over the decade, India passed up the opportunity to use capital inflows to finance a larger current account deficit. Joshi and Sanyal argue that this policy imposed relatively small costs in terms of forgone investment and growth. The reserve accumulation averaged 1.2 percent of GDP annually, and even if all of the accumulation had been used alternatively to purchase investment goods, the incremental impact on economic growth would have been small. This conclusion is in sharp contrast to the claims of others that foreign reserve accumulation imposed large costs in terms of forgone growth.

Overall, Joshi and Sanyal believe that the external aspects of Indian economic policy were well executed during the 1990s. However, the ample level of foreign exchange reserves and the continuation of strong capital inflows present a more difficult policy choice going forward. The current policy of sterilized intervention in exchange markets has outlived its usefulness, and further additions to reserves will impose rising fiscal costs with few benefits. At the same time, the authors oppose exchange rate appreciation because of its negative impact on export competitiveness. An intermediate policy of continued intervention in the foreign exchange market but without any attempt at sterilization would translate into an easing of domestic monetary policy and higher growth in the short run. However, they fear that it would quickly lead to increased inflationary pressures, and the resulting rise in the real exchange rate would be as unattractive from the export perspective as outright nominal appreciation.

Instead, Joshi and Sanyal argue for a mixed strategy that combines a faster rate of import liberalization on the external side with domestic fiscal consolidation. A rise in imports would provide a means of absorbing the excess capital inflows with no loss of export competitiveness. Since India’s tariff structure is among the world’s highest, the policy would also intensify the competitive pressures on the import-competing industries and strengthen incentives to raise productivity. The constraining factor is the negative public revenue impact of reductions in tariffs, but that is consistent with greater reliance on an expanded value-added tax to meet the revenue needs of both the central government and the states.

They stress the importance of action on the fiscal side because of fear that maintaining the large deficit will crowd out investment and slow the pace of growth in future years. A combination of fiscal contraction and monetary expansion would produce lower interest rates with strong incentives for growth. The greater foreign and public saving would provide the resources necessary to support the higher rate of investment and growth.

Finally, Joshi and Sanyal reflect a strong shift in professional sentiment in their lack of enthusiasm for further liberalization of the capital account. They argue against liberalization of the restrictions on capital outflows by residents, based on the risks they pose in the event of adverse future shocks. In fact, they conclude with a willingness to use Chilean-type taxes in the event that inflows of foreign capital should intensify.

India's Experience with a Pegged Exchange Rate, by Ila Patnaik

In a paper that is largely devoted to a positive analysis of the experience with exchange rate management in India, Ila Patnaik examines the reactions of the monetary authority to the changing external environment. The exchange rate plays a central role in the economic policy of most emerging economies, as monetary policy is torn between a focus on stabilizing the domestic economy and maintaining an exchange rate that is consistent with export competitiveness. In a world of capital controls, it is possible to manage both of these goals simultaneously, but once the economy is fully open to the free inflow and outflow of capital, monetary policy must choose between the external and the internal balance. Over the 1990s, Indian monetary policy operated in a transitional phase, as it only gradually reduced its restrictions on capital account transactions. Since 1993, the external value of the rupee has been determined by market forces, but the central bank intervenes extensively to maintain a stable rate vis-à-vis the U.S. dollar. The continuation of partial controls on capital flows provides some room for an independent monetary policy.

Patnaik focuses on two periods of substantial net capital inflows that necessitated large-scale intervention by the central bank to prevent currency appreciation. The first was a relatively short episode extending from June 1993 to November 1994; the second lasted from August 2001 until at least the middle of 2004. Despite official protestations to the contrary, Patnaik’s empirical analysis demonstrates that India is best characterized as operating a tightly pegged exchange rate over the full period. Her paper explores the extent to which the focus on the exchange rate limited the operation of a monetary policy directed at stabilizing the domestic economy.

The first period began with an easing of the restrictions on inflows of portfolio capital in early 1993. The result was a sharp surge of capital inflows and private expectations of a rise in the exchange rate. However, the Reserve Bank of India (RBI) chose to purchase a large portion of the inflow to prevent appreciation. The bank also acted to sterilize a portion of the inflow, financing some purchases through the sale of government debt. However, the lack of liquidity in the bond market restricted the efforts at sterilization and led the bank to finance much of its purchases through an expansion of reserve money. It attempted to offset the inflationary effects of a rapid growth in the monetary base through a series of increases in the cash reserve ratio. However, the net result was still a significant acceleration of growth in the money supply and, at least in the early months, a decline in interest rates. Despite the small size of the external sector and the limited openness of the capital account, the episode represented India’s first experience with the partial loss of monetary policy autonomy, dictated by the need to intervene in the currency market.

The second episode, beginning in the summer of 2001, was triggered by a swing in the current account from deficit to surplus. Increased capital inflows played a significant role only in later years. Again, the RBI intervened to prevent appreciation, and the exchange rate actually depreciated slightly up to mid-2002. This time around, the market for debt was considerably more developed. The bank was able to finance nearly all of its purchases of foreign currency through the sale of government debt instruments, avoiding use of the currency reserve ratio. There was little or no acceleration of growth in reserve money, and the growth of a broad-based measure of the money supply (M3) actually slowed. However, the RBI did not attempt to hold the exchange rate completely fixed after the summer of 2002, opting instead for a small but steady appreciation. Capital inflows also began to accelerate at the same time, perhaps motivated by currency speculation.

The two episodes differ in the extent to which the RBI was able to engage in sterilizing interventions to avoid any conflict with its policies for domestic stabilization. Patnaik’s review suggests that controls on the capital account are still sufficient to permit considerable discretion in the conduct of domestic monetary policy. To date, Indian policymakers have opted to prevent the capital inflow from translating into a current account deficit. However, the sustainability of the bank’s interventions in future years is debatable because the fiscal costs of accumulating additional reserves are rising.

Liberalizing Capital Flows in India: Financial Repression, Macroeconomic Policy, and Gradual Reforms, by Kenneth Kletzer

The paper by Kenneth Kletzer offers a third perspective on India’s exchange rate regime, focusing on the issue of capital account convertibility. Should India accelerate the pace of its liberalization of capital account transactions? Kletzer views this as a particularly critical decision in light of a history of severe repression of domestic financial markets. He points to numerous international examples in which liberalization led to large financial inflows followed by equally abrupt outflows and financial crisis. In his paper, he lays out the conditions necessary to achieve a successful policy for capital account liberalization.

Kletzer begins with a review of the potential benefits and costs of capital mobility. On the benefits side, he points to five factors. First, there are gains from trade in commodities across time, just as there are gains from contemporaneous trade in goods and services. Second, international financial integration, which brings direct foreign investment, may raise the growth rate by raising productivity growth. Third, such integration allows the sharing of risk between savers and investors. Domestic residents are able to diversify risk, which may raise the saving rate. Fourth, the presence of these flows may reduce output and consumption volatility. Finally, capital account liberalization may provide a means for forcing an end to financially repressive policies. The ability of resources to move across borders in response to unsustainable fiscal or financial policies may impose discipline on public authorities.

The principal cost of an open capital account is the possibility that a crisis may occur in the form of capital flight, leading to large depreciation, large-scale bank failures, or both. For example, under a pegged exchange rate regime, a realization or expectation of monetization of public sector budget deficits that is inconsistent with the pegged rate of currency depreciation forces its abandonment sooner or later in a sudden outflow of international reserves. Such depreciations may then spill over into bank failures if the banks have large, unhedged foreign currency–denominated liabilities and home currency–denominated assets.

To date, the international empirical evidence on the growth effects of capital account liberalization for emerging markets is inconclusive. The bottom line is that countries tend to benefit from liberalization when they can better absorb capital inflows by having higher levels of human capital, more developed domestic financial markets, and greater transparency in financial and corporate governance and regulation. On the other hand, the opening of the capital account in the presence of significant macroeconomic imbalances reduces net gains and raises the prospects of subsequent crisis.

Turning to India, Kletzer notes that India had a relatively unrestricted financial system until the 1960s. Starting in the 1960s, interest rate restrictions and liquidity requirements were adopted and progressively tightened. The government established the State Bank of India, a public sector commercial bank, and went on to nationalize the largest private commercial banks toward the end of the decade. Through the 1970s and into the 1980s, credit directed to “priority” sectors constituted a rising share of domestic lending and interest rate subsidies became common for targeted industries. With the start of economic reforms in 1985, steps were taken toward internal financial liberalization, mainly in banking. The government began to reduce financial controls by partially deregulating bank deposit rates, though that step was partially reversed in 1988. However, in later years the government simultaneously began to relax ceilings on lending rates of interest. Progressive relaxation of restrictions on both bank deposit and lending rates of interest and the reduction of directed lending was under way by 1990.

Liberalization accelerated after the 1991 crisis, when important steps were taken toward external liberalization. Specifically, both direct foreign investment and portfolio investment were progressively opened. A major development was full current account convertibility of the rupee under IMF Article 8 in August 1994. In the subsequent years, sectoral caps on direct foreign investment and restrictions on portfolio borrowing and foreign equity ownership were relaxed. Currently, foreign investment income is fully convertible to foreign currency for repatriation. External commercial borrowing has been relaxed, but it is regulated with respect to maturities and interest rate spreads. Effective restrictions continue on the acquisition of foreign financial assets by residents and on currency convertibility for capital account transactions.

According to Kletzer, there remain four macro-cum-financial vulnerabilities that must be considered in evaluating the case for full capital account convertibility: high public debt and fiscal deficit; financial repression; weakness in the banking sector; and a tendency to peg the exchange rate. India’s external debt is low in relation to its foreign exchange reserves, so there is less to fear on that front.

Using two alternative measures of the real interest rate, Kletzer evaluates the sustainability of the current public debt as a proportion of GDP and concludes that without a major reduction in the primary deficit (fiscal deficit minus interest payment on the debt) it cannot be stabilized at its current level of 82 percent. Based on one measure, the current primary deficit of 3.6 percent must be turned into a primary surplus of 0.8 percent for the debt to be sustained at its current level. On the deficit, Kletzer points out that the combined central and state government budget balances understate total public sector liabilities. Unfunded pension liabilities, various contingent liabilities, and guarantees on the debt issued by loss-making public enterprises (most notably state electricity boards) must also be taken into account.

High levels of public debt and deficits have been sustained partially through financial repression, which has been a central aspect of the Indian fiscal system for decades. Capital controls provide the public sector with a captive capital market and allow lower-than-opportunity rates of interest for government debt. Kletzer estimates that the implicit subsidy to the government averaged 8.2 percent of GDP from 1980 to 1993 and 1.6 percent from 1994 to 2002. Thus the liberalization of the 1990s is clearly reflected in the substantial reversal, though not elimination, of financial repression. In the same vein, the government collected seignorage revenues that averaged 2 percent over the entire 1980–2002 period, but 1.4 percent from 1997 to 2002. The decrease in public sector revenue from financial repression is large, indicating some significant progress in financial policy reform.

Policies of financial repression hamper domestic financial intermediation and raise the vulnerability of the banking system to crisis as international financial integration increases. At the end of March 2003, according to the Reserve Bank of India, the gross nonperforming assets of the commercial banks were 9.5 percent of bank advances; taking provisions into account, this figure drops to around 4.5 percent. Directed credit to priority sectors accounted for 31 percent of commercial bank assets but about 40 percent of nonperforming assets of the banks. At 2 percent of GDP, nonprovisioned and nonperforming assets are not large. But some researchers estimate that the actual figure may be twice as large as the official one. Banks also suffer from unhedged interest rate exposure arising from the large holdings of government debt (currently 40 percent of their total assets) and the liberalization of deposit rates.

Finally, capital controls allow policymakers to manage the nominal exchange rate and influence domestic rates of interest as independent objectives of monetary policy. Past exchange rate management in India displays resistance to currency appreciation. The adoption of a floating exchange rate, albeit managed relatively tightly, reduces crisis vulnerability. The government can resist exchange rate movements while not offering any exchange parity guarantee, as under a pegged exchange rate (or crawling peg or narrow target zone). The uncertainty that is induced, especially for short-term rates of change in the exchange rate, could lead to private sector hedging against currency risk. A possible source of concern is the revealed tendency of the government to lean against exchange rate movements that could result in sudden losses of reserves and capital account reversals under an open capital account.

Kletzer concludes that the initial conditions for capital account convertibility in India are strong, with the exception of public finance. India’s very low short-maturity foreign debt exposure, low overall foreign debt, large stock of foreign reserves, and flexible exchange rate place the Indian economy in a strong position by international standards. The average maturities of foreign and public debt could be expected to fall with international financial integration, but a prospective rise in short-term debt does not in itself justify capital controls. The stock of foreign reserves exceeds the current level of short-term external debt several fold. Liberalization and further opening of the banking system requires regulatory improvement, but the present level of nonperforming assets in the banking system is not excessive in comparison with the emerging markets.

In concluding, Kletzer notes two aspects of fiscal vulnerability relevant to financial integration. First, the primary deficit and the need to amortize public debt constitute the government borrowing requirement that would need to be financed on international terms under an open capital account. Second, the banking system holds the overwhelming majority of the public debt; with international financial integration, these become risky assets. Any gain to the government from currency depreciation or rising interest spreads on public debt would be matched by losses by the banks. These holdings pose a threat to the banking system, and a capital account crisis could begin with the exit of domestic depositors. In this case, deposit insurance could reduce the exposure of the banking system to crisis. Limiting the contingent liability of the government created by deposit insurance so that it just offsets public sector capital gains requires institutional reform to ensure successful prudential regulation.

Banking Reform in India, by Abhijit Banerjee, Shawn Cole and Ester Duflo

The final paper, by Abhijit Banerjee, Shawn Cole, and Esther Duflo, addresses some of the concerns raised above about India’s domestic financial system. In comparison with its peers at similar stages of development, India has an advanced and extensive banking system, with branches throughout rural and urban areas, providing credit not only to industry but also to a significant number of farmers. As in many other developing countries, publicly held banks are by far the largest players, and financial sector reforms have become major policy goals. The authors evaluate the performance of India’s banking sector in terms of its provision of financial intermediation and its contribution to the achievement of a variety of “social goals.” They also offer a comparison of the performance of public and private sector banks.

The paper begins with an overview of banking in India, including the two episodes of bank nationalization in 1969 and 1980. Because the Indian government used a strict policy rule (based on the asset base of banks) to determine which banks were nationalized and which were left in the private sector, India offers an ideal case study in the relative performance and behavior of public and private sector banks.

A primary rationale for bank nationalization was to increase the flow of credit, both in general and to targeted “priority sectors” such as agriculture and small-scale industry. In the first section of the analysis, Banerjee and colleagues use detailed records from a public sector bank to determine whether there is “under-lending” to priority sector firms in the Indian financial system. They define under-lending as a situation in which the marginal product of capital for a firm is higher than the rate of interest it is currently paying. A change in lending regulations that increased the amount of credit issued by banks to one group of firms but not another allowed them to estimate the effect of additional credit on output and profits. They find a strong, positive effect of the change, suggesting that the firms are indeed credit constrained.

Enhancing credit supply was a primary goal of nationalization: while the performance of this public sector bank was not impressive, perhaps private sector banks fared worse? Using a regression discontinuity approach, the authors compared the propensity of public and private banks to lend to borrowers in several sectors of the economy: agriculture, small-scale industry, and the composite sector called trade, transport, and finance. They find that public sector banks did lend substantially more to agricultural borrowers than did private sector banks. Contrary to popular wisdom, however, they find that once bank size is taken into account, public sector banks lend no more to small-scale industry than do private sector banks.

Nor does bank nationalization appear to have increased the overall speed of financial development. The authors find that in the period 1980–91, nationalized and private banks of similar asset size grew at about the same rate. However, in the more liberalized period of 1992–2000, old private sector banks grew 8 percent more than public sector banks. (The lack of attention to new private sector banks is explained by the fact that there are simply not enough data at this stage to allow meaningful analysis.)

To gain further insight into under-lending and a low level of financial development, the authors again study the loan information from the same public sector bank. Under government regulations, loan officers are required to calculate credit limits on the basis of firm size (as measured by turnover) rather than profitability; though the rules do allow for some flexibility on the part of the loan officer, the authors find that in most cases loan officers simply reapproved the previous year’s limit. Because of inflation, real credit thus typically shrinks. Firms that are growing rapidly or that have profitable opportunities are not rewarded with additional credit, nor are poorly performing firms cut off.

The authors then turn to potential explanations for the reluctance of loan officers to lend. Public employees are subject to strict anticorruption legislation, and bank officers have expressed concern that if they issue a new loan that subsequently goes bad, they could be charged with corruption, denied promotion, fired, or even put in jail. The authors test this hypothesis by examining whether a corruption charge against a bank employee in a specific bank led to a reduction in overall lending by all loan officers in that bank. They find that it did: corruption charges led to a reduction in lending of approximately 3 percent compared with lending of other banks. That decline lasted approximately twenty-four months.

Critics of public enterprises are quick to point out that since employees tend not to have a stake in the performance of the enterprise, they may tend to exert less effort. For public bankers, this may mean making guaranteed safe loans to the government rather than spending time and energy on screening new clients and monitoring existing ones. To test this possibility, the authors compare how public sector banks in low- and high-growth states responded to a change in spread between lending rates and the rate at which the government was willing to borrow. They find that banks in lowgrowth states were more inclined to make “low-effort” loans to the government when the spread increased.

The final exercise was to examine the contentious issue of nonperforming assets, bank failures, and bailouts. The official rates of nonperforming loans in public sector banks tend to be higher than those in private sector banks, but because those numbers are notoriously unreliable, the authors instead compare the fiscal costs of bailing out failed private banks with the costs of recapitalizing poorly performing public sector banks. Using data starting from the first nationalization, they identify twenty-one cases of bank failure between 1969 and 2000 and compute the costs imposed on the government in rupees at 2000 prices. That sum is compared with the substantial cost of recapitalization of public sector banks in the 1990s. Controlling for size, the cost of the bank failures appears to be slightly higher than recapitalization, implying a small advantage for public sector banks. However, since recapitalization expenses are recurring, in all likelihood the public sector banks represent a greater cost to the treasury.

The authors conclude by arguing that the evidence suggests a tentative case for privatizing public sector banks. Privatization is not a panacea, however, and both public and private sector banks could benefit from significant internal reform. Liberalization and privatization should be accompanied by strong regulation to ensure the continued existence of social banking. But in net terms, the reduction in agency problems, the increased flexibility, and the reliance on private rather than public incentives to limit corruption and NPAs should make for a more dynamic banking system that is more responsive to borrowers’ needs.

---

FOOTNOTES

^[1] As indicated in the paper, Rajesh Chadha is responsible primarily for measuring the quantitative aspects of a possible India-China free trade arrangement and is not responsible for the qualitative views expressed in the paper. Accordingly, in this summary only Lawrence is referred to, except when the simulations are discussed.
^[2] M. S. Ahluwalia. “Economic Reforms in India since 1991: Has Gradualism Worked?” Journal of Economic Perspectives 16, no. 3 (2002): 67–88.

 

The second volume of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, addresses issues of government fiscal and monetary policy, reviews developments in labor markets and the distribution of income since the initiation of large-scale economic reforms in 1991 and contains a critical assessment of policies aimed at promoting universal access to telecommunications services.The editors' summary appears below, and you can download the IPF conference agenda, a PDF version of the volume, purchase a printed copy, or access individual articles by clicking on the following links:

Download the 2005 India Policy Forum conference agenda (PDF) »
Download The India Policy Forum 2005-06 - Volume 2 (PDF) »
Purchase a printed copy of The India Policy Forum 2005-06 - Volume 2 »

Download individual articles:

• Excessive Budget Deficits, a Government-Abused Financial System, and Fiscal Rules by Willem H. Buiter and Urjit R. Patel
• Trends and Issues in Tax Policy and Reform in India by M. Govinda Rao and R. Kavita Rao
• How Applicable Is the Inflation-Targeting Framework for India? by Sheetal K. Chand and Kanhaiya Singh
• Pre- and Post-Reform India: A Revised Look at Employment, Wages, and Inequality by Surjit S. Bhalla and Tirthatanmoy Das
• Universal Telecommunications Service in India by Roger G. Noll and Scott J. Wallsten

---

EDITORS' SUMMARY

This is the second volume of the India Policy Forum. The journal is jointly promoted by the National Council for Applied Economic Research (NCAER) in New Delhi and the Brookings Institution in Washington, D.C., with the objective of presenting high-quality empirical research on the major economic policy issues that confront contemporary India. The forum is supported by a distinguished advisory panel and a group of active researchers who participate in the review and discussion process and offer suggestions to the editors and the authors. Our objective is to make the policy discussion accessible to a broad nonspecialist audience inside and outside India. We also hope that it will assist in the development of a global network of scholars interested in India’s economic transformation.

The five individual papers included in this volume were selected by the editors and presented at a conference in Delhi on July 25–26, 2005. In addition to the working sessions, John Williamson, a member of the advisory panel, gave a public address on the topic “What Follows the Era of the USA as the World’s Growth Engine?” The papers focus on several issues of great relevance to India’s current economic situation. The first three papers involve issues of government fiscal and monetary policy: the implications of a large and sustained fiscal budget deficit, India’s experience with tax reform, and the relevance of the inflation-targeting framework for Indian monetary policy. The fourth paper provides a detailed review of developments in labor markets and the distribution of income since the initiation of large-scale economic reforms in 1991. The last paper provides a critical assessment of policies aimed at promoting universal access to telecommunications services.

Excessive Budget Deficits, a Government-Abused Financial System, and Fiscal Rules, by Willem H. Buiter and Urjit R. Patel

In their paper, Willem Buiter and Urjit Patel explore the mechanisms by which India’s continuing high fiscal deficits (at both the federal and state levels) affect the sustainable growth of the economy. In their view, the abuse of a financial system heavily dominated by the government represents a key channel by which the fiscal position influences economic growth and vulnerability; accordingly, their paper also extends to an examination of the financial system.

Following a crisis in 1991, India has witnessed a turnaround on many indicators of macroeconomic performance. It has transited from an onerous trade regime to a market-friendly system encompassing both trade and current payments. The sum of external current payments and receipts as a ratio to gross domestic product (GDP) has doubled from about 19 percent in 1990–91 to around 40 percent currently. There has also been some liberalization of cross-border capital account transactions, although significant constraints remain in place on cross-border intertemporal trade and risk trading.

Although average annual real GDP growth over the postreform period has been only modestly higher than in the previous decade (6.2 percent from 1992–93 to 2004–05 compared with 5.7 percent from 1981–82 to 1990–91), India continues to be one of the fastest-growing economies in the world. India’s balance of payments has been strong and inflation has been moderate.

After a sharp initial adjustment in the early 1990s, India’s net public debt has risen steadily as a share of GDP, although at about 70 percent of GDP, it remains below the levels recorded at the time of the 1991 crisis. Following custom, Buiter and Patel consolidate the central bank into these estimates, but not the publicly owned commercial banks, on the grounds that to do so would be to assume that the (implicit) guarantee of liabilities in such banks is certain to be called. In addition to public debt of this magnitude, recognized and explicit guarantees in 2003 amounted to a further 11.3 percent of GDP.

By the standard of most emerging markets, including several that have experienced crisis, India’s public and publicly guaranteed debt is very high. The composition of this debt has changed significantly in the fifteen years since the crisis of 1991. Net external debt has declined sharply, shifting the burden of public debt onto the domestic market. This domestic debt is rupeedenominated. In addition, India continues to maintain selective (discretionary) capital controls, particularly those that keep arbitrage-type flows (external borrowing by domestic financial intermediaries, investment by foreign institutional investors in fixed-income securities, and short-term borrowing by practically anyone) in check. While India faced a combined internal (fiscal) and external (foreign exchange) transfer problem during the years leading up to the crisis of 1991, the weakening of the fiscal position since the late 1990s represents an exclusively internal resource transfer problem.

Given repeated and costly crises in several emerging markets associated with possible public debt default, Buiter and Patel first conduct formal fiscal sustainability tests, revisiting an analysis they undertook a decade earlier. Although their fiscal sustainability tests are not conclusive, they find that government solvency may not be a pressing issue at this juncture. The reason India has been able to remain solvent despite the sustained fiscal deficits of the past twenty years is the combination of fast GDP growth and financial repression.

They note that globally, the level of risk-free interest rates at all maturities and credit-risk spreads are extraordinarily low at present. Continuation of the pattern of recent years—a steady increase in the debt–GDP ratio—will sooner or later raise the public debt to unsustainable levels. Political pressure to enhance government expenditure on social sectors and improve public (infrastructure or utility) services has increased in the aftermath of the 2004 general election.

Buiter and Patel then examine two potential channels for the impact of the government on the quantity and quality of capital formation in India. The first is financial crowding out—the negative effect of public borrowing on aggregate (private and public) saving. The second is the effect of government institutions, policies, actions, and interventions, including public ownership, regulation, taxes, subsidies, and other forms of public influence on private savers, private investors, and the financial markets and institutions that intermediate between them. A simple growth accounting framework is constructed to compare India’s investment efficiency with that of selected large countries. They find Indian investment inefficiency to be relatively high, China’s to be even higher.

Across the world, from the European Union’s (ill-fated) Stability and Growth Pact to the United Kingdom’s Golden Rule and Sustainable Investment Rule, there have been attempts to bind governments to fiscal rectitude through formal legal or constitutional devices. In September 1994 an agreement was reached between the Reserve Bank of India and the Central Exchequer to phase out ad hoc treasury bills, which hitherto facilitated automatic monetization of the budget deficit. The Indian Parliament, in August 2003, voted for the Fiscal Responsibility and Budget Management Act (FRBMA), which required that the central government’s fiscal deficit not exceed 3 percent of GDP and that the deficit on the revenue (current) account be eliminated.

The fiscal rules that India has embraced—perhaps in recognition of the serious systemic inefficiency that the fiscal stance has engendered—are evaluated. The requirement that the revenue budget be in balance or surplus is very likely to be the binding constraint on the central government. Even if the gross investment version of the golden rule (limiting debt issues to capital financing) is the operative one, the Indian central government’s gross capital formation program amounted to no more than 1.5 percent of GDP in 2003–04. Net central government capital formation is even less than that and may well be negative in years that economic depreciation is high. The authors judge that a great deal of current expenditure will be reclassified as capital expenditure if the golden rule were ever to be enforced seriously. Regarding the likelihood of the rules being enforced, they point to the absence of any features of the FRBMA that compel governments to act countercyclically during periods of above-normal economic activity or (as in India during these past three to four years) exceptionally low interest rates. Furthermore, the fiscal rules under the FRBMA do not address the key distortions imposed by the Indian state on the private sector through financial repression, misguided regulations, and inefficient ownership and incentive structures.

Trends and Issues in Tax Policy and Reform in India, by M. Govinda Rao and R. Kavita Rao

Tax reform has been a major component of the economic reform agenda in India during the last twenty years. In their contribution on this subject, Govinda Rao and Kavita Rao offer a comprehensive treatment of the evolution of the direct and indirect taxes in India, their shortcomings relative to an ideal tax system, the reforms undertaken so far, and their future course. They note that according to the theory of optimal taxation, revenue-raising taxes should consist exclusively of consumption taxes with the rates of taxation being dependent on various demand elasticities. In turn, the ideal consumption tax can be mimicked by a value-added tax (VAT) that taxes output at the desired rate but rebates the tax paid on the inputs, thereby only taxing the extra value added at each stage of production. In practice, the information on the demand elasticities required to implement the optimal VAT is rarely available. Moreover, its variegated structure is administratively complex, gives rise to tax disputes and tax evasion, and results in lobbying pressures becoming the main determinants of the tax structure. Therefore, a system characterized by greater uniformity in tax rates has gained popularity with policy analysts and policymakers in recent years.

Since the 1950s, India has relied on both direct and indirect taxes to raise revenue. Direct taxes include both the personal income tax and corporate profit tax. Indirect taxes include domestic commodity taxation and custom duties. Domestic commodity taxation initially took the form of excise duties that taxed output up to the manufacturing stage with no tax rebates on inputs and the sales tax by the states. In recent years, a modified value added tax (MODVAT) that rebates the tax paid on inputs at each stage of production up to the manufacturing stage has progressively replaced the excise tax. Custom duty revenues have principally been a by-product of import protection, and their share in total revenue increased especially rapidly in the 1980s when the government decided to replace the previous system of import quotas with enhanced input tariff rates. With the decline in protection after 1990, the importance of this source of revenue has been declining.

The reforms during the last two decades have focused on both the design as well as the administration of taxes. Marginal tax rates on personal income, which had reached near 100 percent levels in the early 1970s, have now been brought down to around 30 percent (with occasional surcharges). Simultaneously, the number of tax slabs has been reduced to three, and some progress has also been made toward eliminating numerous ad hoc exemptions. Similar steps have been taken in the area of corporate taxation.

The big push in the area of domestic commodity taxation has been toward the development of a genuine VAT and unification of the tax rates. Considerable success has been achieved in both tasks. Custom duties have been brought down substantially, and their dispersion has been considerably reduced. Improvement in tax administration has been more pronounced in direct than indirect taxation.

Rao and Rao observe that the ratio of personal income tax to GDP has increased from 2.1 percent in 1985–86 to 4.3 percent in 2004–05. Reductions in indirect tax revenues as a proportion of GDP have more than offset this gain, however. Central government domestic indirect tax collection declined by 1.6 percentage points and the custom duty collection by 1.8 percentage points over the same period.

It is tempting to argue that the increase in the income tax–GDP ratio represents the operation of the so-called Laffer curve whereby reduced rates by themselves lead to increased revenue. Rao and Rao offer evidence to the contrary, however, and argue that the increase in the revenues from the personal income tax resulted from a more rapid growth of the organized industrial sector that is covered by the tax net; deepening of the financial sector, which makes transactions easier to track; and administrative measures including the spread of tax deduction at source.

Rao and Rao also find that contrary to suggestions in some of the recent literature, personal income tax reform has resulted in increased equity. Granted, the reduction in the dispersion of effective tax rates has led to the richest individuals being subject to lower tax rates. But the reform has also brought into the tax net many relatively rich individuals who previously did not pay taxes. This is reflected in a significant increase in the number of income tax payers and the doubling of revenues from the personal income tax.

Despite substantial rationalization of various components of the tax system, indirect tax revenues remain highly concentrated in terms of commodities. Just five groups of commodities—petroleum products, chemicals, basic metals, transport vehicles, and electrical and electronic goods— contribute 75 percent of the total central domestic commodity tax revenue. Petroleum products alone, which have tripled their share over a thirteenyear period, contribute over 40 percent. Almost 60 percent of custom duty is collected from just three commodity groups: machinery (26.6 percent), petroleum products (21 percent), and chemicals (11 percent). This concentration exceeds the concentration of output or of imports across commodities.

Rao and Rao recommend further rationalization of central taxes through a reduction in the number of tax rates and the elimination of exemptions. In the area of corporation tax, they argue in favor of reducing the depreciation allowance to more realistic levels. They also point to a need for aligning the corporate profit tax rate with the highest marginal tax rate on personal income tax. With regard to import duties, the authors recommend a minimum tariff of 5 percent on all imports as a step toward harmonizing duty rates across commodities.

In the area of domestic commodity taxation, the goal must be a single, unified goods and services tax. The achievement of this goal has several components. All specific duties must be converted into ad valorem rates and the tax on services must be widened substantially. The sales tax must be harmonized across states and, for collection purposes, integrated with the central VAT, which should eventually cover all goods and services. This unification will also allow the adoption of the destination-based sales tax on all interstate trade. Keeping in view revenue needs, Rao and Rao recommend that the total burden of taxation on goods and services should be 20 percent. Of this, 8 percent should be borne by the center and 12 percent by the states.

The state of tax administration, resulting partially from the virtual absence of data on both direct and indirect taxes, has been a major reason for low levels and high costs of compliance. The absence of information has also led to the evolution of a compliance system in which tax payments are negotiated between the payer and the government. The recent initiatives for administrative reform that include the development of a computerized information system and procedural changes such as expanded coverage of tax deduction at source and systematized audit procedures have alleviated this problem to some degree. Within direct taxes, efforts include outsourcing of issue of permanent account numbers, a tax information network established by the National Securities Depository Limited with special focus on tax deductions at the source; and the Online Tax Accounting System. Within indirect taxes, a few examples of new information systems are the customs e-commerce gateway, known as ICEGATE, and the Customs Electronic Data Interchange system. Further initiatives are under way, including a systematic approach to compiling relevant data from a variety of relevant sources. Rao and Rao believe that, as a part of this initiative, it is critical that mechanisms be set up for data sharing between direct and indirect tax authorities, as well as between central and state tax authorities.

Inflation targeting has emerged as one of the most significant developments in the theory and practice of monetary policy. Disenchantment with the outcomes of the activist monetary policies of the 1970s and 1980s led many economists and policymakers to advocate a simplified and more rulesbased approach to monetary policy, one in which attaining and sustaining price stability is given a clear priority. Many countries, however, have experienced difficulties in attempting to use the growth in monetary aggregates or the exchange rate as a guide to such a policy. An inflation-targeting framework (ITF), which consists of setting an inflation target and aligning monetary policy to ensure its attainment in a transparent and accountable manner, is increasingly advocated as a best-practice approach to controlling inflation.

In the long run, the inflation rate is the only outcome that monetary policy can influence. However, because there is a short-run cost of disinflation, a trade-off between inflation and unemployment, the optimum path of future inflation implies a gradual return to the desired rate. At the heart of the ITF is a specific view of the inflation-generating process as a largely demanddetermined phenomenon, a conviction that the most efficient way of dealing with inflation is through an interest rate rule, and the belief that the public’s inflation expectations can be managed. From this follows the prescription that the central bank, as the custodian of interest-rate policy, should play a dedicated and dominant role in promoting the inflation objective. Initially, inflation targeting was adopted by several industrial countries, but it has recently spread to some emerging markets. At present, much of the focus on monetary policy is on credit growth, not interest rates. Is the ITF practical in the absence of a large role for market-determined interest rates?

How Applicable Is the Inflation-Targeting Framework for India?, by Sheetal K. Chand and Kanhaiya Singh

In their paper, Sheetal Chand and Kanhaiya Singh ask whether such a framework might be applicable to developing economies. In particular, is the ITF suitable for guiding the monetary policy of India? Earlier discussions focused on the difficulties that developing countries would have in adopting a policy rule that assigns absolute priority to the control of inflation. They often have less-developed financial institutions (requiring a more nurturing approach by the central bank), an aversion to large exchange rate fluctuations, or a need to be accommodative of some changes in fiscal policy. Widespread public knowledge of these constraints implies that a policy based on inflation targeting would lack credibility.

Chand and Singh examine the issue from a different perspective, however, arguing that the inflation process in India differs in significant respects from that commonly assumed to hold for the industrial economies. The paper first tests a standard formulation of the ITF, relying on a paper by Lars Svensson. This formulation explicitly incorporates a short-run tradeoff between inflation and the deviation of output from full employment (a Phillips-curve type relationship). In their tests of the Indian experience from 1970–71 to 2002–03, Chand and Singh find that the output gap is not a significant determinant of inflation. Thus, they argue that Svensson’s derivation of the optimal policy rule is not satisfactory in the Indian context.

However, this does not necessarily imply that demand factors have negligible effects on inflation. The authors develop an alternative specification that defines excess demand as the difference between the nominal GDP growth rate and the growth rate of potential output valued at the preceding year’s rate of inflation. They find that this alternative version accords better with conditions in India. However, the demand-side effects are supplemented by a substantial role for variations in input prices. In the final model, the coefficients on the measures of demand conditions indicate some effect, but the dominant role is that of supply-side factors.

The authors interpret the large role for supply-side shocks in the generation of inflation as arguing against reliance on the ITF approach. In addition, the nominal interest rate appears to be a less powerful instrument with which to influence the inflation rate. They are also concerned about the potential for undesirable side effects that might result from large variations in interest rates, such as large and persistent swings in exchange rates or asset values.

Chand and Singh favor a more balanced approach that employs both monetary and fiscal policy as instruments to control inflation and that is reflective of supply-side phenomenon. The more active role for fiscal policy is justified by their finding of a shorter transmission lag between an expenditure stimulus and the inflation rate than is typical for the advanced countries. However, they agree that more research is needed to establish fully the role that fiscal policy should play.

Within the monetary policy sphere, they advocate the use of multiple instruments rather than relying solely on interest rates. Examples would be adjustments in liquidity requirements to regulate the supply of credit that finances investment expenditures and direct controls on capital inflows. They perceive these measures as having fewer adverse effects on asset valuations. With regard to interest rate policy, the Reserve Bank of India might seek to maintain a desired real interest rate, with the nominal interest rate being adjusted whenever the underlying inflation rate deviates from target. From time to time, shifts in liquidity preference will result in asset transactions that push interest rates above or below the target long-term level. Accommodating liquidity preference shifts through appropriate open market operations would help keep interest rates stable. All this implies that it may be more prudent and welfare enhancing for India to pursue a strategy other than the standard ITF to control inflation.

The performance of the Indian economy following the initiation of an economic reform program in 1991 has been a subject of intense intellectual debate. There are sharp differences of view on whether the economic situation of Indian workers improved in the postreform years. Some commentators characterize the postreform period as a largely jobless expansion with a marked slowing of real wage growth, particularly in rural areas.

Pre- and Post-Reform India: A Revised Look at Employment, Wages, and Inequality, by Surjit S. Bhalla and Tirthatanmoy Das

Surjit Bhalla and Tirthatanmoy Das undertake a detailed review of the available survey data on employment, unemployment, agricultural wages, and income inequality over the past thirty years to examine several of these controversial propositions. Much of the evaluation of the effects of the economic reforms is confounded by the low frequency of detailed survey data on the economic situation of Indian workers. The discussion has centered on the results from large-scale quinquennial surveys of their employment status conducted in 1983, 1987–88, 1993–94, and 1999–2000. Bhalla and Das construct a more expansive time series of available data by including two surveys from the 1970s and twelve smaller annual surveys from the 1980s and 1990s. The major advantage of the additional data is that it allows a better alignment of the data on labor market conditions with the initiation of the reforms in 1991. Because 1991 was also a year of economic crisis in India, the precise dating of the end of the prereform period and the beginning of the reform era plays a crucial role.

On the employment front, Bhalla and Das conclude that employment growth slowed between 1991 and 2003 to 1.7 percent a year, compared with a 2.6 percent rate in the 1983–91 period. They attribute a large portion of the slowdown during the 1990s to a slower rate of growth of the population of labor force age and to a decline in the labor force participation rate related in part to a rise in the proportion of persons who remained out of the labor force while enrolled in educational institutions. They argue that the slow employment growth of the 1990s is not therefore a reflection of weak labor market conditions.

Labor market surveys in India produce three alternative measures of employment status. First, usual status classifies individuals among employed, unemployed, and not in the workforce on the basis of the principal activity status of the individuals over the prior 365 days. Current weekly status follows international conventions of classifying those who worked at least one hour in the prior week as employed, and distinguishing between unemployed and out of the workforce on the basis of whether they were available for work in the prior week. A third concept of “current daily status” is also determined in the quinquennial surveys. Individuals are asked to report their activities over a seven-day period and to distinguish half days in determining the activity status. Those who work four or more hours are considered employed for the full day, and one to four hours is considered a half day. Similarly, persons who did not work but were available for four or more hours are considered to be unemployed for the full day, and those who were available for one to four hours are reported as unemployed for half a day.

Bhalla and Das point to a general perception that unemployment has increased in the postreform years as the primary rationale for a new government program aimed at providing job guarantees for rural families. They argue, however, that the measures of unemployment based on usual and weekly status show significantly lower rates of unemployment in the years after 1991 relative to the experience of the 1970s and 1980s. This conclusion also accords with their earlier interpretation that the slowing of employment growth in the 1990s was not indicative of a weak labor market. They also point out that the educational level of the unemployed is high; this is consistent with a view that much of the unemployment is the result of the more skilled members of the workforce spending longer in search of better job matches.

Third, the authors examine the patterns of real wage change in the postreform era. That analysis is faced with a severe shortage of high frequency surveys of wage developments. The quinquennial surveys provide the only information on economywide wages, and annual measures are available only for agricultural wages. The quinquennial surveys do suggest an acceleration of real wage growth after 1993, from an annual rate of 2.5 percent between 1983 and 1993–94 to 4.5 percent in the period of 1993–93 to 1999–2000. That pattern is apparent in the wage data for both urban and rural workers.

Bhalla and Das undertake a more detailed analysis of the annual data on agricultural worker wages, a subgroup of the rural workforce. This is also the group for which wage growth is alleged to have slowed sharply after the introduction of economic reforms in 1991. They compare two basic measures: the Survey of Agricultural Wages in India (AWI), and wage data from a lesser-used Survey on the Cost of Cultivation (CoC) of major crops. The AWI survey was terminated after 1999–2000 and the last available year for the CoC is 2000–01. They use a new survey to extend the other wage measures through 2004–05. The measures of real wage growth do grow at different rates over some subperiods and the year-to-year changes are erratic; but neither the AWI not the CoC measure supports the notion of significant deceleration of real wage growth after 1991.

Finally, the trend in income inequality during the 1990s is a subject that has generated great controversy among the group of researchers who have written on the subject. The analysis is largely limited to a comparison of data from the quinquennial surveys, and it is complicated by some changes in the survey methodology. Bhalla and Das believe that there may have been some increase in inequality after 1993–94 but that the change is small and largely limited to a widening of inequality at the very top of the distribution. It is also difficult to match the timing of the change with the introduction of economic reforms. In summary, Bhalla and Das maintain that the frequent assertion that the economic reforms have not helped Indian workers is not supported by the data.

Though telecommunications reform in India began in the 1980s, it achieved at best limited success in the initial decade. Beginning in the early 1990s, technological change and new government policies exhibited greater promise, with dramatic gains made in the quality of service as well as its availability in the new millennium. Telecommunications reforms represent a major success of the economic reforms in India in the last decade. Unsurprisingly, however, telecommunications access has increased more rapidly for wealthy and urban consumers than for poor and rural consumers. To address this gap, India has adopted so-called “universal service” policies, especially targeting rural villages. The philosophy behind the desire to spread the service to all is that certain services, such as electricity, water, and telecommunications, should be available to all.

Universal Telecommunications Service in India, by Roger G. Noll and Scott J. Wallsten

In their paper, Roger Noll and Scott Wallsten remind us that universal service policies are typically justified on three grounds. First, the presence of economies of scale may lead to the underprovision of the service. At best, the firm will price the service at the average cost, which is higher than the marginal cost when scale economies are present. If, in addition, the market turns imperfectly competitive due to a single supplier or a handful of suppliers, the service may be further undersupplied. Second, the government may view some services as “merit goods” that everyone should have, regardless of their willingness to pay. Finally, politics or regional development goals may induce government to transfer resources to rural or lowincome constituents.

The “merit good” argument is easier to justify for universal access to some types of infrastructure than to others. Water and sewerage, for example, involve large health externalities, and bringing these services to everyone can yield large social benefits. The provision of universal telecommunications service is more difficult to justify along these lines. Given the presence of a large proportion of the poor in the population, it can be argued that the government revenues are better spent on direct poverty alleviation programs. The issue of economies of scale points to the need for regulatory measures rather than universal service. It is true that the scale economy may take the form of an externality in the sense that the addition of new customers may lower the cost of supplying the service to the existing customers. But the firms, which are capable of figuring cost at various levels of supply, can readily internalize such externalities. Nevertheless, perhaps because of its political appeal, most countries in the world pursue the goal of universal access to telecommunications services in some form.

Noll and Wallsten also argue that the case for subsidizing the incumbent wire-line carrier, whether privatized or state-owned, to achieve the universal service objective is weak since it offers relatively little service in the poor areas in the initial equilibrium. In the era of state-owned monopolies, the telecom provider had little incentive to invest in telecommunications services in general, as witnessed by the long waiting period to obtain connections and the poor quality of service following installation. Telephone penetration and usage were low, even considering developing countries’ low incomes, with service to poor and rural areas virtually absent.

India’s first official universal service program was introduced as a part of the 1994 National Telecom Policy. That policy set the goal of providing certain “basic telecom services at affordable and reasonable prices” to all citizens. This policy was revised under the New Telecom Policy of 1999, which made the provision of telecom services in remote rural areas a higher priority and set certain specific goals to be achieved by 2002. When those goals were not met, the Department of Telecommunications adopted two objectives: providing public telephones in villages and providing household telephones in rural areas. The first objective was given higher priority.

A universal service fund was created based on the implicit assumption that competition among private providers would not generate adequate service in rural areas. The government also took the view that it could minimize the magnitude of the subsidy necessary to provide universal service by opting for only one firm in any given area. The government finances the subsidy through two taxes. The first, the universal service levy, which goes into the Universal Service Fund (USF), is a tax of 5 percent of adjusted gross revenues on all telecommunications providers except “pure value added service providers” such as Internet service providers. The second includes access deficit charges (ADCs), which are incorporated into interconnection charges and are paid directly to the incumbent state-owned enterprise Bharat Sanchar Nigam Limited (BSNL) to compensate it for providing belowcost service in rural areas.

The USF is intended to reimburse the net cost (total cost minus revenues) of providing rural telecom service. Telecommunications firms bid for subsidies to be received in return for providing service in rural areas in an auction. The firm bidding the lowest subsidy, subject to the bid being no higher than a benchmark established by information from the incumbent wire-line monopoly, is eligible to be reimbursed that amount from the fund. Any firm with a license to provide basic or cellular service in the relevant service area is eligible to bid. The winner receives a subsidy for seven years, subject to review after three years.

In nearly all service areas, only one firm bid: the incumbent BSNL. Not surprisingly, the BSNL bid exactly the benchmark amount, which was the maximum subsidy the government was prepared to provide. The failure to create genuine competition for rural public service arose from three problems. First, the benchmark subsidy was based on data provided by BSNL, whose accounts are aggregated in a way that makes it impossible to separate costs of its various operations. Second, BSNL receives nearly all of the ADC cross-subsidies. The incumbent has potential gains from manipulating how cost information is aggregated across service categories and across high-cost and low-cost areas, because these data not only determine the benchmark subsidy, but also the magnitude of the net deficit for all local access service. Allocating some ambiguous cost elements to subsidized areas can increase both the public telephone subsidy and the ADC subsidy. Third, the auction allowed only basic service operators already providing rural service in the area to bid. Given the existing service was in any case quite limited, there was no advantage to choosing the provider from among the existing operators. Therefore, the exclusion of the firms not already present had detrimental effect on new entry into rural services commensurate advantage of choosing an existing operator.

ADCs, the second major source of universal service, are paid by private entrants to the incumbent based on the premise that basic access providers face unprofitable social service obligations and should therefore be compensated for them by entrants who are free to seek out profitable customers. The assumption underlying the expectation of these losses is that regulated price ceilings on basic monthly access service charges applying to a large number of customers are below the cost of service.

The ADC fee structure is highly inefficient for two reasons. First, the price elasticity of demand is much greater for usage than for access. Hence, taxing usage to finance access substantially distorts the former for the relatively small gain in the latter. Second, applying the tax to only some calls creates another distortion. The regulatory authority had intended to impose ADC charges for five years and has recently reduced the fee so that it now represents about 10 percent of the sector’s revenue rather than 30 percent when it was first introduced

Noll and Wallsten argue that India’s universal service policies may unfortunately have had the unintended consequences of deterring investment in precisely the areas they had hoped to target. The subsidies discourage competition, and the most efficient operators are taxed to support the least efficient operator. Fortunately, most of the telecommunications market in India is sufficiently competitive and dynamic that growth may not been hampered significantly by these inefficient policies. Nonetheless, because telecommunications is such an important industry, it is crucial to minimize inefficiencies. Noll and Wallsten conclude that India’s best approach for achieving universal service is to ensure that its policies promote competition and do not favor any single firm over another.

       

This third issue of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, covers India’s economic growth performance over the past quarter century and the impact of trade liberalization on the distribution of income and poverty; the distressingly poor performance of India’s elementary schools; the role of economic factors on the decline of the Indian birth rate; and the link between economic growth and environmental change by assessing the interaction between local living standards and forest degradation in the Indian mid-Himalayas. The editors' summary appears below, and you can download a PDF version of the volume, purchase a printed copy, or access individual articles by clicking on the following links: 

Download the 2006 India Policy Forum conference agenda (PDF) »
Download India Policy Forum 2006-07 - Volume 3 (PDF) »
Purchase a printed copy of India Policy Forum 2006-07 - Volume 3 »

Download individual articles:

• Sources of Growth in the Indian Economy, by Barry Bosworth, Susan M. Collins, and Arvind Virmani
• Trade Liberalization, Labor-Market Institutions, and Poverty Reduction: Evidence from Indian States, by Rana Hasan, Devashish Mitra, and Beyza P. Ural
• Teacher Compensation: Can Decentralization to Local Bodies Take India from the Perfect Storm Through Troubled Waters to Clear Sailing?, by Lant Pritchett and Rinku Murgai
• Does Economic Growth Reduce Fertility? Rural India 1971–99, by Andrew D. Foster and Mark R. Rosenzweig
• Managing the Environmental Consequences of Growth: Forest Degradation in the Indian mid-Himalayas, by Jean-Marie Baland, Pranab Bardhan, Sanghamitra Das, Dilip Mookherjee, and Rinki Sarkar

 

---

EDITORS' SUMMARY

This is the third volume of the India Policy Forum. The journal is jointly promoted by the National Council for Applied Economic Research (NCAER) in New Delhi and the Brookings Institution in Washington, D.C., with the objective of presenting high-quality empirical research on the major economic policy issues that confront contemporary India. The forum is supported by a distinguished advisory panel and a group of active researchers who participate in the review and discussion process and offer suggestions to the editors and the authors. Our objective is to make the policy discussion accessible to a broad nonspecialist audience inside and outside India. We also hope that it will assist in the development of a global network of scholars interested in India’s economic transformation.

The five individual papers included in this volume were selected by the editors and presented at a conference in Delhi on July 31 and August 1, 2006. In addition to the working sessions, Pranab Bardhan, a member of the advisory panel, gave a public address on the topic of “Governance Matters in Economic Reform.” The papers cover a diverse set of macro and microeconomic topics of relevance to policymakers. The first two papers focus on India’s economic growth performance over the past quarter century and the impact of trade liberalization on the distribution of income and poverty. The third paper highlights the distressingly poor performance of India’s elementary schools. The fourth paper examines the role of economic factors on the decline of the Indian birth rate. The last paper explores the link between economic growth and environmental change by assessing the interaction between local living standards and forest degradation in the Indian mid-Himalayas.

Sources of Growth in the Indian Economy, by Barry Bosworth, Susan M. Collins, and Arvind Virmani

During the first three decades of its development, the Indian economy grew at the so-called Hindu rate of growth of 3 to 4 percent. But India has now turned a corner, growing at a much higher rate of 6 to 7 percent during the last two decades. How has this transition been achieved and what implications does it have for the future transformation from a primarily rural and agricultural economy to a more modern one? These are the key questions Bosworth, Collins, and Virmani address in their paper.

Bosworth et al. observe that answering these questions requires analyses of both the evolution of productivity in the three key sectors—agriculture, industry and services—and the implications for aggregate productivity growth of the reallocation of resources out of agriculture to more productive activities in industry and services. Consequently, they use a growth accounting framework to examine empirically the acceleration in economic growth that India has achieved over the past two decades. The analysis focuses on two dimensions in which India’s experience differs from that of China and other parts of Asia. First, instead of strong growth in the manufacturing sector and in exports, India’s success reflects rapid expansion of service-producing industries. Second, it has been associated with relatively modest levels of human and physical capital accumulation.

The authors construct accounts at the sectoral level, and identify the residual gains from resource reallocation across sectors. They then undertake further analysis of the role of capital accumulation—providing estimates of the returns to schooling for human capital, and reporting on trends in sectoral saving and investment in physical capital. The paper concludes with a discussion of some of the important issues for India’s growth experience and prospects for the future.

Throughout the analysis, the authors focus on the quality of the available data. The updated growth accounts incorporate recent data revisions, some of which are quite large. Extensive examination of the relevant underlying data series helps to clarify a number of issues related to how the data are constructed. In particular, the discussion highlights challenges faced by the Indian statistical agencies in preparing measures of output and employment, primarily because much of the non-agricultural workforce operates outside of standard reporting programs. Thus, India’s national accounts depend on quinquennial surveys (conducted in 1973, 1983, 1987, 1993, 1999, and 2004) for information on households and small enterprises. Researchers should have a reasonable degree of confidence in the GDP estimates for benchmark years that incorporate results from the surveys. However, for non-benchmark years, annual output data are based on interpolation and extrapolation of the labor input data required to construct output measures for India’s large unorganized sector. The lack of reliable annual series makes it impossible to pin down the precise timing of India’s growth acceleration.

A key finding of the paper is that services have shown very substantial productivity growth since the early 1980s—a result in sharp contrast to that obtained for other countries at a similar stage of development. Productivity gains in agriculture and industry have been modest, which is consistent with both the findings of prior studies of India and those for other comparable countries such as Korea and Taiwan in the 1960s and 1970s. What distinguishes the Indian case is the relatively small output growth in industry: the sector has not played a major role in reallocating workers out of agriculture where they are underutilized.

Considerable attention has been focused on the role of services— especially high-tech services—as the source of India’s growth. The growth accounts attribute 1.3 percentage points of the 3.8 percent per annum growth in GDP per worker during 1980–2004 to growth in total services productivity (versus 0.7 percentage points each to agriculture and industry and 1 percent to reallocation).

However, the authors argue that the frequent emphasis on business services as the driving force behind India’s economic expansion may be overblown. Despite its extraordinary growth, the industry comprises only a small share of India’s GDP and employment. Business services provide jobs primarily for the relatively small proportion of the workforce that is highly educated, and recent increases in the returns to higher education suggest that high-skill services industries are encountering labor shortages. Furthermore, the strong gains in service sector TFP are puzzling. One might expect this in sub-sectors such as finance and business services, but these sectors remain small—just 17 percent of total services output in 2004. In fact, the growth acceleration is quite widely dispersed across service sub-sectors and rapid productivity growth seems unlikely in the biggest, which are trade, transportation and community services. Though difficult to verify, the authors express concern that an underestimate of services price inflation, particularly in the more traditional sectors, may imply an overestimate of output growth. The available measures of employment suggest a less dramatic acceleration of overall growth and a somewhat smaller focus on services.

In any case, India’s growth expansion is not creating adequate job growth for the bulk of the population that is not particularly well-educated. Thus, it is important that India broaden the base of the current expansion by promoting programs that would increase India’s attractiveness as a source of manufactured goods for the world market. Growth of the manufacturing sector would also provide a strong match for the skills of India’s workforce.

The paper also offers additional discussion of education and physical investment, both of which have an important bearing on growth and productivity. The accounting decomposition finds that the growth contribution from increases in education has been quite modest. The paper also examines the evolution of India’s saving behavior. The authors conclude that saving is not constraining India’s growth. However, there is room for increased public and foreign savings.

Pulling together the findings of their analysis, the authors draw a number of implications for India’s growth in the coming decade. A key message is that India needs to broaden the base of its economic growth through the expansion of the industrial sector—especially manufacturing. In this context, China provides a useful model, in its emphasis on exports of manufactured goods as a primary driver of growth.

To accomplish this, India needs to create a more attractive economic environment for doing business—a location able to compete effectively with China. This will require strengthening its infrastructure—including a weak and unreliable power system, and poor land transportation in many states. However, India already enjoys relatively good institutions and is strong in the areas of finance and business services.

The liberalization of the international trade regime is believed to reduce poverty through its impact on both efficiency and distribution. Expansion of trade lowers the cost of goods and services consumed by the poor and freer trade should lead to an increased demand for and higher returns to unskilled labor in poor countries. However, those gains may not emerge if workers are not able to move to the sectors and areas of expanding demand. Thus, the ultimate effect of trade expansion on poverty is ambiguous and must be determined empirically.

Trade Liberalization, Labor-Market Institutions, and Poverty Reduction: Evidence from Indian States, by Rana Hasan, Devashish Mitra, and Beyza P. Ural

In their paper, Hasan, Mitra, and Ural examine the impact of India’s trade liberalization on poverty reduction using state and regional level data from the National Sample Survey (NSS) of households. Their measure of trade policy includes changes in both tariffs and non-tariff barriers (NTBs). They weight tariffs (and alternatively NTBs) by sectoral employment to arrive at a state-level measure of the trade exposure of the labor force, and they construct a second version that is based on a principal-components aggregation of the two policy instruments. They then allow the impact of trade policy on poverty to differ across states according to the flexibility of labor-market institutions. The classification of states with flexible and inflexible labor markets is based largely on a prior study by Besley and Burgess. To obtain a clearer picture of the effects on poverty, they also investigate the impact of another important, complementary component of economic reforms, namely product market deregulation, and look also at its interaction with labor-market institutions.

The measures of poverty are drawn from the NSS surveys of 1987–88, 1993–94, and 1999–2000, and are largely based on a methodology developed by Deaton and Drèze and their approach for adjusting the poverty estimates for a change in the design of the household survey in 1999–2000. However, Hasan et al. also check the robustness of their results with two alternative measures: one based on the official Government of India (GOI) estimates of poverty, and a longer time series of state-level poverty rates created by Ozler, Datt, and Ravallion. Another innovation in the paper is that they allow the transmission of changes in protection rates to domestic prices to vary across states since distance and the quality of the transportation system should influence the extent of change in local prices.

Their principal finding is that states whose workers are more exposed to foreign competition tend to have lower rural, urban and overall poverty rates (and poverty gaps), and this beneficial effect of greater trade openness is more pronounced in states that have more flexible labor market institutions. Trade liberalization has led to poverty reduction to a greater degree in states that are more exposed to foreign competition by virtue of their industrial composition. The results hold, at varying strengths and significance, for overall, urban and rural poverty.

For example, controlling for state as well as time fixed effects, they conclude that the reduction in tariff rates over the 1990s was associated with a reduction in poverty rates ranging from 16 percent to 40 percent. Reductions in tariff rates also were associated with a decline of about 15 percent in urban poverty in states with flexible labor market institutions relative to other states. They find some evidence that industrial delicensing has had a more beneficial impact on poverty reduction in states with flexible labor institutions.

Hasan et al. contrast their evidence on the linkages between trade and poverty with a prior study by Petia Topalova, whose investigation utilized district-level data. Topalova concluded that trade liberalization slowed the pace of poverty reduction in rural districts, with the strength of this effect being inversely related to the flexibility of labor-market institutions. She found that the linkage between trade liberalization and poverty reduction was also negative in urban areas, but that result was not statistically significant. The authors provide some reasons for the differences. First, Topalova restricted her analysis to one measure of employment-weighted tariffs. The current paper includes NTBs and a principal-components aggregate of tariffs and NTBs. Second, there are significant differences between the two studies in the methods used to construct the overall employment-weighted indexes of average tariffs. Topalova included nontradable goods industries, which are explicitly excluded from the measures used in the current study. Third, the Topalova paper did not allow for the effects of changes in trade protection on domestic prices to vary across districts. Finally, the authors explored the robustness of their own results by incorporating a greater variety of poverty measures and by extending the analysis to the regional level.

India’s public elementary education system faces enormous problems. Although enrollments have increased, a recent survey of rural areas found shockingly low levels of learning achievement, confirming the cumulating evidence of a dysfunctional system. There are many other indicators of distress—high levels of dissatisfaction of parents and students with teachers, the massive and on-going shift into private schooling, and the unhappiness of the public sector teachers themselves.

Teacher Compensation: Can Decentralization to Local Bodies Take India from the Perfect Storm Through Troubled Waters to Clear Sailing?, by Lant Pritchett and Rinku Murgai

In their paper, Pritchett and Murgai argue that the current system of teacher compensation in the public sector is at the heart of many of these problems. They argue that the system of compensation within any high performance organization should be designed to attract, retain and motivate workers who, on a day-to-day basis, pursue the goals of the organization. All four elements of a system of compensation (durability of the employment relationship, structure of pay across states of the world, assignment of workers to tasks, and cash versus benefits) should work together towards this goal.

Their paper highlights the extraordinary extent to which India’s system of teacher compensation departs from this norm. While there are many variations across states, the current system can aptly be described as a combination of high pay and zero accountability. The paper documents four facts about the system of teacher compensation: (1) there is little or no ability to terminate the employment of teachers—for any cause; (2) the average pay of public sector teachers is very high relative to alternatives (both private teaching and other private sector jobs); (3) the degree of overpayment is higher for public sector teachers at the early stages of a career; and (4) the pay of public sector teachers has very little variance even potentially related to performance—much less than either private sector teachers or other private sector salaried workers.

Each of these elements of the system of compensation reinforces the lack of accountability. There is nothing in the present system to attract people well matched to teaching, to retain the best and most committed teachers, or to motivate performance of good teachers (for that matter, prevent good teachers from becoming disillusioned, cynical, and embittered and yet stay until they are 60 years old). Moreover, the institutional context of basic schooling—all the other relationships of accountability—is also weak.

Pritchett and Murgai argue that this system of compensation plays a large role in producing the current “perfect storm” in public schooling: (a) the learning achievement of students is low, (b) absenteeism of teachers is very high, (c) the treatment by teachers of students is often abysmal, (d) parents and students are dissatisfied with government schools, and (e) families are voting with their feet and pocketbooks to move their children into private schools. Perhaps worst of all, the potentially good teachers within the public system are disenchanted, overburdened, and feel disrespected by parents and managements. The authors argue that any reform of teacher compensation needs to be pro-teacher in contrast with the current system which is dramatically anti-teacher.

In one study of schools in New Delhi, teachers in government schools were compensated at a rate seven times of that of teachers in unregistered schools, they were present less than half the time, and their students consistently scored far below those of students in the unregistered schools in all subject areas. Parents and students expressed higher levels of displeasure with teacher performance in the public schools. Even so, government teachers were dissatisfied with nearly every element of their jobs.

While accepting the common view that there is no possibility of significant reform of the compensation system under the present circumstances, Pritchett and Murgai argue that the devolution of education to Panchayati Raj Institutions (PRIs) provides a unique opportunity to restructure the system to be consistent with an accountable and performance-oriented public sector. Decentralization to PRIs, if done well, has the potential to break the political impetus behind business as usual by combining a reallocation of functions across tiers of government (states and PRIs) with allowing PRIs to develop systems of compensation that are aligned with the realities of public employment and the particularities of the practice of teaching.

Pritchett and Murgai suggest that the development of a future cadre of teachers should take place within a new system under district control. They propose a system with three phases for teachers’ careers, ranging from an initial apprentice phase up to a masters level, with each stage corresponding to increased pay and prestige. Promotion from one phase to another would be based on performance reviews with input from the local school, peers, and technical reviews. The objective is to develop a professional teacher cadre at the district level, but to leave control of school administration and the actual hiring of teachers from the eligible pool with the local authorities.

Fast growth of the population has been a central concern of policy makers in the developing countries with large populations such as India and China. Reductions in fertility have been seen as an important means to achieve rapid and sustained economic growth. And, many countries have adopted policies ranging from offering incentives for fertility reduction to outright restrictions on the size of the families. The advocates of such direct measures to reduce fertility are skeptical that economic growth alone can deliver the necessary reduction in fertility without at least a major expansion of education among women.

At one level, the controversy over the positive role of economic growth in driving down fertility would seem surprising. After all, richer, more developed economies have uniformly lower fertility rates than do poorer, less developed ones. Over time many formerly poor countries have become richer and simultaneously achieved sustained fertility declines.

But there also exist examples and patterns supporting the view that fertility responds to declining mortality and a transition in cultural perspective that need not be related to growth. For example, we have countries such as Cuba, Costa Rica, and Sri Lanka with traditionally high levels of education and health and correspondingly low levels of fertility. Likewise, China has lowered fertility through direct intervention at a relatively low level of income. There also exists evidence that the timing of a first sustained decline in fertility is not connected to a particular threshold level of economic development.

Does Economic Growth Reduce Fertility? Rural India 1971–99, by Andrew D. Foster and Mark R. Rosenzweig

In their paper, Andrew Foster and Mark Rosenzweig employ a newly available panel data set to assess the impact of economic factors on fertility. The data set offers a representative sample of rural India over the period 1971–99, and it allows an examination of the main factors responsible for the rural fertility decline that occurred in India in the 1980s and 1990s. The authors first construct a simple dynamic model of fertility choice that incorporates the opportunity cost of time, the trade-off between investments in the human capital of children and family size (the so-called qualityquantity trade-off), and increased access to health and family planning services as determinants of fertility. The model yields testable hypotheses relating the fertility decision to its various determinants.

The authors then go on to use the data set to test the hypotheses so derived. A key feature of the data is that it links the households across different rounds of the survey. This permits the elimination of the influence of time-persistent cultural and preference differences across Indian states and households that may be correlated with economic change. When these cultural and preference differences are ignored, the empirical results lead to the conclusion that neither agricultural productivity growth nor changes in the value of time matter for fertility change. Cross-sectional variations in fertility decisions depend only on the spatial differences in maternal education. This analysis supports the advocates of direct intervention to influence fertility decisions.

But once the authors take the cultural and preference differences into account, the results change dramatically. The corrected results show that increases in the opportunity cost of women’s time, as reflected in female wages and increased investments in child schooling, explain the lion’s share of the fertility decline. The results leave very little role for parental schooling, male or female.

The results show that the areas of high agricultural productivity growth not only experience declines in fertility but also increases in the schooling of children and in the time devoted by married women to non-household work. The quantitative estimates suggest that aggregate wage changes, dominated by increases in the value of female wages, explain 15 percent of the decline in fertility over the 1982–99 period. In combination, changes in agricultural productivity and agricultural wage rates explain fully 61 percent of the fertility decline. Health centers are found to have had a significant effect on fertility as well, but the aggregate increases in the diffusion of health centers in villages only explains 3.4 percent of the fall because during the period there was little change in the distribution of such centers. The results thus suggest that the process of economic growth has had a major impact on fertility in India over the last two decades. The authors conclude that given sustained economic growth that continues to raise wages and increase returns to human capital, the fall in fertility in India will continue for the foreseeable future.

Managing the Environmental Consequences of Growth: Forest Degradation in the Indian mid-Himalayas, by Jean-Marie Baland, Pranab Bardhan, Sanghamitra Das, Dilip Mookherjee, and Rinki Sarkar

Given their enormous populations, the rapid, sustained growth of India and China has heightened concerns on the environmental consequences of such growth. Yet there is no accepted professional consensus on the nature and intensity of these links. For some economists, growth is seen as continuing to raise the demand for the earth’s energy resources. For others poverty is seen as the root cause, implying that growth is itself at least part of the solution. The so-called ‘environmental Kuznets curve’ hypothesis represents an intermediate view: economic development may initially aggravate environmental problems, but beyond a threshold of economic development environmental conditions improve. Yet another viewpoint stresses the importance of local institutions such as monitoring systems and community property rights. Particularly where deforestation is concerned it is argued that assigning local communities effective control of forest resources would substantially reduce environmental pressures, leaving little need for external policy interventions.

Despite these different perspectives, there is remarkably little systematic micro-empirical evidence on their relative validity. Efforts to test these hypotheses have been cast mainly on the basis of macro cross-country regressions, with only a few recent efforts to use micro evidence concerning behavior of households and local institutions governing use of environmental resources. The paper by Baland and others attempts to fill this gap through a careful analysis of the determinants of firewood and fodder collection, the chief causes of forest degradation in the mid-Himalayan region of India. The study seeks to predict the deforestation implications of future growth in the region, assess the likely impact on future livelihoods of local residents, and evaluate some specific policies to arrest forest degradation.

The analysis is based on a stratified random sample of 3,291 households in 165 mid-Himalayan villages in the Indian states of Uttaranchal (recently renamed Uttarakhand) and Himachal Pradesh, complemented by detailed measurement of forest conditions in surrounding areas used for collection of firewood and for livestock grazing. Prior accounts of the state of these forests suggest significant externality problems at both local and transnational levels. The local externality problem arises from the dependence of the livelihood of local inhabitants on neighbouring forests. The forests are important for the collection of firewood (the principal source of household energy), fodder for livestock rearing, leaf-litter for generation of organic manure, timber for house construction, and collection of herbs and vegetables. Sustainability of the Himalayan forest stock also has significant implications for the overall ecological balance of the South Asian region. The Himalayan range is amongst the most unstable of the world’s mountains and therefore inherently susceptible to natural calamities. There is evidence that deforestation aggravates the ravaging effects of regular earthquakes, and induces more landslides and floods. This affects the Ganges and Brahmaputra river basins, contributing to siltation and floods as far away as Bangladesh.

On the basis of contemporary recall the paper finds considerable evidence of forest degradation (though not deforestation) over the last quarter century in forest areas accessed by villagers. Such degradation is evident in the presence of over-lopped trees and low rates of forest regeneration, and a 60 percent increase in the average time needed to collect a bundle of firewood—approximately six additional hours per week per household. Against this background, the first part of the paper assesses the likely impact of growth in household incomes and assets on firewood collection. Such growth both gives rise to wealth effects (which raise collections by increasing household energy demand) and substitution effects (which lower collections by raising the value of time of households; almost all firewood is directly collected by consuming households with negligible amounts purchased in markets). The econometric analysis shows that the substitution and wealth effects offset each other, so that firewood and fodder collection is inelastic with respect to improvements in living standards. The paper finds no evidence for any effects of poverty or growth on forest pressure, nor any Kuznets-curve patterns.

In contrast, the effects of growth in population are likely to be adverse: rising population will cause a proportional rise in collections at the level of the village, while leaving per capita collections almost unchanged. To the extent that household fragmentation induces a shift to smaller household sizes, the resulting loss of economies of scale within households will raise per capita collections even further. Hence anthropogenic pressures on forests are likely to be aggravated by demographic changes, rather than economic growth. Unless there is substantial migration out of the Himalayan villages, the pressure on forests is likely to continue to grow in the future.

The paper next estimates the effect of such further projected forest degradation on the future livelihoods of affected villagers, mainly via a further increase in collection times for firewood. This is done by estimating the effects of increased collection times by one hour, which is a plausible estimate for the next decade or two. The welfare impact of this externality turns out to be surprisingly low: the effect is less than 1 percent loss in household income across the entire spectrum of households. Moreover, there are no significant effects on child labor, nor on the total labor hours worked by adults. This indicates that the magnitude of the local externality involved in use of the forests is negligible, providing a possible explanation for lack of effort among local communities to conserve neighboring forests. The argument for external policy interventions then rests on the larger ecological effects of forest degradation, which are beyond the scope of the paper.

Should the ecological effects demand corrective action, the paper surveys the available policy options. The authors find that the principal fuel alternative to firewood, somewhat surprisingly, is LPG (liquefied petroleum gas); kerosene and electricity are still secondary (despite the region’s enormous abundance of hydropower reserves). Household firewood use exhibited considerable substitution with respect to the price and accessibility of LPG cylinders, suggesting the scope for LPG subsidies as a policy which could be used to induce households to reduce their dependence on forests for firewood. The authors estimate the effectiveness and cost of a Rs 100 and a Rs 200 subsidy for each gas cylinder. The latter is expected to induce a rise in households using LPG from 7 percent to 78 percent, reduce firewood use by 44 percent, and cost Rs 120,000 per village annually (about 4 percent of annual consumption expenditure). A Rs 100 subsidy per cylinder would be half as effective in reducing wood consumption, but would have a substantially lower fiscal cost (Rs 17,000 per village annually, approximately 0.5 percent of annual consumption).

The econometric estimates also show that firewood use was moderated when local forests were managed by the local community (van panchayats) in Uttaranchal. However, this effect is limited to those community-managed forests that were judged by local villagers to be moderately or fairly effectively administered, which constituted only half of all (van panchayat) forests. It is not clear how the government can induce local communities to take the initiative to organize themselves to manage the neighboring forests effectively, when they have not done so in the past. Moreover, the authors conclude that, even if all state-protected forests could be converted to van panchayat forests, firewood use would fall by only 20 percent, which is comparable to the effect of a Rs 100 subsidy per LPG cylinder.

       

The fourth volume of the India Policy Forum features papers on schooling inequality, the duration of microfinance groups, sub-national fiscal flows, and reform of the power sector, land policies, and higher education. Suman Bery, Barry Bosworth, and Arvind Panagariya edited the volume. The editors' summary appears below, and you can download a PDF version of the volume: 

Download India Policy Forum 2007-2008 - Volume 4 (PDF) »
Download the 2007-2008 India Policy Forum conference agenda » 

Download individual articles:

• The Political Economy of the Indian Fiscal Federation
• Can Schooling Policies Affect Schooling Inequality? An Empirical Evaluation of School Location Policies in India
• Mortgaging the Future? Indian Higher Education
• Microfinance Lifespans: A Study of Attrition and Exclusion in Self-Help Groups in India

---

EDITORS' SUMMARY

The India Policy Forum held its fourth conference on July 17 and 18 of 2007 in New Delhi. This issue of the journal contains the papers and the discussions presented at the conference. The first paper examines the fiscal relationship between the Central Government and the states of India. The next two papers focus on the Indian educational system, specifically the social implications of government policies governing access to primary and secondary schools, and the challenges facing the country’s system of higher education. The fourth paper evaluates the performance of an important component of India’s microfinance system. Finally, the fifth paper provides an assessment of recent efforts to reform the distribution segment of the electric power industry. In addition to the working sessions of the conference, T.N. Srinivasan of Yale University, a member of the advisory panel, delivered a public lecture on the topic of: “Economic Reforms, External Opening and Growth: China and India.”

The Political Economy of the Indian Fiscal Federation

Despite massive unfulfilled need and repeated rhetorical commitment to increase public spending, public expenditure in India on education and health has never exceeded more than 3.3 and 1.3 percent of GDP, respectively. Implementing such spending, and to a large degree paying for it, is the responsibility of India’s states. In her paper, Indira Rajaraman argues that an important explanation for this persistently low level of spending lies in the nature of fiscal transfer arrangements in India’s federal structure, particularly the unpredictable and discretionary nature of significant components of these transfers.

The assignment of expenditure responsibilities and revenue rights in India gives rise to a vertical fiscal gap at the sub-national (state) level. The closure of this gap is provided for by the appointment, every five years, of a constitutional body called the Finance Commission. The report of each Commission, once accepted by the government, prospectively defines the formula for statutory flows from the national government (the “Center”) for the succeeding quinquennium. Such statutory flows from the Center to the states are predictable in relation to the underlying tax base, are pre-defined both in aggregate and in their distribution between states, and are unconditional. In Rajaraman’s view, these are all desirable properties to permit states to make multi-year expenditure commitments of the kind needed for provision of primary education and health.

However, such statutory flows represent only part of the story. In the years before 2005, statutory flows never exceeded 60 percent of the total flow. The remaining Center–state transfers took place under a range of nonstatutory mechanisms, largely under the control of an extra-constitutional body called the Planning Commission, and were unpredictable in aggregate from year to year.

While initially entirely discretionary, in 1969–70 the inter-state allocation of a portion of these “Plan” transfers was in turn subjected to a periodically revised formula (commonly referred to as the “Gadgil Formula”). However, this formulaic distribution was accompanied by a shift from a full grant basis to one comprising 70 percent loans and 30 percent grant. This shift to borrowed funds rather than grants implicitly altered incentives away from health and education state-level spending, which were unable to bear the ensuing interest burden. This disincentive, associated with the loan component, led to a gradual reduction in the share of this formulaic component in overall non-statutory flows.

Against this policy and institutional background, the paper performs three empirical exercises to determine the year-to-year changes in the share in grants from the Center received by states in aggregate that was not subject to formula and therefore open to bargaining by the states. The first empirical exercise quantifies the non-formulaic bargaining margin within aggregate flows for each year of the period 1951–2007, and estimates it to have varied inversely with an index of political fractionalization in the federation. As fractionalization increased, the formulaic share rose. The system thus fluctuated in response to changes in the political situation. This instability is inappropriate for funding requirements of basic developmental services.

The second exercise tests whether the control over aggregate state borrowing from the financial markets (constitutionally vested at the national level, and an important force for macroeconomic stability) represents opportunistic behavior influenced by the national electoral cycle. The difference between the consolidated fiscal imbalance, or deficit (aggregated across national and state levels), and the imbalance for the Central Government alone, provides a proxy measure for measuring the extent of sub-national borrowing from financial markets.

The consolidated fiscal imbalance is shown to have risen in years preceding Parliamentary elections. This is in contrast to the fiscal imbalance at the Center, which was not dictated by the electoral cycle. Taken together, the two sets of specifications strongly suggest that aggregate Central limits on state borrowing from financial markets were raised in pre-election years.

This inter-temporal variability, together with the spatial distortions implicit in the opaque system for allocating borrowing entitlements across the states in all years, further adds to the fiscal uncertainty faced by states, and inhibits orderly and sustained planning.

The third empirical exercise deals with a major initiative that commenced in 2005 to reduce the accumulated debt burden of the states. The proposal to reduce this debt originated from the Finance Commission, and addressed debt owed by the states to the Center arising from the loan component of Plan transfers mentioned earlier. The debt relief was to be granted in exchange for promises of fiscal adjustment.

The Finance Commission took the view, later endorsed by Parliament, that the differences in initial conditions across states should be taken into account in setting such conditionality. However the conditionality actually imposed by executive action at the Center envisaged a common terminal year deficit level for all states, implying a difference in the magnitude of adjustment that varies by as much as 10 percent of state GDP, with presumed adverse consequences, once again, for the stable provision of essential state level developmental services.

Starting in 2005–06, there has been a regime change with the replacement of direct Central lending to states for Plan expenditure, with a more inflexible system of caps on state borrowing as part of the conditionality for the above-mentioned debt concessions. Thus, the kinds of uncertainties and patterns in aggregate borrowing limits on states will not be visible for a while longer.

Rajaraman further notes that there has been a fall over the last ten years in the share of state expenditure in overall public spending on health and education because of the huge new Central expenditures on primary education and mid-day meals in schools, which are not routed through states. Thus, the policy response has been to alter the pattern of functional responsibility, rather than restoration to the states of their constitutionally assigned functions, with correction of the adverse incentives that became embedded in the de facto structure of sub-national funding.

Finally, Rajaraman also uses the empirical exercises to draw implications for the nature of dialogue between the Center and the states regarding fiscal matters. She notes the absence of a dispute-resolution forum where the de facto functioning of fiscal arrangements can be subjected to continual examination and monitoring by all partners to the federation. Within such a forum, major issues spanning Central transfers, revenue rights, expenditure externalities, and unfunded mandates, could be resolved in a participatory framework. Its need is likely to become even more urgent as India moves to an integrated nation-wide goods and services tax (GST), where the direct role of the states in revenue collection would be even more restricted, and the need for a broad review of fiscal federal arrangements even more urgent.

Can Schooling Policies Affect Schooling Inequality? An Empirical Evaluation of School Location Policies in India

Over the past several decades, a primary tool used by the Government of India to improve school enrollments, particularly those of the Scheduled Castes (SCs), has been the expansion of access to schools. To this end, the government has long embraced the objective of providing a school within easy walking distance from each rural household. In her paper, Anjini Kochar argues that in implementing this policy, scant attention was paid to the fact that targeting access to schools as a primary objective may constrain the government in addressing other critical aspects of schools, particularly those related to school quality. This is because decisions regarding the location of schools determine more than just access to schools; they combine with the residential structure of a society to define the school community, and hence school characteristics known to affect schooling attainment.

According to Kochar, it is the nature of residential communities in rural India that makes this trade-off between access and quality likely. Rural India resides in habitations—distinct residential settlements within a village— which vary in size but are, on average, fairly small. Because habitations are generally organized along caste lines, the rural economy is thus characterized by a considerable degree of caste-based segregation. The stated policy objective of providing a school within easy walking distance of each household, in conjunction with the geographic distance across habitations, requires the government to adopt a policy that provides schools to relatively small habitations and frequently results in multiple schools within a village.

Therefore, the paper argues that the current school location policy does not permit an optimal allocation of schools based upon enrollment or size. Because school enrollment determines the availability of inputs such as the number of teachers, there is a corresponding variation in the number of teachers per school. To the extent that this attribute of schools affects schooling attainment, Kochar argues that the policy generates schooling inequality across regions, with schools in smaller habitations being of generally lower quality than those in larger habitations.

School location policies also affect the caste composition of the student population. When schools are provided in SC habitations as well as in the other habitations of a village, the residential segregation that characterizes the village gets translated into a corresponding system of de facto schooling segregation. The corresponding difference in the caste composition of students across village schools is also likely to affect schooling attainment. 

The paper explores these hypotheses empirically, examining the relationship between school enrollments and availability of schools within habitations, as well as the effect of the number of teachers and the prevalence of schooling segregation. To identify the effect of these school attributes, Kochar uses the policy rules that determine whether a school can be placed in a habitation and the number of teachers assigned to a school. These rules are specified at the district level, and are implemented by the government based on district level data on habitations collected in the All India Education Surveys (AIES). The paper uses this same data that guides policy decisions, and relates it to household data from the Government of India’s National Sample Surveys. The use of policy rules specific to the attributes in question, and the availability of the data that guides current policy decisions, provides a compelling source of identification. To assess the effects of school segregation, Kochar uses the insight that schooling segregation exists only when schools are provided in the SCs/STs (Scheduled Castes/Scheduled Tribes) habitations. Because the AIES data also provide information on the size distribution of SC/ST habitations, it is possible to identify the probability of schools being located in SC/ST habitations (a proxy for schooling segregation) separately from the overall effect of school availability.

The paper has two principal findings. First, based on the size distribution of habitations within a district, the author finds that the current policy rules do affect access, but they also affect teacher numbers and schooling segregation. The regression analysis shows that schools with two or fewer teachers experience reduced enrollments. The results on teacher availability suggest that the decision to provide schools even to relatively small habitations generates a source of schooling inequality: children who reside in small habitations with schools attend schools of poorer quality than those who reside in larger habitations.

Second, the author finds that school location policies also perpetuate caste-based inequalities. Since the SC habitations are generally smaller than others, this means that SC schools are of lower quality, as measured in terms of the availability of teachers. The empirical results show an asymmetric effect of schooling segregation by caste: children of upper castes benefit significantly while segregation has little effect on the SCs. The benefits of living in districts with widespread access to schools therefore vary by caste.

The results of the paper suggest that improvements in school quality cannot be affected without re-considering the government’s school location policies. Kochar admits, however, that improving school quality along the dimensions considered in the paper is no easy task. She suggests an alternative policy that consolidates habitation schools to provide one school in each village, which would enable an optimal number of teachers in each school and thereby improve schooling attainment. While the greater distance to school implied by such a consolidation, particularly for children from the SC/ST habitations, may reduce access, the paper argues that the savings generated by the consolidation could be used to implement a system of cash transfers to children from the SC and the ST conditional on their school attendance records. The positive effects from increased teachers and economies of scale are enough to provide cause for a reconsideration of school location policy in India.

Mortgaging the Future? Indian Higher Education

The higher education system in India also faces troubling distortions and suboptimal outcomes. In their paper, Kapur and Mehta argue that the vast majority of institutions of higher learning are incapable of producing students with skills and knowledge. Attendance does not serve as a screening system for the vast bulk of students, nor does it prepare students to be productive and responsible citizens. The current system is highly centralized, politicized, and militates against the production of general intellectual virtues. It may come as no surprise then, that the last few years have witnessed a rapid rise in skill premiums in India despite the country’s huge population.
 
Kapur and Mehta maintain that the poor state of the sector and the recent rise in skill premiums can be largely explained by the regulatory bottlenecks facing Indian higher education. Despite impressive reforms elsewhere, Indian higher education remains one the last bastions of the “license control raj”—with troubling implications for India’s future. The paper argues that the result is a state of crisis in Indian higher education notwithstanding the success of a few professional schools. The fact that the system produces a noticeable number of high-quality students is largely the result of Darwinian selection mechanisms and very little because of pedagogic achievements.

According to the authors, the most acute weakness plaguing India’s higher education system is a crisis of governance, both of system and of individual institutions. Because the prevailing political ideological climate views elite institutions as anti-democratic, there is a natural response in political circles to influence admissions policies, internal organization, and the structure of courses and funding. The paper provides data to show that there has been a massive increase in both private higher education and the flight of elites to foreign educational institutions. However, the private sector also suffers from regulatory obstacles and governance weaknesses, raising doubts as to its ability to address the huge latent demand for quality higher education in the country.
 
From the perspective of the three key suppliers of Indian higher education—markets, the state, and civil society (philanthropy)—the authors elaborate on six significant distortions. First, the process of regulatory approvals diminishes the capacity of private investment to respond to market needs. Second, the regulatory process produces an adverse selection in the kind of entrepreneurs that invest since the success of a project depends less upon the pedagogic design of the project and more on the ability to manipulate the regulatory system. Third, there are significant market failures in acquiring physical assets that are necessary for educational institutions, especially land. Fourth, regulatory approvals are extremely rigid with regard to infrastructure requirements (irrespective of costs or location) and academic conformity to centrally mandated course outlines, degree structures, and admissions policies. Fifth, a key element of a well-functioning market — competition—is distorted by restricting foreign universities from setting up campuses in India, which limits benchmarking to global standards. Sixth, another central element of a well-functioning market, informational transparency, is woefully inadequate.

The university system in India is the collateral damage of Indian politics. As the paper demonstrates, the dismal educational outcomes are not the result of limited resources. For politicians, the benefits of the license-control raj extend beyond old-fashioned rent seeking by manipulating contracts, appointments, admissions, and grades in government-run colleges and universities to the use of higher education for vote-banks, partisan politics, and as a source of new entrepreneurial activities.

The authors identify three key variables that help to clarify the political economy of India’s higher education: the structure of inequality in India, the principal cleavages in Indian politics, and the nature of the Indian state. India is an outlier in the extreme degree of educational inequality, which has led to a populist redistributive backlash. However, the specific redistributive mechanisms are conditioned by the principal cleavages in Indian politics and the nature of the Indian state. The growth of identity politics has sharply enhanced political mobilization around two key cleavages in Indian society: caste and religion. Consequently, redistributive measures follow these two cleavages rather than other possibilities such as income, region (urban–rural), or gender. Thus, the focus on redistribution helps explain why Indian politicians have obsessed over reservations (that is, quota-based affirmative action) in elite institutions of higher education rather than improvements in the quality of primary and secondary schooling, and the thousands of colleges of abysmal quality.

The consequences of the preceding political economy are onerous. One, a diminished signaling effect of higher education; two, an ideological entrapment between what the authors call half-baked socialism and halfbaked capitalism, with the benefits of neither; and three, a pathology of statism wherein higher education policy is being driven foremost by the state’s own interest (or perhaps its own ideological whims). Much of what goes in the name of education policy is a product of the one overriding commitment of the education bureaucracy—namely state control in as many ways as possible.

The paper also highlights the role of the Indian judiciary in higher education reforms, arguing that it has done as much to confuse as to clarify the existing regulatory framework. Although there has been a distinct shift in the Supreme Court’s stance in the past decade, its primary response does not always center on what will enable the education system to adequately respond to demands. Rather, it has uneasily and often confusingly attempted to reconcile disparate principles, be it the dichotomy between education being a charitable or commercial enterprise, or the inherent tension between institutional autonomy and equitable access in higher education.

Kapur and Mehta conclude with a few options for change moving forward. Market failure in higher education means that substantial public investment will continue to be critical in this sector. However, since there are few clear analytical criteria to address the central question of what is “good” higher education, the paper argues that a regulatory system that emphasizes diversity, flexibility, and experimentation is in the long run most likely to succeed. Such a system will also need a different conception of accountability than the one currently prevailing in the Indian system, where resource allocation decisions are centralized to an extreme degree in the Planning Commission, the Ministry of Human Resource Development, and the University Grants Commission. Its quality depends entirely upon the informational resources of a very small group of decision makers and presumes an omniscience that few decision makers can have. Instead India needs to move to a regulatory system with increased horizontal accountability that empowers students to make better informed decisions. Finally, Indian policy makers need to recognize that the competition for talent is now global and that only a combination of a flexible and supple state system that enlists the energies of the market as well as a committed non-profit sector will be able to meet the challenges and the vast scale of demand for higher education in India.

The expansion of rural credit through the “formal” financial system has been a major goal of Indian policy since independence. While a number of initiatives (including nationalization of the country’s major commercial banks) have been taken over the years, success of these initiatives has been only partial.

In 1992, the Reserve Bank of India (RBI), India’s central bank and banking regulator, issued guidelines to the public sector commercial banks (which still dominate Indian banking) encouraging them to lend to small preformed groups called “self-help groups” (SHGs). These groups are almost always composed of rural women, and are often assisted by non-governmental organizations (NGOs) in their formation and their subsequent growth and development.

While the scheme, sometimes called the “commercial bank–SHG linkage scheme”, was in part inspired by the success of Bangladesh’s Grameen Bank in sustainably widening access to financial services in that country, the Indian SHG scheme differs in several respects from the Bangladesh model, and therefore needs to be assessed in its own right. One such difference is the provision of subsidized refinancing to the commercial bank by the National Bank for Agriculture and Rural Development (NABARD) (a publicly-owned affiliate of the RBI). The RBI reports that over 2.5 million of such groups have borrowed from commercial banks since 1992, and loan disbursements by commercial banks to SHGs were 29 percent of all direct bank credit to small farmers in 2004–05.

Microfinance Lifespans: A Study of Attrition and Exclusion in Self-Help Groups in India

However, in spite of the growing importance of SHGs as a source of credit to the poor, there is little systematic evidence on their internal functioning. The paper by Baland and Somanathan attempts to fill this informational gap by using survey data on SHGs created during the period 1998–2006. It does so by describing the survival of groups and members within groups, documenting group activities, and estimating the determinants of group and member duration using an econometric survival model.

The data comes from a survey of 1,102 rural SHGs and the 16,800 women who were members of these groups at some point during the period 1998– 2006. It considers all groups formed by PRADAN (an NGO that has actively promoted SHGs since the start of the NABARD program) in the districts of Keonjhar and Mayurbhanj in northern Orissa, and the Raigarh district in the newly formed state of Chhattisgarh in central India. Although the group members are engaged in a variety of collective activities, saving and credit do seem the most important. Almost all groups surveyed had made small loans to their members and 68 percent of them had received at least one loan from a commercial bank.

For those members who do borrow from the group the average size of the loan, provided from internal group funds, is Rs. 2,200 per year. For groups with at least one bank linkage, 83 percent of members in the group received some part of this loan, and the average amount received by these members is Rs. 2,189 per year. Although loan sizes provided by some specialized microfinance institutions are often larger, these SHG loans are sizable as a fraction of local earnings and, for women who received both group loans and bank loans, it corresponds to roughly two months of labor earnings at the minimum wage in these areas.

The group members in many SHGs appear to be collectively involved in activities not directly related to credit. About 10 percent of the surveyed groups are involved in the preparation of school meals, 3 percent administer state programs that distribute subsidized foodgrains, and about half of them get involved in family or village conflicts or help members during periods of personal distress. These groups therefore seem to play a role in promoting solidarity networks in the community.
 
The paper then estimates models of both group and member duration. It finds that factors behind group survival are quite different from those affecting member longevity. With respect to group survival, the highest attained level of education in the group is important for its survival, perhaps because some educated members are needed to facilitate transactions and ensure that group accounts are accurate. The presence of other SHGs in the area also has a positive effect on group duration. It may be that a dense cluster of groups allows for the sharing of costs, provides each group with ideas for successful activities, or simply instills in members the desire to survive, compete, and be part of a larger network.

Drawing upon on a large literature pointing to the importance of social heterogeneity in collective action, the paper then explores whether such heterogeneity matters for the average duration of groups and the members within groups. For each member surveyed, the paper records both their individual caste group (or jati) and the “official” caste category to which they belong—ST, SC, Other Backward Castes (OBC), and a residual category often termed General Castes that we refer to as Forward Castes (FC).

The particular question explored is whether heterogeneity matters for group functioning when members belong to different jatis in the same official caste category. The paper finds that commonly used measures of fractionalization and social heterogeneity based on these classifications do not have systematic effects on group survival, but that they do help explain the departure of individuals from groups. Even within broad caste categories, heterogeneity matters. This suggests that the “official” classifications fail fully to capture the relevant social hierarchy.

The members from traditionally disadvantaged groups, especially from the ST, are more vulnerable to group heterogeneity. In addition to group heterogeneity, lower levels of education, lower landholdings, and fewer relatives within the SHG are also associated with higher rates of member exit.

The paper also finds that the bulk of the difference in the duration of membership in a SHG observed between Chhattisgarh and Orissa can be attributed to characteristics of groups in these areas; the authors find that state-level variations in performance are negligible once these characteristics are incorporated in their model.

The results suggest that it is problematic to evaluate the success of microfinance interventions based on conventionally reported coverage figures because they do not account for attrition. The authors’ concern is not with overall attrition rates but with the selectivity they exhibit. It is predominantly the poorer and socially marginalized communities that leave the SHG network and this makes it unlikely that women moving out of SHGs enter individual contracts with lending institutions. It also means that some of those in desperate need of credit cannot obtain it from within this sector. To arrive at concrete policy prescriptions for this sector, more information is needed about the financial opportunities available to members once they leave this sector and the extent to which SHG lending crowds out other types of lending to the poor. Although the duration of membership is only one, admittedly crude, measure of the performance of the microfinance sector, the study suggests that survey data which follows members and groups in this sector is critical to an assessment of Indian microfinance.

The Power Sector in India: An Inquiry into the Efficacy of the Reform Process

Electricity supply constitutes the most important infrastructure constraint on overall economic growth in India. While the telecommunications sector has gone through a revolution of increased service and lower prices, and signs of progress are visible in virtually all areas of transportation, progress in improving the performance of the electricity sector has been painfully slow. The paper by Saugata Bhattacharya and Urjit R. Patel examines the sources of the inefficiencies and undertakes an evaluation of the efforts to reform the industry’s distribution segment, which is dominated by state governments.

The electricity sector can be divided into three segments: the generation of electricity using a variety of fuels; the transmission of electricity from generating plants over high voltage towers and lines to the major distribution points; and the distribution of electricity from distribution points to consumers whether industrial or residential. While both the Central Government and the states have the constitutional right to legislate in areas of generation and transmission, distribution is entirely under the jurisdiction of the states. Reform in the electricity sector is made far more difficult than in the telecommunications sector because it requires active participation from the states, which often lack the necessary technical, legal, and administrative talent as well as motivation.

By the early 1960s, the electricity sector had become a vertically integrated monopoly in each state with generation, transmission, and distribution coming under a single umbrella known as the State Electricity Boards (SEBs). Recent reforms have resulted in the unbundling of these segments in many but not all states, and distribution has been delegated to autonomous distribution companies (discoms). With rare exceptions, the latter remain in the public sector.

A key problem facing the electricity sector is the large magnitude of aggregate technical and commercial (ATC) losses. In effect, ATC losses reflect that fraction of power generation for which there is no remuneration. Nationally, they amounted to 37.2 percent of electricity generated in 2001–02. Electricity shortages could be considerably alleviated if these losses could be brought down to normal international levels. Bhattacharya and Patel analyze the success achieved in this area through a variety of reform efforts beginning in the early 2000s. They emphasize the state-by-state variation in performance as a means of identifying the most successful reform measures. The authors identify three specific reforms. First, SEBs, which buy electricity from central public sector generation companies, have traditionally accumulated large arrears with the latter. The Central Government offered them a one-time settlement (OTS) scheme provided they undertook a set of efficiency-enhancing steps. Second, the Central Government followed up the OTS with the Accelerated Power Development and Reform Program (APDRP) under which incentives were offered to undertake a variety of reforms. Finally, the government introduced the landmark Electricity Act of 2003 to bring about nation-wide systemic reforms in the sector.
 
The authors study revenues and cash flows of discoms and SEBs to explain the connection between the reform initiatives and financial performance across states. They also devise a composite index of commercial orientation, which they call the Index of Revenue Orientation (IRO), and rank utilities according to it. The authors explore data over several years from a consistent group of SEBs/discoms on outcomes, and the concomitant key economic and financial parameters that indicate the effect of reform steps associated with SEBs/discoms.

The analysis yields a number of provisional findings. First, at an aggregate level, the deterioration in the power sector has been arrested. The financial situation of the sector has eased and state government subsidies as a ratio to GDP have declined. The sector, nevertheless, is still far from financial viability. The key performance indicators, after having improved significantly in the immediate aftermath of the reform measures, seem to have stagnated after 2003–04. The ATC losses, while having dipped slightly from the 2000–01 crisis levels, remain very high. The basic problem is that although the sector is expected to have made a small cash profit at an all- India level in 2005–06, there are simply not enough resources in the state government-owned system to add capacity (and/or buy excess capacity from other systems) on any appreciable scale, let alone that which is required to power India’s economic growth.

Second, there are significant differences across states and utilities in performance and related indicators (including average revenue realization, collection efficiency, composition of demand, power units input, cost of supply, and physical losses). Also, the variability in performance among states and among utilities has increased between 2001–02 and 2004–05. The outcomes and many of the underlying explanatory variables have exhibited even greater unevenness after the reform measures than in 2001–02. Some states have improved significantly and some have deteriorated sharply. Five utilities account for 80 percent of the total cash losses and another five utilities contribute 78 percent of the cash profits.
 
Finally, using their IRO, authors note that the spread of performance between utilities increased in 2004–05, compared to the situation in 2001–02. While the average index value increased from 1.14 in 2001–02 to 1.3 in 2004–05, the associated standard deviation rose from 0.9 to 1.2. In other words, utilities had a more homogenous ordering of revenue orientation in 2001–02 than in 2004–05. The authors also show that the strongest influence on the extreme ends of the rankings in the IRO was the relative amount of power supplied to the subsidizing (industry) segment versus the subsidized (agriculture and residential) segment.

What implications do these findings have for policy? Various utilities have placed emphasis on different strategies for enhancing revenues. The fragmented information indicates that there is significant progress in many of the basic inputs of utilities. These, however, do not seem to be rapidly translating into higher revenues and cash flows. The unevenness in performance among discoms suggests that there would be large gains to tariff setting at the level of discoms rather than states, or, even at the level of distribution circle and city. This would attract reliable suppliers to discoms or circles who are paying their bills and lead to lower tariffs in an area with low ATC losses. The variation of improvements in different states is also a warning sign of the increasing disparities in the ability of states to attract investments and foster growth.

       

The fifth issue of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, includes papers on India’s financial sector, including capital account liberalization, currency appreciation and capital reserves, as well as growth and employment in Indian manufacturing and the impact of private education. The editors' summary appears below, and you can purchase a printed copy, or access individual articles by clicking on the following links: 

Download the 2008 India Policy Forum conference agenda »
Download India Policy Forum 2008-2009 - Volume 5 »
Purchase a printed copy of India Policy Forum 2008 - Volume 5 »

Download individual articles:

• Some New Perspectives on India's Approach to Capital Account Liberalization, by Eswar Prasad
• The Cost of Holding Excess Reserves: Evidence from India, by Abhijit Sen Gupta
• Big Reforms But Small Payoffs: Explaining the Weak Record of Growth and Employment in Indian Manufacturing, by Poonam Gupta, Rana Hasan, and Utsav Kumar
• What Explains India's Real Appreciation?, by Renu Kohli and Sudip Mohapatra
• Private Schooling in India: A New Educational Landscape, by Sonalde Desai, Amaresh Dubey, Reeve Vanneman, and Rukmini Banerji

---

EDITORS' SUMMARY

The fifth annual conference of the India Policy Forum was held on July 15 and 16 of 2008 in New Delhi. This issue of the journal contains the papers and discussion presented at the conference. A total of five papers were presented. The first paper examines the growth of private schools in India and their influence on school quality. It is an extension of recent issues of this journal that have evaluated the performance of India’s education system. The second paper addresses a major question of why the growth of manufacturing output and employment in India has been disappointingly low. The final three papers share a common focus on India’s external financial relations. The third paper analyzes the process of capital account liberalization and the integration of India’s financial institutions into the global financial system. The fourth paper measures the evolution of prices in the nontradable and tradable sectors of the Indian economy and seeks explanations for the rise in the relative price of nontradables. The last paper addresses the issue of the adequacy of India’s current foreign exchange reserves.

Private Schooling in India: A New Educational Landscape

Although the growth of private schooling in India is ubiquitous even in rural areas, the contours and implications of this change remain poorly understood, partially due to data limitations. Official statistics often underestimate private school enrollment and our understanding of the effectiveness of private education in India is also limited. If we assume that parents know what is best for their children and that what is beneficial privately is also beneficial socially, their decision progressively to opt for private schools would suggest the superiority of the latter over public schools.

In their paper, Sonalde Desai, Amaresh Dubey, Reeve Vanneman, and Rukmini Banerji point out, however, that this is not a foregone conclusion. The vast body of research on school quality, especially that relating to the United States, suggests that much of the observed difference in school outcomes results from differences in parental background and levels of parental involvement with children going to different schools. In the Indian context, one runs the additional risk that many private schools are poorly endowed with resources, unrecognized (lack accreditation), and have untrained teachers. A proper empirical examination is essential to arrive at an informed assessment.

The authors use data generated from a new survey, the India Human Development Survey 2005 (IHDS), jointly conducted by researchers from the University of Maryland and the National Council of Applied Economic Research. These data allow them to explore some of the links between private school growth and school quality in India. They begin by providing a description of public and private schools in India as well as some of the considerations that guide parents in selecting private schools. They then examine whether private school enrollment is associated with superior student performance and whether this relationship is concentrated in certain sections of the population.
 
The IHDS data show considerably higher private school enrollment, particularly in rural areas, than documented in other studies. The authors place private school enrollment (including in schools receiving grants-in-aid from the government) among children aged 6–14 years at 58 percent in urban and 24 percent in rural areas. Private school enrollment is particularly high in India’s most populous state, Uttar Pradesh. In terms of outcomes, based on specially designed reading and arithmetic tests administered to children aged 8–11 years, those in private schools exhibit better reading and basic arithmetic skills than their counterparts in government schools.

But since these children also come from higher income households and have parents who are better educated and more motivated to invest in their children’s education, it is important to control for selectivity bias. The paper utilizes a variety of techniques (including multivariate regression, switching regression, and family fixed effects) to examine the relationship between private school enrollment and children’s reading and arithmetic skills. While no model is able to completely eliminate possible biases—there is a different source of bias left in each case—taken together, the results strongly indicate that private school enrollment is associated with higher achievements in reading and arithmetic skills. The magnitude of the gain from private school enrollment varies from one-fourth to one-third standard deviation of the scores.

The paper also distinguishes the relative magnitudes of the benefits from private schooling to children with rich versus poor economic backgrounds. It finds that the benefits to private school enrollment for children from lower economic strata are far greater than those for children from upper economic strata; at upper income levels, the difference between private and government school narrows considerably. This seems plausible since at upper income levels, students are likely to have better access to alternative educational resources including well-educated parents.

While the results of the paper point to positive benefits from private schools, especially for the underprivileged, the authors emphasize that their analysis does not imply that private schooling is the elixir that will cure the woes of primary education for children from poor families. They argue that both empirical results based on the IHDS data and theoretical considerations point to the need for caution.

Empirically, the paper finds that while private school students perform better than their counterparts in government schools, these effects are modest in comparison to other factors influencing the outcomes. For example, the results show substantial inter-state variation in the scores of both government and private school students. Controlling for parental characteristics, government school students in states as diverse as Kerala, Himachal Pradesh, Chhattisgarh, and West Bengal perform at a higher level than private school students in many other states. More importantly, the private school advantage seems to be concentrated in states such as Bihar, Uttar Pradesh, Uttarakhand (formerly Uttranchal), and Madhya Pradesh—states known for poorly functioning public institutions as well as high rates of poverty or low per capita incomes.

These results suggest that before a blanket embrace of private schooling, it may be worthwhile to understand why some government schools function well and others do not. Blaming teacher absence is superficially appealing, but theoretical considerations suggest that the complete story may be more complex. If the classroom environment in private schools is favorably impacted by the demands made by paying middle-class parents, a voucher program that brings a large number of poorer parents to the schools may dilute this effect. But this argument would seem to be undermined by the fact that the authors themselves find the private school effect to be significant in poor states with many students coming from poor families.

Nevertheless, the authors are correct in noting that it will be useful to further examine the processes that give rise to different classroom environments as between government and private schools before jumping to wholesale voucher programs leading to privatization of education. We must know, for example, whether children from poor households in private schools benefit because their parents are able to prevent teachers from resorting to physical punishment. And if so, would this benefit be diluted when vouchers rather than parents pay for the tuition? Can we devise mechanisms to ensure that government school teachers do not resort to discriminatory behavior when dealing with students from poor families? To date, the discourse on the benefits of private schooling in a developing country context has focused on teacher absence, lack of accountability, and lower costs of private schooling. While these are important issues, perhaps future research could try to shed additional light on other processes that establish different environments in private and public schools.

Big Reforms But Small Payoffs: Explaining the Weak Record of Growth and Employment in Indian Manufacturing

The promotion of manufacturing, particularly for export, has been a key pillar of the growth strategy employed by many successful developing countries, especially those with abundant labor. India’s recent experience is puzzling on two accounts. While India’s economy has grown rapidly over the last two decades the growth momentum has not been based on manufacturing. Rather the main contributor to growth has been the services sector. Second, the relatively lackluster performance of Indian manufacturing cannot be ascribed to a lack of policy initiatives. India introduced substantial product market reforms in its manufacturing sector starting in the mid-1980s, but the sector has never taken off as it did in other high-growth countries. Moreover, insofar as subsectors within manufacturing have performed well, these have been the relatively capital or skill-intensive industries, not the labor-intensive ones as would be expected for a labor abundant country like India.

One of the main components of reforms in India was the liberalization of the industrial licensing regime, or “delicensing.” Under the Industries Development and Regulation Act of 1951, every investor over a very small size needed to obtain a license before establishing an industrial plant, adding a new product line to an existing plant, substantially expanding output, or changing a plant’s location.

Over time, many economists and policymakers began to view the licensing regime as generating inefficiencies and rigidities that were holding back Indian industry. The process of delicensing started in 1985 with the dismantling of industrial licensing requirements for a group of manufacturing industries. Delicensing reforms accelerated in 1991, and by the late 1990s, virtually all industries had been delicensed. Large payoffs were expected in the form of higher growth and employment generation with this policy reform.
 
However, the payoffs to date have been limited. It could be argued that a lag between the announcement and implementation of the policy, and also a lag between implementation and the payoffs may be responsible. However, as many as 20 years have passed since the first batch of industries was delicensed, and the last batch of industries was delicensed almost a decade ago; the view that payoffs would occur with a lag is no longer easy to sustain.
 
What then could be the reasons for the rather lackluster performance of the industrial sector? The following factors are usually cited: (a) strict labor laws have hindered growth, especially of labor-intensive industries; (b) infrastructure bottlenecks have prevented industries from taking advantage of the reforms; and (c) credit constraints due to weaknesses in the financial sector may be holding back small- and medium-sized firms from expanding. More recently, two other factors have also been raised. First, it has been pointed out that the evolution of Indian industry may be influenced by path dependence or hysteresis so that despite the reforms of the mid-1980s and the early 1990s the relative profitability of capital and skill-intensive activities remains higher than that of labor-intensive activities. Second, the major reform initiatives undertaken so far—focused mainly on product market reforms—have been national ones. However, the working of product markets in a federal democracy such as India is influenced not only by regulations enacted by the Central Government, but also by those enacted by individual state governments. Moreover, much of the authority on administration and enforcement of regulation also rests with state governments. Accordingly, it has been pointed out that regulatory and administrative bottlenecks at the state level may be blunting the impact of reforms undertaken at the central level.

Using the Annual Survey of Industries (ASI) data at the three-digit level for major Indian states over the period 1980–2004, the paper by Gupta, Hasan, and Kumar analyzes the effects of delicensing reforms on the performance of what in India is called registered manufacturing. (The portion of manufacturing in the so-called unorganized sector is not covered by the ASI data and is therefore not analyzed in the paper; however, this component was also unlikely to have been affected by the licensing controls when these were in effect.) The paper utilizes variations in industry and state characteristics in order to identify how factors such as labor regulations, product market regulations, availability of physical infrastructure, and financial sector development may have influenced the impact of delicensing on industrial performance.

The main findings of the paper are as follows:

1. The impact of delicensing has been highly uneven across industries. Industries that are labor intensive, use unskilled labor, depend on infrastructure, or are energy dependent have experienced smaller gains from reforms.

2. Regulation at the state level matters. States with less competitive product market regulations have experienced slower growth in the industrial sector post-delicensing, as compared to states with competitive product market regulations. States with relatively inflexible labor regulations experience slower growth of labor-intensive industries and slower employment growth.

3. Infrastructure availability and financial sector development are important determinants of the benefits that accrued to states from reforms.

If supportive regulatory conditions prevailed and infrastructure availability allowed it, businesses responded by expanding their capacity and grew; thus hysteresis does not seem to matter. The authors acknowledge that their approach is subject to a few caveats. Several other major reforms have been introduced that impact Indian manufacturing, including reductions in barriers to trade and the dismantling of the policy of reserving particular industries for production by small-scale enterprises. These are not systematically examined and might interact with the impact of delicensing. Second, the neglect of the unorganized sector noted above means that the interactions between the “registered” and the “unorganized” sectors in adjusting to policy change is not systematically explored. Finally, regulations can affect firms and industries in many different ways. For example, they may create incentives for firms to operate in the informal sector, stay relatively small, or adopt particular types of techniques. While the analysis of aggregate data can shed (indirect) light on some of these effects, a more complete analysis would require the use of a microbased approach utilizing plant-level data.
 
The authors conclude that the agenda of reforms to promote manufacturing is not yet complete. Areas for additional action include further reform of labor market regulations; improvement of the business environment; provision of infrastructure and further development of the financial sector. In addition, in a federal democracy like India, reforms at the Center (especially those related to labor) need to be complemented by reforms at the state level.

Some New Perspectives on India's Approach to Capital Account Liberalization

Capital account liberalization remains a highly contentious issue. Proponents argue that rising cross-border flows of financial capital allow for a more efficient allocation of financial resources across countries and also permit countries to share their country-specific income risk more efficiently. Detractors have blamed capital account liberalization as being the root cause of the financial crises experienced by many emerging market countries. Their case has been strengthened by the lack of clear evidence of the presumed benefits of financial globalization. This debate has again become topical as many emerging market economies and even some low-income countries are coping with volatile capital inflows, with major economies like China and India contemplating further opening of their capital accounts.
 
A common argument in the literature in favor of openness from the viewpoint of the developing economies has been that access to foreign capital helps increase domestic investment beyond domestic saving. The recent literature has revived another older argument emphasizing the indirect benefits of openness to foreign capital, including the development of domestic financial markets, enhanced discipline on macroeconomic policies, and improvements in corporate governance.
 
In his paper, “Some New Perspectives on India’s Approach to Capital Account Liberalization,” Eswar S. Prasad argues that a major complication in considering capital account convertibility is that economies with weak initial conditions in certain dimensions experience worse outcomes from their integration into international financial markets in terms of both lower benefits and higher risks. For countries below these “threshold” conditions, the benefit–risk tradeoff becomes complicated and a one-shot approach to capital account liberalization may be risky and counter-productive. This perspective points to a difficult tension faced by low and middle-income countries that want to use financial openness as a catalyst for the indirect benefits mentioned above.
 
The author, nevertheless, maintains that the practical reality is that emerging market countries are being forced to adapt to rising financial globalization. In his view, capital controls are being rendered increasingly ineffective by the rising sophistication of international investors, the sheer quantity of money flowing across national borders, and the increasing number of channels (especially expanding trade flows) for the evasion of these controls. Hence, concludes the author, emerging market economies like China and India are perforce grappling with the new realities of financial globalization, wherein capital controls are losing their potency as a policy instrument (or at least as an instrument that creates more room for monetary and other macro policies). Against this background, the author provides a critical analysis of India’s approach to capital account liberalization through the lens of the promised indirect benefits from such liberalization. In recent years, the Reserve Bank of India (RBI) has taken what it calls a calibrated approach to capital account liberalization, with certain types of flows and particular classes of economic agents being prioritized in the process of liberalization. The result of these policies is that, in terms of overall de facto financial integration, India has come a long way, experiencing significant volumes of inflows and outflows. Although foreign investment flows crossed 6 percent of GDP in 2007–08, in the author’s view the flows are modest, placing India at the low end of the distribution of de facto financial integration measures in an international comparison across emerging market economies.

The RBI’s cautious and calibrated approach to capital account liberalization has resulted in a preponderance of FDI and portfolio liabilities in India’s stock of gross external liabilities. The author agrees that this is a favorable outcome in terms of improving the benefit–risk tradeoff of financial openness and has reduced India’s vulnerability to balance of payments crises. But he goes on to argue that the limited degree of openness has, nevertheless, hindered the indirect benefits that may accrue from financial integration, particularly in terms of broad financial sector development.

Against the backdrop of recent global financial turmoil, the author sees merit in a high level of caution in further opening the capital account. He states, however, that excessive caution may be holding back financial sector reforms and reducing the independence and effectiveness of monetary policy. He goes on to argue that increasing de facto openness of the capital account implies that maintaining capital controls perpetuates some distortions without the actual benefit in terms of reducing inflows. Flows of different forms are ultimately fungible and it is increasingly difficult, given the rising sophistication of investors and financial markets, to bottle up specific types of flows. In the author’s view, rising de facto openness in tandem with de jure controls may lead to the worst combination of outcomes—new complications to domestic macroeconomic management from volatile capital flows with far fewer indirect benefits from financial openness.

The author takes the view that a more reasonable policy approach would be to accept rising financial openness as a reality and to manage, rather than resist (or even try to reverse), the process of fully liberalizing capital account transactions. Dealing with and benefiting from the reality of an open capital account will require improvements in other policies—especially in monetary, fiscal, and financial sector regulations. This approach could in fact substantially improve the indirect benefits to be gleaned from integration into international financial markets.

In terms of specific steps, the author suggests that this may be a good time to allow foreign investors to invest in government bonds as an instrument of improving the liquidity and depth of this market. A deep and well-functioning government bond market can serve as a benchmark for pricing corporate bonds, which could in turn allow that market to develop. By providing an additional source of debt financing, it would create some room for the government to reduce the financing burden it currently imposes on banks through the statutory liquidity ratio—the requirement that banks hold a certain portion of their deposits in government bonds.

The author also recommends an “opportunistic approach” to liberalization whereby outflows are liberalized during a period of surging inflows. He suggests that if undertaken in a controlled manner, it could generate a variety of collateral benefits—sterilization of inflows, securities market development, and international portfolio diversification for households. The RBI has recently adopted such an approach by raising ceilings on external commercial borrowings in order to compensate for capital outflows. According to the author, these are steps in the right direction. But one potential problem he sees is that when taken in isolation rather than as part of a broader and well articulated capital account liberalization agenda, these measures are subject to reversal and unlikely to be very productive.

Despite this enthusiasm for capital account liberalization, the author goes on to suggest that none of this implies that the remaining capital controls should be dropped at one fell swoop. What it does imply is that there are some subtle risks and welfare consequences that can arise from holding monetary and exchange rate policies as well as financial sector reforms hostage to the notion that the capital account should be kept relatively restricted for as long as possible. It may seem reasonable to maintain whatever capital controls still exist in order to get at least some protection from the vagaries of international capital flows. However, in the author’s view, not only this is an unrealistic proposition, it could detract from many of the potential indirect benefits of financial integration. He sees steady progress toward a more open capital account as the most pragmatic policy strategy for India.

What Explains India's Real Appreciation?

India’s rapidly evolving economic landscape during the past two decades has elicited broad discussion of how changing economic factors will influence the future of India’s growth and prosperity. Often overlooked in the discussion are the effects of India’s changing economic structure on relative price dynamics, which have consequential effects on the allocation of resources in the economy. A host of recent developments would likely induce a change in relative prices, including the shift in economic policies beginning in 1991, the acceleration in economic growth, a rapid increase in exports, and rising per capita incomes and productivity growth. Taken together, these factors amount to the “catch-up” process that typically leads to an increase in the relative price of nontradables in developing economies.

In their paper, Renu Kohli and Sudip Mohapatra trace relative price developments in a two-sector, two-good (tradable and nontradable) framework for the Indian economy over the period 1980–2006. In line with their a priori expectations, the ratio of nontradable to tradable prices, also called the internal real exchange rate, rises consistently over the past one-and-a-half decades. Their empirical analysis confirms that this rise, or real appreciation, is driven by both demand and supply factors. A later section uses the results of the study to illuminate the evolution of past macroeconomic policies. Finally, using India’s recent robust economic performance as a guide, the paper concludes with a discussion on an appropriate macroeconomic policy mix for the future.

The authors construct the relative price of nontradables from the national accounts statistics using the degree of participation in trade as a criterion for classifying the economy into traded and nontraded sectors; the tradable– nontradable price series are derived as respective deflators for the two sectors. They find that the tradable and nontradable sectors are characterized by divergent inflation rates with the relative price of nontradables accelerating after 1991; on average, the difference exceeds 1 percentage point per year during 1991–2006. There are two competing explanations for such a divergent acceleration in prices: (a) the Balassa–Samuelson hypothesis posits that real exchange rates tend to appreciate as countries develop and (b) other demand-side explanations originate from changes in government spending and/or a shift in consumer preferences toward services (nontradable) as incomes rise. The preliminary analysis presented in the paper indicates a role for both factors in explaining the real exchange rate appreciation. A puzzle posed by the data, however, is the increase in the relative price of nontradables in conjunction with an expansion of the tradable sector, which suggests an offsetting role might have been played by economic reforms like import liberalization and exchange rate correction, leading to the emergence of new tradables through an increase in competitiveness.

The paper examines the determinants of this divergence in an integrated framework, exploring the role of both demand and supply side determinants. The relative price of nontradables is modeled as a function of the labor productivity growth gap between the tradable and nontradable sectors, real government expenditure as a share of gross domestic product, real per capita income, and a measure of import tariffs. The labor productivity growth gap and the import tariff rates capture the supply-side influences due to technological change (the Balassa–Samuelson effect) and the impact of trade liberalization, which accelerated after 1991. The fiscal and income growth variables summarize the demand side impact upon relative prices. The regression results reveal a significant influence of both demand and supply factors. A percentage point rise in the relative price of nontradables is associated with a 5 percent increase in the labor productivity growth gap, a 4 percent increase in per capita income growth, and a 3 percent increase in fiscal growth; the estimated impact of a fall in import prices upon the relative nontradables’ inflation rate is 0.04. The results are robust to a number of sensitivity checks, including different estimation methods, stability, specification, omission, and inclusion of variables as well as alternate definitions of the variables.

A decomposition of the relative price change over the sample period indicates that demand factors accounted for almost three-fourths of the average relative price increase over the sample period. In contrast, the supply-side influence stemming from the labor productivity growth differential between the two sectors accounted for only 35 percent of the mean of the dependent variable. Noting the rapid decline in import tariffs after 1991, the authors argue that this result underscores the role of convergence in tradable prices and its contribution to the divergence in sectoral inflation rates in liberalizing economies.

Kohli and Mohapatra link their results to macroeconomic policy by tracing the past evolution of exchange rate and fiscal policies in India. They argue that the fiscal expansion of the 1980s ending in the 1991 crisis led to a rise in the inflation rate of the nontradable sector, while the exchange rate policy favored steady depreciation in order to retain competitiveness and boost growth. Noting India’s recent and potential economic performance, its buoyant exports, and strong per capita income growth, they observe that the pressures upon real exchange rate appreciation, internal as well as external, are likely to continue—and indeed, accelerate—in the future. Under the circumstances, an appropriate macroeconomic policy mix would be to continue with the gradual increase in exchange rate flexibility so as to absorb the equilibrium shifts in the economy. This could be complemented with fiscal consolidation to offset competitiveness losses arising from the nominal and real exchange rate appreciation.

The Cost of Holding Excess Reserves: Evidence from India

Finally, the paper raises a number of critical data issues, not the least of which is the absence of a services price index in India. The implicit price series developed in the paper strongly suggests an understatement of generalized inflation through the current inflation indicator, the wholesale price index (WPI), which can be misleading. It also identifies gaps in the data on sectoral employment shares, emphasizing the need for sufficiently disaggregated information to enable fruitful analysis and informed policymaking.
 
The Asian financial crisis of 1997–98 served as a startling revelation to emerging economies of the drawbacks of financial integration. Neither the International Monetary Fund nor reliance on more flexible exchange rate regimes succeeded in preventing—or indeed, adequately combating—such a systemic crisis. Moreover, even countries practicing sound macroeconomic policies realized they were not immune to such crises as they can be hit by contagion and financial panic from other countries, regardless of their proximity. As a result, many countries have decided that they need to protect themselves against a speculative currency attack, and further, that the key to self-protection is the accumulation of substantial holdings of liquid foreign exchange. Over the past decade, developing countries, and particularly those in East and South Asia, have greatly expanded their foreign currency reserves. By the middle of 2008, the reserves of China, South Korea, Russia, and India alone amounted to over US$2.85 trillion. In the case of India, reserve accumulation has increased five-fold since 2001–02.
 
The security that results from high reserves does come at a price, however. The magnitude of reserves being held combined with the fact that most reserves are held as low-yield government bonds suggests that the opportunity cost of reserve holdings can be substantial. In his paper, Abhijit Sen Gupta employs a new empirical methodology to evaluate the factors influencing the demand for international reserves in emerging markets, and he estimates the costs incurred in the process for India in particular. Sen Gupta argues that the traditional analysis of the costs of reserve holdings, which considers a single adequacy measure (namely, import cover), does not reflect the multitude of factors influencing demand for international reserves in a financially integrated world. In addition to the desire to meet potential imbalances in current account financing, a central bank may also hold reserves to defuse a potential speculative run on its currency or to cover its short-term debt obligations.

The author first introduces a simple empirical model to highlight the principal determinants of reserve holding in emerging countries. Using the results of this model, one can create an “international norm” of reserve holding, and thereby calculate a measure of “excess reserves” which is the difference between actual reserve holdings and this international norm. Next, Sen Gupta provides a brief discussion of the history of reserve accumulation in India. As the bulk of India’s reserves are held in the form of highly liquid securities or deposits with foreign central banks and international organizations, the real return on these assets in recent years has been largely negative. In the final section, Sen Gupta estimates the cost of holding reserves in India by considering three alternative uses of the resources currently held in excess of the international norm described earlier.

The empirical section of the paper employs a sample of 167 countries over the period 1980–2005 and a regression framework that identifies the principal determinants of cross-country variation in the level of international reserves. In this context, reserves are defined as total reserves minus the country’s holdings of gold. The dependent variable is this measure of reserves scaled by Gross Domestic Product (GDP). The results of this regression accord well with the a priori expectations. The log of per capita GDP and a proxy for trade openness (measured as the ratio of imports to GDP) both record positive and significant coefficients for reserve holding, implying that richer countries and more open countries tend to have higher reserves. In addition, the regression results reveal that countries with less flexible exchange rate regimes and more capital account openness tend to accumulate greater reserves.

Next, the author uses the above framework for the period 1998–2005 to predict the demand for international reserves for various emerging countries. The difference between actual reserves and the reserve level predicted by the equation is interpreted as a measure of excess reserves. As illustrations of his results, Sen Gupta finds that by 2005, Indonesia, Philippines, and Argentina had reserves close to the amount predicted by the model, while Brazil’s reserve accumulation fill significantly short of the predicted value. In contrast, China, India, Korea, Russia, and Malaysia all exhibit significantly more reserves than what could be interpreted as an “international norm.”

In his discussion of India’s experience in reserve accumulation, Sen Gupta identifies several distinct episodes of significant reserve buildup in India: April 1993 to July 1995, November 2001 to May 2004, and November 2006 to February 2008. These three episodes account for more than US$ 220 billion worth of India’s current stock of reserve accumulation of US$ 300 billion. In each of these episodes, the author discusses the role that both the government and the Reserve Bank of India (RBI) played in the decision to accumulate reserves. Sen Gupta estimates that by the end of 2007, India had more than US$ 58 billion of excess reserves. In order to impute the costs of holding these excess reserves, he considers three alternative uses of the resources: financing physical investment, reducing the private sector’s external commercial borrowing, and lowering public sector debt. The cost is substantial across all specifications, both in terms of actual income foregone and as a percentage of GDP. The author estimates the annual cost of keeping excess reserves in the form of low-yielding bonds rather than employing the resources to increase the physical capital of the economy to be approximately 1.6 percent of GDP. Alternatively, if the resources were instead used to reduce private sector external commercial borrowing or public sector debt, India could gain more than 0.23 percent of GDP.

       

The sixth annual India Policy Forum conference convened in New Delhi from July 14-15. This fourth issue of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, covers the global financial crisis and the implications for India. The editors' summary appears below, and you can download a PDF version of the volume, or access individual articles by clicking on the following links:

Download the India Policy Forum 2009-2010 agenda »
Download India Policy Forum 2009-2010 - Volume 6 » 

Download the individual volumes:

• Why India Choked When Lehman Broke
• Global Crisis and the Indian Economy - On a Few Unconventional Assertions
• India Transformed? Insights from the Firm Level 1988-2007
• Climate Change and India: Implications and Policy Options
• India Equity Markets: Measures of Fundamental Value

---

EDITORS' SUMMARY

The sixth annual conference of the India Policy Forum was held on July 14 and 15, 2009 in New Delhi. The meeting was dominated by considerations of the global financial crisis and its implications for India. The events of 2009 provided evidence of India’s growing integration with the global economy, an illustration of the resilience of country’s economic growth, and its emergence as a major participant in an expanded system of governance for the global economic system. This issue of the journal includes four papers and the associated discussion from the conference, and a fifth paper that was originally presented at the 2007 conference. 

Indian Equity Markets: Measures of Fundamental Value

Beginning in 2005, the Indian equity market underwent a period of explosive growth rising from a valuation equal to about 50 percent of GDP to a peak of 150 percent by early 2008. Growth of this magnitude raised concerns that the market was hugely overvalued and it was often characterized as an example of an asset market bubble. The market valuation subsequently fell back to about 70 percent of GDP during the global financial crisis. This experience stimulated interest in India in the question of what would constitute a reasonable or fair value for equities that could be use as a standard for evaluating market fluctuations. In “India Equity Markets: Measures of Fundamental Value,” Rajnish Mehra examines this question by comparing corporate valuations in India over the period of 1991–2008 relative to three key market fundamentals: the corporate capital stock, aftertax corporate cash flows, and net corporate debt.

Mehra’s model builds on the idea of a link between the market value of the capital stock and the debt and equity claims on that stock—a concept known as Tobin’s q. He extends the existing framework using some prior work by McGrattan and Prescott on US equity valuations, and he incorporates both intangible capital and key features of the tax code. It is a multi-period model in which firms maximize shareholder value subject to a production function with labor and two kinds of capital—tangible and intangible—as the inputs. Wages, intangible investment and depreciation of tangible capital are treated as tax-deductible expenses. It yields an equilibrium representation of the relationship between the market value of equity and the reproduction value of tangible and intangible capital in the corporate sector. All of the nominal values are normalized by GDP and the result is a framework that can be used to evaluate the effect on equity prices of a range of different policy actions, such as changes in the taxation of corporate dividends.

The model is calibrated to the Indian situation with respect to the capital stock, tax rates, and the characteristics of economic growth in the nonagricultural sector. Mehra also develops his own estimates of the valuation of intangible capital using three different methodologies. The first method is that used by McGrattan and Prescott and is based on the assumption that tangible and intangible capital earn the same rate of return along a balanced growth path. That assumption allows him to derive the equilibrium ratio of tangible and intangible capital. The alternative methods are based on recent work in the United States by Corrado, Hulten, and Sichel that involves cumulating investment flows to estimated stocks. Mehra uses two different methods to calibrate the Indian data with information from the United States, and he estimates the stock of intangible capital for two periods of 1991–2004 and 2005–08. The focus on two sub-periods is designed to capture a structural break in the data: Indian equity valuations as a fraction of GDP were fairly constant over the period 1991–2004, rising sharply starting in 2005. The two estimates of the stock of intangibles based on the comparison with the United States are very similar, but they are significantly lower than the estimates obtained with the McGrattan and Prescott methodology.

His analysis suggests that an optimistic estimate of the fundamental value of the current Indian equity market is about 1.2 times GDP, considerably lower than the 1.6 value observed in 2008, but close to the average over the full period. One effect on equity prices that the study does not account for is a change in investor demand from foreign institutional investors. If the effect of this is a change in the characteristics of the marginal investor, the relevant marginal rate of substitution will change, and with it market valuations. Thus, Mehra suggests that the extension of the model to include foreign investors should be a major objective for future research.

Why India Choked when Lehman Broke

Mehra’s paper generated an active discussion that centered on the difficulties of accurately measuring some of the values, such as the rate of technological change and real interest rates, required to calibrate the model to India’s situation. Several commentators also emphasized the important role of foreign investors. Others pointed to the difficulties of applying a model based on equilibrium conditions to the highly transitional nature of the Indian economy. In “Why India Choked when Lehman Broke,” Ila Patnaik and Ajay Shah analyze the rapid transmission of the impact of the Lehman bankruptcy into Indian financial markets. The authors propose an explanation that revolves around the treasury operations of Indian multinational corporations (MNCs). Such MNCs are less subject to the capital controls imposed on purely domestic Indian companies. 

The developments that emerged within Indian financial markets in September and October following the bankruptcy of Lehman Brothers on September 14, 2008 were quite extraordinary. First, there was a sudden change in conditions in the money market. Call money rates shot up immediately after September 15. Despite swift action by the Reserve Bank of India (RBI), the tightness persisted through the month of October. The operating procedures of monetary policy broke down in unprecedented fashion and interest rates were persistently above the target range of the Reserve Bank of India (RBI). The call rate consistently breached the 9 percent ceiling for the repo rate and attained values beyond 15 percent. There was a huge amount of borrowing from the RBI. On some days, the RBI lent an unprecedented Rs 90,000 crore through repos. These events are surprising given the extent of India’s de jure capital controls that were expected to isolate its financial markets from global developments. Greater understanding of crisis transmission, the effectiveness of capital controls, and India’s de facto openness could be achieved by carefully investigating this episode and identifying explanations.

The main hypothesis of this paper is that many Indian firms (financial and non-financial) had been using the global money market before the crisis to avoid India’s capital controls. This was done by locating global money market operations in offshore subsidiaries. When the global money market collapsed upon the demise of Lehman, these firms were suddenly short of dollar liquidity. They then borrowed in the rupee money market, converting rupees to US dollars, to meet obligations abroad.

The result was strong pressure on the currency market, and the rupee depreciated sharply. The RBI attempted to limit rupee depreciation by selling dollars. It sold $18.6 billion in the foreign exchange market in October alone. Ordinarily, one might have expected depreciation of the exchange rate in both the spot and the forward markets. However, instead of the forward premium rising in response to the pressure on the rupee to depreciate, it crashed sharply. The authors’ hypothesis is that some Indian MNCs that were taking dollars out of India planned to return the funds within a few weeks. To lock in the price at which they would bring that money back, they sold dollars forward. Thus, the one month forward premium fell sharply into negative territory.

Balance of payments data shows outbound FDI was the largest element of outflows in the “sudden stop” of capital flows to India of the last quarter of 2008. This supports the aforementioned hypothesis. During this time there was no significant merger and acquisitions activity taking place owing to the banking and money market crisis around the world. The explanation for the large FDI outflow when money market conditions in India and the world were among the worst seen in decades, could lie in the offshore money market operations of Indian MNCs. Finally, the authors analyze stock market data, finding that Indian MNCs were more exposed to conditions in international money markets as compared to non-MNCs.

This paper’s main contribution lies in showing that Indian MNCs are now an important channel through which India is financially integrated into the world economy. This raises questions about the effectiveness of India’s capital controls, which inhibit short-dated borrowing by firms. This restriction appears to have been bypassed to a substantial extent by Indian MNCs. This phenomenon contributes to a larger understanding of the gap that exists between India’s highly restrictive de jure capital controls and its de facto openness.

De jure capital controls have not made India as closed to global financial markets as expected. The expectation that a global financial market crisis would not hit India owing to these controls was proved to be incorrect when the financial crisis was transmitted to India with unprecedented speed. This evidence of India’s integration with global capital markets will influence the future discussion of its de facto capital account convertibility.

Climate Change and India: Implications and Policy Options

Climate change and the mitigation of greenhouse gas (GHG) emissions have moved to the forefront of international discussion and negotiations. While global warming may have adverse effects on Indian society, there are also concerns that efforts to mitigate emissions within India could seriously impair future economic growth and poverty alleviation. These concerns are the focus of the paper, “Climate Change and India: Implications and Policy Options” by Arvind Panagariya.

The basic perspective is that India’s current per capita carbon emissions are very small, only one-fourth those of China and one-twentieth those of the United States; and given the strong association between income and emissions, the capping of emissions at current levels would make it impossible for India to sustain the growth required to match Chinese income levels, much less narrow the gap with the developed economies. Panagariya argues that India should resist making binding emission commitments for several decades, or until it has made greater progress in poverty alleviation.

The paper begins with a discussion of various uncertainties relating to the response of temperatures to GHG emissions, and in turn, the impact of any temperature changes on rainfall and various forms of extreme weather. There is further uncertainty about the effects of those weather changes on productivity and GDP growth. The author discusses the changes in temperatures and rain patterns specific to India during the last century, as well as their impact if any on sea levels, glacier melting, and natural disasters such as drought and cyclones.

The paper then explores the question of optimal mitigation and instruments to achieve it. A key conclusion is that, absent any uncertainties, either a uniform worldwide carbon tax or a fully internationally system of tradable pollution permits should be employed to reach the optimal solution. A more complicated issue relates to the distribution of the costs of mitigation. Efficiency dictates that countries in which the marginal loss of output per ton of carbon mitigated is the lowest should mitigate more. But absent any international transfers, this may lead to an inequitable distribution of costs of mitigation. An additional question arises with respect to past emissions for which the responsibility largely rests with developed countries. A case can be made that if countries are asked to pay a carbon tax for future emissions, they should also pay for the past emissions. This is especially relevant since big emitters of tomorrow are likely to be different from big emitters of yesterday.

Panagariya argues that these distributional conflicts are the primary explanation of why countries have found it so difficult to arrive at a cooperative solution. Developing countries argue that since developed countries are responsible for the bulk of the past emissions and are also among the largest current emitters, they should undertake much of the mitigation. In turn, the United States has responded by raising the specter of trade sanctions against countries that do not participate in the mitigation efforts. The paper discusses whether such trade sanctions are compatible with the existing World Trade Organization (WTO) rules. It argues that the legality of the trade sanctions is far from guaranteed although the ultimate answer will only be known after the specific measures are tested in the WTO Dispute Settlement Body.

Turning to the specific situation of India, Panagariya argues that it should resist accepting specific mitigation obligations until 2030 or even 2040. The case for an exemption from mitigation for the next two or three decades is justified by the fact that India is a relatively small emitter in absolute as well as per capita terms. Based on 2006 data, it accounts for only 4.4 percent of global emissions, and in per capita terms it ranks 137th worldwide. This is in contrast to China, with which it is often paired. China currently emits the most carbon in the world in absolute terms, and as much as one-fourth of the United States in per capita terms. In addition, Panagariya argues that India needs to give priority to the reduction of poverty.

Given the situation of India and other poor countries, how can an international agreement to combat global warming be reached? Panagariya proposes first that significant progress can be made through agreements on the financing of investments devoted to the discovery of green sources of energy and new mitigation technologies. He believes that private firms will under-invest in such technologies due to the inherent uncertainties. Thus, he argues for establishing a substantial fund financed by contributions from the developed countries and using it to finance research by private firms with the proviso that the fruits of such research would be made available free of charge to all countries. Second, he argues that there is still considerable work to be done in completing an agenda of near-term actions. If developed countries are serious about the necessity of developing countries undertaking mitigation targets beginning some time in the near future, they need to lead by example and accept substantial mitigation obligations by 2020. Finally, he believes that mitigation targets for the developing countries should be stated in terms of emissions per capita or per unit of GDP.

The paper generated a lively exchange among participants on both the effects of climate change and on how India should participate in the international policy discussion. Some thought that Panagariya underestimated the costs to India of climate change, but most of the discussion centered on the development of an appropriate Indian policy response.

Beginning with the major 1991 reform, India has systematically phased out investment and import licensing. Progressive movement toward promarket policies accompanying this phasing out of controls was expected to bring about major shifts in India’s industrial structure. Partly because the opening up itself was uneven across sectors and partly because responses to liberalizing reforms were bound to differ across sectors and firms, it was expected that the changes would be highly variable.

India Transformed? Insights from the Firm Level 1988-2005

“India Transformed? Insights from the Firm Level 1988–2005” by Laura Alfaro and Anusha Chari, sets out to study the responses of firms and sectors accompanying the ongoing transformation of India’s microeconomic industrial structure. Relying on firm-level data, collected by the Center for Monitoring the Indian Economy from company balance sheets and income statements, they study the changes in firm activity from 1988 to 2005. They highlight the differing responses to reforms across sectors, private versus public sector firms, and incumbent versus new firms.
 
The authors define liberalization as consisting of trade and entry liberalization, regulatory reform and privatization that lead to increased domestic and foreign competition. They present a series of stylized facts relating to the evolution of firms and sectors accompanying and following liberalization. The database covers both unlisted and publicly listed firms from a wide cross-section of manufacturing, services, utilities, and financial industries. Approximately one-third of the firms in the database are publicly listed and the remaining two-thirds are unlisted. The companies covered account for more than 70 percent of industrial output, 75 percent of corporate taxes, and more than 95 percent of excise taxes collected by the Government of India.

Detailed balance sheet and ownership information permits the authors to analyze a range of variables such as sales, profitability, and assets for approximately 15,500 firms classified across 109 three digit industries encompassing agriculture, manufacturing, and services. Therefore, in contrast to most existing firm level studies that focus on manufacturers, the authors are able to study the firms in the services and agriculture sectors as well. The data also permit distinction according to ownership categories such as state-owned, business groups, private stand-alone firms, and foreign firms. The authors divide the years from 1988 to 2005 into five sub-periods: 1988–90, 1991–94, 1995–98, 1999–2002, and 2003–05. This division into sub-periods is intended to capture the effects of various reforms taking place over time.

The authors present detailed information on the average number of firms, firm size, as measured by assets and sales, and profitability as measured by operating profits and the return on assets. The information is presented by sector as well as by category of firm: state-owned enterprises, private firms incorporated before 1985 (old private firms), private firms incorporated after 1985 (new private firms), and foreign firms for the five sub-periods. Sales, entry, profitability, and overall firm activity are interpreted as disaggregated measures of economic growth and proxies for efficiency; and thus, they provide an understanding of the effectiveness of reforms. The authors also look at market dynamics with regard to promotion of competition in order to understand the efficiency of resource allocations. They also examine the evolution of industrial concentration over time.
 
Alfaro and Chari find some evidence of a dynamic response among foreign and private firms as reflected in the expansion of their numbers as well as growth in assets, sales, and profits. But overall, they find that the sectors and economy continue to be dominated by the incumbent state-owned firms and to a lesser extent traditional private firms that were incorporated before 1985. Sectors dominated by state-owned and traditional private firms prior to 1988–90, where dominance is defined by 50 percent or larger share in assets, sales, and profits, generally remain so in 2005. Interestingly, rates of return remain remarkably stable over time and show low dispersion across sectors and across ownership groups within sectors. Not only is concentration high, but there is persistence in terms of which firms account for the concentration.

The exception to this broad pattern is the growing importance of new and large private firms in the services industries in the last ten years. In particular, the assets and sales shares of new private firms in business and IT services, communications services and media, health, and other services have expanded at a rapid pace. These changes coincide with the reform measures that took place in the services sectors after the mid-1990s, and they are also consistent with the growth in services documented in the aggregate data.

According to Joseph Schumpeter (1942), creative destruction, defined as the replacement of old firms by new firms and of old capital by new capital, happens in waves. A system-wide reform or deregulation such as the one implemented in India may have been the shock that prompted the creative destruction wave. Creation in India seems to have been driven by new entrants in the private sector and foreign firms forcing the incumbent firms to shape up as well. Outside of the services sectors noted in the previous paragraph, and especially in many manufacturing sectors, transformation seems not to have gone through an industrial shakeout phase in which incumbent firms are replaced by new ones. In many of these sectors, stateowned enterprises and private business groups have continued to dominate despite many liberalization measures.

Different explanations may account for these findings. In part, continued dominance of public sector firms in certain sectors may reflect the high barriers to exit that not only impede destruction of marginal firms but also discourage new firms from entry. On the one hand, potential entrants know that exit of public sector firms is unlikely; on the other hand, they may fear paying high exit costs in case they fail to find a foothold. An additional explanation, perhaps not sufficiently stressed in the debate, is the possibility that entrenched public sector and business group firms subvert true liberalization in sectors in which they dominate. The authors find, for example, that both industry concentration and state ownership are inversely correlated with measures associated with liberalization.

Recent literature highlights the idea that economic growth may be impeded not simply by a lack of resources such as capital and skilled labor, but also by a misallocation of available resources. The high levels of state ownership and ownership by traditional private firms in India raise the question of whether significant gains could be made simply through the allocation of existing resources from less efficient to more efficient firms.

Land Reforms, Poverty Reduction, and Economic Growth: Evidence from India

In “Land Reforms, Poverty Reduction, and Economic Growth: Evidence from India,” Klaus Deininger and Hari K. Nagarajan consider the important but relatively neglected issues of land market policies and institutions. They focus attention on three issues: the role of rental markets in land, the contribution of land sales to the promotion of efficiency, and the potential benefits of better land ownership records and the award of land titles. The authors posit that well-functioning rental and sales markets lead to superior outcomes by raising productivity and providing improved access to land. On an average, these markets shift land toward more efficient farmers, thus contributing to poverty alleviation. The paper also brings into question the long-held view that land sales markets are dominated by distress sales whereby poor farmers facing credit constraints are forced to sell their land for below-market prices to their creditors.

In evaluating the impact of rental markets, the authors test three hypotheses: 

1. Whether a household becomes a lessor or a lessee should be a function of the household’s agricultural ability. Efficient but land-poor households would rent additional land to cultivate while inefficient and land-abundant households should rent out their land for cultivation by other more efficient households. In this manner, well-functioning rental markets in land enhance productivity and improve factor use in the economy.
2. The presence of high transactions costs inhibits households from participation in rental markets. These costs may force households to withdraw from rental transactions altogether and undermine productivity.
3. Participation in rental markets is crucially impacted by wage rates offered in the market. Increases in wage rates will prompt households with low ability to manage their land to rent their land to other households. The resulting increase in the supply of land to the rental markets leads to lower rental rates.

Using survey data, the authors test these various hypotheses. They show that rental markets improve productivity of land use by transferring land to more efficient producers. The results suggest that the probability for the most productive household in the sample to rent additional land is more than double that of the average household. The paper also shows that higher land and lower labor endowments increase the propensity of households to supply land to the rental market. By transferring land to labor-rich but land-poor households, markets allow gainful employment of rural labor. The current policies have severely curtailed rental and have therefore retarded advancement of efficiency and equity in rural India.

The authors next turn to markets for land sales. They examine the impact of a well-functioning land sales market on land access. The long-held view has been that land sales are primarily motivated by adverse exogenous shocks. To the contrary, the authors find that such markets have helped more productive and more labor-abundant farmers to gain access to land. The authors also show that land sales markets exhibit greater activity in the presence of higher economic growth. This suggests that if other factor market imperfections are removed, the role of sales markets in promoting equity and efficiency will be expanded. Finally, identifying the source of shocks leading to distress sales and adopting policies that directly address these shocks can ameliorate the adverse effects of such sales in otherwise well-functioning land sales markets.

The last issue addressed in the paper concerns the importance of land administration for the promotion of efficient rental and sales markets. In India, there exist multiple institutions governing land records, registration, and transactions. This situation has led to a duplication of land records, leading to confusion and conflicts over ownership. It also creates a general sense of insecurity of tenure. The authors argue that the computerization of land records can help alleviate these problems. They cite Karnataka and Andhra Pradesh as examples of this experience. They note that the computerization of records can reduce petty corruption, ease access to land records, and possibly increase the probability of land becoming acceptable as collateral to obtain credit.

       

The seventh annual India Policy Forum conference convened in New Delhi from July 13-14. This seventh volume of the India Policy Forum, edited by Suman Bery, Barry Bosworth and Arvind Panagariya, cover economic growth, infrastructure, and politics in India. The editors' summary appears below, and you can download a PDF version of the volume, or access individual articles by clicking on the following links:

Download India Policy Forum 2010-2011 - Volume 7 »

---

EDITORS' SUMMARY

The India Policy Forum held its seventh conference on July 13 and 14, 2010 in New Delhi. This issue of the journal contains the papers and the discussions presented at the conference, which cover a wide range of issues. The first paper examines the services sector in India, evaluating its growth and future prospects. The second paper looks at India’s corporate sector, analyzing the profitability of firms in the wake of liberalization. The third paper explores the reasons for the large time and cost overruns that have been endemic to Indian infrastructure projects. The final two papers focus on more political issues, looking at the impact of political reservations used to increase women’s political voice, as well as the politics of intergovernmental resource transfers.

Among fast-growing developing countries, India is distinctive for the role of the service sector. Whereas many earlier rapidly growing economies emphasized the export of labor-intensive manufactures, India’s recent growth has relied to a greater extent on the expansion of services. Although there are other emerging markets where the share of services in Gross Domestic Product (GDP) exceeds the share of manufacturing, India stands out for the dynamism of its service sector. Barry Eichengreen and Poonam Gupta critically analyze this rapid service-sector growth in their paper “The Service Sector as India’s Road to Economic Growth?”

Skeptics have raised doubts about both the quality and sustainability of the increase in service-sector activity. They have observed that employment in services is concentrated in the informal sector, personal services, and public administration—activities with limited spillovers and relatively little scope for productivity improvement. They downplay information technology and communications-related employment on the grounds that these sectors are small and use little unskilled and semi-skilled labor, the implication being that a labor-abundant economy cannot rely on them to move people out of low-productivity agriculture. Some argue that the rapid growth of service sector employment simply reflects the outsourcing of activities previously conducted in-house by manufacturing firms—in other words, that it is little more than a relabeling of existing employment. They question whether shifting labor from agriculture directly to services confers the same benefits in terms of productivity growth and living standards as the more conventional pattern of shifting labor from agriculture to manufacturing in the early stages of economic development.

This paper evaluates these claims, coming up with an in-depth look at the services sector in India. Eichengreen and Gupta find that the growth of the sector has been unusually rapid, starting 15 years ago from a very low level. The acceleration of service-sector growth is widespread across activities, but the modern services such as business services, communication, and banking are the fastest growing activities. Other rapidly growing service sectors are hotels, restaurants, education, health, trade, and transport. Some observers have dismissed the growth of modern services on the grounds that these activities constitute only a small share of output and therefore contribute only modestly to the growth of GDP. However, the results show that the contribution of the category communication, business services, and financial services has in fact risen to the point where this group contributes more to growth of GDP than manufacturing. A slightly broader grouping of communication, business services, financial services, education, health, and hotels accounted for roughly half of total growth of the service sector in 2000–08. These activities explain most of the post-1990 acceleration in service sector growth.

Modern services have been the fastest growing in India and their takeoff began at much lower incomes than in the Organisation for Economic Co-operation and Development (OECD) countries. This, clearly, is a unique aspect of the Indian growth experience. Furthermore, the expansion of the modern service sector is not simply disguised manufacturing activity. Only a relatively small fraction of the growth of demand for services reflects outsourcing from manufacturing. Most production that does not go towards exports, in fact, derives from fi nal demand at home. Thus, the growth of service sector employment does more to add to total employment outside agriculture than outsourcing arguments would lead one to expect.

Looking at the proximate determinants of services growth, Eichengreen and Gupta show that tradable services have grown 4 percentage points a year faster than nontradable services, other things equal. Services that have been liberalized have also grown significantly faster than the average. Regulatory change has been an important part of the story: where essentially all services were heavily regulated in 1970, the majority have since been partially or wholly deregulated. The services segments which were both liberalized and tradable grew 7–8 percentage points higher than the control group (nontradable/nonliberalized services). All this implies that policy makers should continue to encourage exports of IT, communication, fi nancial, and business services while also liberalizing activities like education, health care, and retail trade, where regulation has inhibited the ability of producers to meet domestic demand.

The fact that the share of services has now converged more or less to the international norm raises questions about whether it will continue growing so rapidly. In particular, it will depend on the continued expansion of modern services (business services, communication, and banking). But, in addition, an important share of the growth will result from the application of modern information technology to more traditional services (retail and wholesale trade, transport and storage, public administration and defense). This second aspect obviously has more positive implications for output than for employment.

Finally, the authors find that the mix of skilled and unskilled labor in manufacturing and services is increasingly similar. Thus it is no longer obvious that manufacturing will need to be the main destination for the vast majority of Indian labor moving out of agriculture, or that modern services are a viable destination only for the highly skilled few. To the extent that modern manufacturing and modern services are both constrained by the availability of skilled labor, growth in both areas underscores the importance for India of increasing investments in labor skills.

The paper concludes that sustaining economic growth and raising living standards will require shifting labor out of agriculture into both manufacturing and services, not just one or the other. The argument that India needs to build up labor-intensive manufacturing and the argument that it should exploit its comparative advantage in services are often posed in opposition to one another. Eichengreen and Gupta argue that these two routes to economic growth and higher incomes are in fact complements, not incompatible alternatives.

In their paper “Sources of Corporate Profits in India: Business Dynamism or Advantages of Entrenchment?” Ashoka Mody, Anusha Nath, and Michael Walton ask whether the liberalization during the last two decades has led to increased competition, characterized by innovation and growth, or to profiteering through entrenchment and increased market power of the large firms. While the authors consider various indicators of market structures, the main focus of their analysis is the evolution of the profit rate at the firm level in the wake of liberalization. The authors find that while liberalization induced considerable new entry in the 1990s, that pattern did not continue into the 2000s. On the whole, the major business houses and public sector firms were able to maintain their dominance in terms of market share. 

The authors employ firm-level data from the Prowess database, which provides detailed information on large- and medium-sized companies in India. They focus on firms listed on the Bombay Stock Exchange. While they present some trends for the period spanning 1989–2009, their core econometric analysis covers the shorter period from 1993 to 2007, during which the sample size increased from 1,000 to about 2,300 firms. Several significant conclusions emerge from the authors’ discussion of corporate and macroeconomic trends and their econometric analysis.

First, despite some deviations in the early years, they find a consistent pattern that the corporate profit rate—measured as a return on assets—has gone up and down in line with overall economic growth. Profit rates were high in the early 1990s (with a median rate of 10–12 percent) when growth accelerated and fell subsequently as GDP growth decelerated until around 2001 (reaching about 4 percent). The rates rose again (to about 8 percent in 2007–08) as growth in the Indian economy accelerated again.

Second, unless the expansion of the tradable sectors lagged behind the growth in nontradable sectors—a possibility that cannot be ruled out—the trade liberalization of the late 1980s did not have a major influence on corporate profi ts. There is a striking similarity in the evolution of profitability in the tradable and nontradable sectors, both moving in unison with domestic growth. Tradable sectors enjoyed a somewhat higher profit rate than nontradable sectors.

In contrast to trade liberalization, industrial deregulation was associated with a more definite impact on profitability. Following deregulation around 1991, the number of firms increased in virtually all sectors. This increase was associated with reduced market shares. The authors’ econometric analysis suggests that smaller market shares, in turn, were associated with reduced profitability. Thus, in the second half of the 1990s, slower GDP growth and the scramble for market shares both contributed to driving down profit rates. 

The bulk of new entry, in terms of numbers, was of Indian stand-alone firms, but both government-owned firms and business houses remain dominant in terms of sales and asset shares. Indeed, the share of business houses in the total sales rose slightly from 41 percent in 1989 to 42 percent in 2008.

Firm profitability does show substantial year-to-year persistence, raising the possibility of some market power. But the persistence declines when profitability is averaged over longer periods (up to four years), implying that some “super-normal” profits are whittled away over time. Also, more efficient firms tend to have more persistent profits. Thus, some part of the persistence reflects greater efficiency, although because of the overlap between efficient and large firms, the possibility that market power may play a role in maintaining the profit rate over time cannot be completely ruled out.

There is no consistent evidence of a general influence of market concentration on profitability: if anything, firms in less concentrated sectors have slightly higher profit rates. The 2000s witnessed some reconcentration in some sectors, affecting about a third of all the firms, but the profit behavior of firms in re-concentrating sectors appears to be similar to that in the overall sample. Firms with growing market shares do enjoy higher profitability, but the pattern of results is more consistent with causality fl owing in the other direction, that is, with the success of dynamism. In particular, this association is at least as strong for small firms and for less concentrated industries. 

This said, following significant new entry and competition for market shares in the first half of the 1990s, the pace of entry abruptly stalled in the late 1990s, market shares stabilized, and concentration rates started to rise again in some sectors. Thus, the findings are also consistent with the possibility that the phase of competitive dynamism may be diminishing, with incentives for the exercise of market power and investment in business– government relationships being on the rise.

Finally, the authors’ econometric results show that the faster a firm grew, the higher was its profitability. Supporting descriptive statistics add interesting nuances to this finding. The gap in firms’ growth rates opened up in the 2000–07 period. During that period, the fast-growing firms opened up the largest gap in profitability rates relative to the medium-growth firms. Slow growing firms, typically much smaller in size, have had particularly low profit rates and have actually been shrinking in terms of real sales. This suggests that efficiency was rewarded: the dynamic medium-sized firms were able to grow fast and garner sizeable profits, reinforcing their ability to grow. The smallest firms fell increasingly behind. Thus, the shakeout resulted in a potentially more efficient structure.

Greatly expanded level of infrastructure investment is critical to sustaining Indian economic growth. During the last decade, an increasing volume of funds has been allocated to building infrastructure, and successive governments have accorded infrastructure a high priority. Nevertheless, delays and cost overruns remain large and frequent. Moreover, owing to a paucity of research on the subject, our understanding of the causes behind the cost and time overruns and their remedies remains poor. These issues assume additional importance in view of the recent changes in the official procurement policy in infrastructure. The central government as well as state governments are increasingly looking to private funding for infrastructure projects principally through public–private partnerships (PPPs). Though a shortage of funds within the government sector is largely responsible for this shift, there is equally a belief that private-sector participation can reduce delays and cost overruns. However, there is insufficient empirical work to either support or repudiate this confidence in the superiority of the private sector.

In his paper “Determinants of Cost Overruns in Public Procurement of Infrastructure: Roads and Railways,” Ram Singh provides a detailed analysis of time and cost overruns in infrastructure projects in India using two large datasets that contain information on the key dates for implementing and completing projects and the difference between planned and actual costs. The first dataset includes 934 infrastructure projects completed during April 1992–June 2009. The second dataset includes 195 road projects under the supervision of the National Highways Authority of India (NHAI). The analysis develops several hypotheses and subjects them to empirical testing. Among other issues, the paper compares delays and cost overruns in PPPs with traditionally funded projects.

A simple tabulation of the data shows large cost overruns, averaging 15 percent, and time delays of about 80 percent. However, the author also finds that delays and cost overruns have declined over time. It is also evident that time delays are the primary cause of cost overruns and that larger projects lead to larger percentage cost overruns. Projects in sectors such as roads, railways, urban development, civil aviation, shipping and ports, and power have experienced much longer delays and higher cost overruns than those in other sectors, but the author finds no evidence of any regional pattern of cost overruns or delays. He suggests that incompleteness in the initial planning and contracting is responsible for many of the cost overruns.

The study shows that the design of the contract has a significant bearing on the level of delays. Traditional item-rate contracts provide little or no incentives to avoid delays. In contrast, since a PPP allows contractors to reap returns as soon as the project is complete, it creates a strong incentive to complete the project at the earliest possible date. Moreover, by bundling responsibility for maintenance with construction, the PPP also motivates contractors to avoid compromising on quality. Somewhat surprisingly, PPP projects experience higher cost overruns even though they have significantly lower time delays. The author attributes the shorter time delays to the fact that the project revenues do not begin until it is complete. The larger cost overruns are more puzzling, but may reflect incentives to expand the scope of the project.

Finally, according to the author, a comparison of road with railways sector projects suggests that organizational factors also contribute to delays and cost overruns. The author identifies three specific aspects. The railways sector is slower during planning and contracting phases. Second, contract management by the railways sector is poorer than by the roads sector. While the NHAI awards most project works to a single contractor, the railways award different works to different contractors. This results in poor project coordination. Third, in the railways sector, projects are allocated funds only for the relevant fiscal year and this is done in the second half of the year. The NHAI’s project delivery mechanism is not subject to this constraint.

Despite recent progress in India toward the social inclusion and empowerment of women, their presence in the country’s state and national lawmaking bodies remains low, raising concerns about how well women’s interests are represented. Previous empirical evidence has substantiated these concerns: women have different policy preferences than men, and elected leaders tend to implement policies in line with their own personal policy preferences, regardless of earlier campaign promises. These arguments provide an important motivation for gender-based affirmative-action policies.

In order to increase women’s political voice, the Indian government amended its constitution in 1993, devolving significant decision-making powers to village-level councils called Gram Panchayats (GPs) and requiring a randomly selected third of all members and leaders (Pradhans) of these councils to be reserved for women. Most recently, in 2010, the upper house of the Indian parliament passed a bill applying similar reservation requirements to the state and national levels of government in the face of considerable resistance and skepticism. Despite the widespread adoption of such gender-reservation policies, several concerns about their effectiveness remain. First, little will change if husbands of female leaders elected to reserved seats lead by proxy, and second, reservation could leave fewer seats to be contested among other disadvantaged groups for which reservations were not established, such as India’s Muslims.

Using new data spanning 11 Indian states, the paper by Lori Beaman, Esther Duflo, Rohini Pande, and Petia Topalova, “Political Reservation and Substantive Representation: Evidence from Indian Village Councils,” assesses the impact of introducing political reservation in India’s GPs, with particular attention to the aforementioned concerns. In conducting their study, the authors collect GP meeting data across fi ve economically and socially heterogeneous states, obtain data on public-good provision from a nationwide survey, and conduct their own survey of 165 GPs within the Birbhum district of West Bengal.

The study examines the effect of reservations in local village councils; the results are likely to be applicable to similar provisions within higher levels of government because the electoral process is the same, voter participation is high, and political parties invest significant resources in elections across all levels of government. Furthermore, by exploiting the random assignment of GP gender reservations, the authors are able to ensure that observed effects can be attributed to political reservations, rather than other factors, such as social attitudes toward women and local demand for public goods. The expansive data and novel study design allow the authors to shed light on three distinct elements of the debate on gender reservations in policymaking: politician selection, citizen participation in politics, and policymaking. 

First, the authors assess the degree to which reservation affects politician selection. Encouragingly, they fi nd no evidence that reservation for women has caused the crowding-out of other politically underrepresented social groups. Evidence does suggest, however, that women elected to reserved seats are less experienced and more likely to enlist their husband’s help in carrying out their duties as Pradhan. Nevertheless, two years into their tenure, female Pradhans from reserved GPs claim they are as comfortable and effective in their roles as their counterparts in nonreserved seats.

The study also reveals the causal mechanisms through which issues important to women might receive insufficient attention in local government. The authors hypothesize that underinvestment in what they determine are “female-friendly” issues occurs because male leaders either possess entirely different preferences, or discriminate against the viewpoints of the opposite gender, regardless of whether or not their preferences diverge. The study revealed that neither is the case. Leaders in reserved GPs are neither more likely to react positively to a female-friendly issue, nor more likely to respond favorably to the inquiry of a female participant in Village Council (Gram Sabha or GS) meetings. On the contrary, women in both reserved and nonreserved GPs were found to receive more constructive responses in these meetings then men. This suggests that the problem lies not in unsympathetic leadership, but in a lack of female constituent participation in the political process that would voice women’s policy concerns. Accordingly, the study also examines the effect of gender reservation on female participation in politics. Reservation does have a positive effect on whether women participate at all in the GS meeting, and the degree to which they remain engaged throughout the meeting. Therefore, inasmuch as electing women to Pradhan seats continues to encourage the participation of women in GS meetings, the reservations will continue to prove effective.

Finally, the study takes advantage of new data to elucidate earlier claims regarding the effects of political reservations on allocations of public goods. A first dataset, much broader in geographic scope than that of previous studies, confirms earlier findings that female Pradhans elected to reserved seats deliver more drinking water infrastructure, sanitation, and roads than their nonreserved counterparts. However, in exploiting the richer cross-time variation of a second dataset, the study reveals that reservations have a much broader impact across sectors than previously thought. The data from the Birbhum region of West Bengal allow the authors to compare public goods allocation patterns between newly reserved GPs, GPs reserved twice in a row, and GPs that are currently unreserved but were reserved before. These new data indicate that, while continuing to push drinking water investments, women elected in the second term under a reserved seat also invest more in “male issues” such as school repair, health center repair, and irrigation facilities. These investment patterns are found to be enduring, as even male Pradhans elected to previously reserved seats continue to invest in female friendly issues, after female reservation for their GP has expired.

Taken together, the findings of the study provide important insights into how leaders in reserved seats are elected, affect policymaking, and actual policy outcomes. While women elected in reserved GPs do differ from their male counterparts in their experience as leaders, they are able to increase female participation in the political process and make different policy decisions. The basic structure of India’s fiscal federalism was in place within fi ve years of the country’s independence on August 15, 1947. The division of expenditure responsibilities and sources of revenue across units of the federation as well as the institutions for allocating resources between levels of government gave substantial discretion to the central government, thereby concentrating economic and political power at the federal level. The design was understandable in light of the perceived need to combat incipient forces of separatism and the economic logic of planned development. This framework for fiscal federalism has been remarkably stable, however, even as the fears of separatism faded, political power dispersed and new parties representing state interests gained representation at all levels of government, and markets replaced planners in directing investment.

In their paper “Inelastic Institutions: Political Change and Intergovernmental Transfer Oversight in Post-Independence India,” T.N. Srinivasan and Jessica Seddon Wallack examine the persistence, and in some cases strengthening, of centralizing features in India’s fiscal federalism, which is a surprising exception to the general trend toward decentralization that other analysts of India’s political economy have described.

The paper focuses in particular on the two institutions—the Finance Commission (FC) and the Planning Commission (PC)—that oversee the bulk of intergovernmental resource transfers. The FC, a constitutional body designed to be independent of both Center and state constitutionally defined jurisdictions, was created to ensure that states had predictable and stable resources and autonomy in their use. In practice, the FC has played a limited role relative to its constitutional potential. Many have argued that it has unique constitutional authority to oversee intergovernmental revenue transfers, but a substantial portion of these transfers are determined and allocated through the PC instead.

The PC, an entity created by a cabinet resolution and hence a part of the constitutional sphere of the Center, was to advise the Center on planning and plans for national development. In contrast to the FC, the PC has in fact played a much larger role in allocating transfers than advising would necessarily imply. As a transfer mechanism, it facilitates Central government oversight of states’ development policies and has ample scope for Central government discretion in transfers. The centralizing aspects of this arrangement have been highlighted in various high-profile public discussions questioning the division of responsibilities between the FC and the PC as well as the various mechanisms for transfers by the PC. Yet, little has changed in terms of the institutional oversight over resource flows.

The authors explore various explanations for the persistence of these centralizing features and conclude that the most likely explanation lies in the barriers that India’s federal institutions pose to collective action by states. State leaders have ample political reasons to seek greater control over their finances and in fact do appear to care about the centralizing implications of the fiscal federal framework. However, they are divided both by design—state boundaries were in many cases drawn on the basis of linguistic or cultural differences—as well as by the economic reality of diverging fortunes and varying dependence on transfers.

India’s institutions also offer no authoritative forum for states and Central government to discuss federal arrangements and propose alternatives. The available arenas for intergovernmental discussions are either toothless or have structures that create incentives for individualist behavior. The Union Parliament, for example, would be able to effect changes to the federal structure through instruments available to it under the constitution or through constitutional amendments if needed. However, the parliamentary system also gives those state parties that are part of the government a vested interest in preserving the status quo.

Srinivasan and Wallack’s analysis implies that there will be limited change in the intergovernmental transfer system, a conclusion that they find worrisome for India’s ability to adjust economically and politically to changing circumstances. Not only does conventional public finance theory favor decentralization of decision making with respect to the financing and provision of public goods and services, especially in heterogeneous societies, but “voices from below” are increasingly valuable as an information source about what is needed in a fast-changing world. They argue that India’s record of government performance also suggests a dearth of accountability, and that real decentralization of roles and responsibilities—not delegated expenditure duties—can be more effective in creating stronger performance incentives.

       

A number of policymakers and analysts in the United States have called for countries like China and India to “do more” in the Middle East. Arguably, both Beijing and Delhi are doing more—though perhaps not in the way these advocates of greater Asian engagement in the Middle East might have wanted. President Xi Jinping recently traveled to the region and India’s Prime Minister Modi will return there over the weekend. After quick trips to Brussels for the India-EU Summit and a bilateral, as well as to Washington for the Nuclear Security Summit, Indian Prime Minister Narendra Modi will head to Riyadh tomorrow. The trip reflects not just the importance of Saudi Arabia for India but also the Middle East (or what India calls West Asia) and the opportunity this particular moment offers to Indian policymakers.

The Middle East has been crucial for India for decades. It’s been a source of energy, jobs, remittances, and military equipment, and holds religious significance for tens of millions of Indians. It’s also been a source of concern, with fears about the negative impact of regional instability on Indian interests. But today, as Modi visits, there’s also opportunity for Indian policymakers in the fact that, for a number of reasons, India is important to Saudi Arabia and a number of Middle Eastern countries in a way and to an extent that was never true before. 

It’s a two-way street

As it has globally, India has a diversified set of partnerships in the Middle East, maintaining and balancing its relationships with the Gulf Cooperation Council countries, Iran, and Israel. The region remains India’s main source of imported oil and natural gas (58 percent of its oil imports and 88 percent of its liquefied natural gas imports in 2014-15 came from the Middle East). In addition, as of January 2015, there were 7.3 million non-resident Indians in the region (64 percent of the total). These non-resident Indians remitted over $36 billion in 2015 (52 percent of the total remittances to India). Add to that India’s Sunni and Shiite populations (among the largest in the world), counter-terrorism cooperation with some countries, India’s defense relationship with Israel, the desire to connect with Afghanistan and Central Asia through Iran, and the potential market and source of capital it represents for Indian companies, and it becomes clear why this region is important for India. 

But, with many Middle Eastern countries pivoting to Asia or at least giving it a fresh look, India arguably has more leverage than it has ever had in the past. There have been a number of reasons why these countries have been looking east recently: 

• traditional strategic partnerships in flux and questions about the U.S. role in the region; 
• the economic slowdown in Europe and the U.S. following the 2008 financial crisis; 
• changing global energy consumption patterns; 
• growing concerns about terrorism in the region; 
• And, in Israel’s case, the boycott, divestment, and sanctions movement. 

In this context, India has some advantages. Its economy is doing relatively well compared to that of other countries and offers a market for goods and services, as well as potentially an investment destination. India, for example, has become Israeli defense companies’ largest foreign customer. 

Crucially for the oil and natural gas-producing states in the region, India also continues to guzzle significant—and growing—quantities of both. But, today, Delhi has buyer’s power. Why? Because oil prices are relatively low and there’s a lot of gas on the market, traditional buyers are looking elsewhere for fossil fuels or looking beyond them to cleaner energy sources. India, too, has more options and has been diversifying its sources of supply (compare India’s 74 percent dependence on the Middle East for oil in 2006-07 to the lower 58 percent that it gets from there now). 

India might still be dependent on the Middle East for energy, but now the Middle East also depends on India as a market.

Thus, India might still be dependent on the Middle East for energy, but now the Middle East also depends on India as a market. This has altered dynamics—and India’s increased leverage has been evident, for example, in the renegotiated natural gas supply deal between Qatar’s RasGas and India’s Petronet, which came with lower prices and waived penalties. Even countries like Iran, which now have more options for partners and have not hesitated to point that out to Delhi, still have an interest in maintaining their India option. Regional rivalries might have made Delhi’s balancing act in the region more complicated, but it also gives each country a reason to maintain its relationship with India. 

And the Modi government has been looking to take advantage of this situation. While its Act East policy received a lot more attention over the last couple of years—from policymakers and the press—this region hasn’t been missing from the agenda or travel itineraries. For example, Modi has traveled to the United Arab Emirates and met with Iranian President Hassan Rouhani on the sidelines of the last Shanghai Cooperation Organization conference, and the Indian president has traveled to Israel, Jordan, and the Palestinian territories. The Indian foreign minister has visited Bahrain, Israel, the Palestinian territories, Jordan, Oman, and the UAE and also participated the first ministerial meeting of the Arab-India Cooperation Forum in Manama earlier this year. The Modi government has also hosted the emir of Qatar, the crown prince of Abu Dhabi, the Bahraini, Iranian, Omani, Saudi, Syrian, and UAE foreign ministers, as well as the Israeli defense minister to India.

China’s increased activity in the region, as well as Pakistan’s engagement with Iran and the rush of European leaders to the latter, have led to calls for speedier action.

But there have been concerns that this engagement is not sufficient, particularly relative to that of some countries. For example, China’s increased activity in the region, as well as Pakistan’s engagement with Iran and the rush of European leaders to the latter, have led to calls for speedier action. The Indian foreign secretary’s recent comment that “we are no longer content to be passive recipients of outcomes” in this region also seemed to reflect the understanding that Delhi needs to be more proactive about deepening its relationships with the countries in the region, rather than waiting for them to take shape organically or just reacting to events as they occur. 

The Saudi connection

It is in this context that Modi travels to Riyadh. The relationship with Saudi Arabia is one of the key pillars of India’s Middle East policy. A major source of oil, jobs, and remittances, it is also a destination for over 400,000 Indians who go to the country for Hajj or Umra every year. In addition, in recent years, there has been more security cooperation, with Riyadh handing over individuals wanted in India and the two countries working together on countering money laundering and terrorism financing. 

The relationship has not been without problems from Delhi’s perspective. Just to list a few: 

• the Saudi-Pakistan relationship; 
• diaspora-related issues, including the treatment of Indian workers in-country and efforts towards Saudization that might limit employment opportunities for Indian expatriates;
• ideology-related concerns, particularly funding from Saudi Arabia for organizations in India, which might be increasing the influence of Wahhabism in the country; and
• regional dynamics, including Saudi Arabia’s rising tensions with Iran that has had consequences for Indian citizens, for example, in Yemen from where Delhi had to evacuate 4,640 Indians (as well as 960 foreigners).

More recently, incidents involving Saudi diplomats in India have also negatively affected (elite) public perceptions of the country, though the broader impact of this, if any, is unclear. Over the medium-to-long term, there are also concerns about potential instability within Saudi Arabia.

During Modi’s trip, however, the emphasis will be on the positives—not least in the hope that these might help alleviate some of the problems. The prime minister will be hosted by King Salman, who visited India as crown prince and defense minister just before Modi took office. He will also meet a slate of Saudi political and business leaders. The Indian wish-list will likely include diversification of economic ties, greater two-way investment, as well as more and better counter-terrorism cooperation. 

There will not be a large diaspora event—as Modi has done in Australia, Singapore, the UAE, United Kingdom, and the United States—but the prime minister will engage privately with members of the Indian community. He will also meet with Indian workers employed by an Indian company that is building part of the Riyadh metro. It is not hard to assess the reason for this particular engagement, given increased sensitivity in India (particularly in the media) about the treatment of citizens abroad, as well as the government’s interest in making a pitch for Indian companies to get greater market access. But, with Riyadh’s interest in creating jobs for Saudis, Modi will also try to highlight that Indian companies are contributing to the training and employment of locals (especially women) by visiting another Indian company’s all-female business process service center.

This will reflect the broader theme of highlighting to Riyadh and Saudis that it is not just India that benefits from the relationship—they do too. Some in India hope this has an additional effect: of giving Riyadh a reason not to let its relationship with Pakistan limit that with India, and perhaps occasionally making it willing to use some of its leverage with that country to India’s benefit. Despite recent irritants in the Saudi-Pakistan relationship, however, Delhi is realistic about the limits of weaning Riyadh away from Islamabad.

So does all this mean India will “do more” in the Middle East? For all the reasons mentioned above, the country has been involved in the region for a number of years—though, as the Indian foreign secretary has noted, this involvement was not in large part the product of active state policy. Indian interests in the region will likely increase in the future and, thus, so will its corporate and official engagement. But that engagement might not be what some American observers have in mind. As India’s capabilities grow, it might do more in terms of providing maritime security, intelligence sharing, evacuating expatriates when necessary, and contributing to U.N. peacekeeping operations. It could also potentially do more in terms of capacity building within these countries with the support of the host governments. There might also be scope for India to expand its West Asia dialogue with countries like the United States. But it will likely remain wary of picking sides or getting involved in non-U.N.-sanctioned military interventions in the region unless its interests are directly affected (the previous BJP-led coalition government did briefly consider—and then reject—joining the United States coalition in the Iraq war, for instance).

       

On his fourth trip to the U.S. as Indian Prime Minister, Narendra Modi will spend some quality time on Capitol Hill on Wednesday, where he'll address a joint meeting of the U.S. Congress. House Speaker Paul Ryan will also host the Indian premier for a lunch, which will be followed by a reception hosted jointly by the House and Senate Foreign Relations Committees and the India Caucus. What's the significance of this Congressional engagement and what might be Modi's message? 

Given that all the most-recent Indian leaders who've held five-year terms have addressed such joint meetings of Congress, some have asked whether Ryan's invitation to Modi is a big deal. The answer is, yes, it is an honour and not one extended all that often. Since 1934, there have been only 117 such speeches. Leaders from France, Israel and the United Kingdom have addressed joint meetings the most times (8 each), followed by Mexico (7), and Ireland, Italy and South Korea (6 each). With this speech, India will join Germany on the list with leaders having addressed 5 joint meetings of Congress: Rajiv Gandhi in 1985, P.V. Narashima Rao in 1994, Atal Bihari Vajpayee in 2000 and Manmohan Singh in 2005. India's first premier, Jawaharlal Nehru, spoke to the House and Senate in separate back-to-back sessions in 1949 as well. 

Congress is a key stakeholder in the U.S.-India relationship and can play a significant supportive or spoiler role. While American presidents have a lot more lee-way on foreign policy than domestic policy, Congress is not without influence on U.S. foreign relations, and shapes the context for American engagement abroad. Moreover, the breadth and depth of the U.S.-India relationship, as well as the blurring of the line between what constitutes domestic and foreign policy these days means that India's options can be affected by American legislative decisions or the political mood on a range of issues from trade to immigration, energy to defense. 

The Indian Foreign Secretary recently said that the U.S. legislature was at "very much at the heart" of the relationship today. He noted it has been "very supportive" and "even in some more difficult days where actually the Congress has been the part of the US polity which has been very sympathetic to India." But India's had rocky experiences on the Hill as well--which only heightens the need to engage members of Congress at the highest levels. 

The speech and the other interactions offer Modi an opportunity to acknowledge the role of Congress in building bilateral relations, highlight shared interests and values, outline his vision for India and the relationship, as well as tackle some Congressional concerns and note some of India's own. He'll be speaking to multiple audiences in Congress, with members there either because of the strategic imperative for the relationship, others because of the economic potential, yet others because of the values imperative--and then there are those who'll be there because it is important to their constituents, whether business or the Indian diaspora. There is also the audience outside Congress, including in India, where the speech will play in primetime. What will Modi's message be? A glimpse at previous speeches might offer some clues, though Modi is likely also to want to emphasize change. 

The speeches that came before

The speeches of previous prime ministers have addressed some common themes. They've acknowledged shared democratic values. They've mentioned the two-way flow of inspiration and ideas with individuals like Henry David Thoreau, Mahatma Gandhi, Martin Luther King getting multiple mentions. They've noted the influence of American founding documents or fathers on the Indian constitution. They've highlighted India's achievements, while stressing that much remains to be done. 

They've noted their country's diversity, and the almost-unique task Indian leaders have had--to achieve development for hundreds of millions in a democratic context. Since Gandhi, each has mentioned the Indian diaspora, noting its contributions to the U.S. Each prime minister has also expressed gratitude for American support or the contribution the U.S. partnership has made to India's development and security. They've acknowledged differences, without dwelling on them. They've addressed contemporary Congressional concerns that existed about Indian policy--in some cases offering a defense of them, in others' explaining the reason behind the policy.

Many of the premiers called for Congress to understand that India, while a democracy like the U.S. and sharing many common interests, would not necessarily achieve its objectives the same way as the U.S. And each subtly has asked for time and space, accommodation and support to achieve their goals--and argued it's in American interests to see a strong, stable, prosperous, democratic India.

In terms of subjects, each previous speech has mentioned economic growth and development as a key government priority, highlighting what policymakers were doing to achieve them. Since Gandhi, all have mentioned nuclear weapons though with different emphases: he spoke of disarmament; Rao of de-nuclearization and concerns about proliferation; two years after India's nuclear test, Vajpayee noted India's voluntary moratorium on testing and tried to reassure Congress about Indian intentions; and speaking in the context of the U.S.-India civil nuclear talks, Singh noted the importance of civil nuclear energy and defended India's track record on nuclear non-proliferation.

Since Rao, every prime minister has mentioned the challenge that terrorism posed for both the U.S. and India, with Vajpayee and Singh implicitly noting the challenge that a neighboring country poses in this regard from India's perspective. And Rao and Singh made the case for India to get a permanent seat on the U. N. Security Council.

The style of the speeches has changed, as has the tone. Earlier speeches were littered with quotes from sources like Christopher Columbus, Swami Vivekananda, Abraham Lincoln, Lala Lajpat Rai and the Rig Veda. Perhaps that was reflective of the style of speechwriting in those eras, but perhaps it was also because there were fewer concrete issues in the bilateral relationship to address. The evolution in the areas of cooperation is evident in the speeches. 

Rao's speech about two decades ago, for instance, listed U.S.-India common interests as peacekeeping, environmental crises, and combating international terrorism and international narcotics trafficking. Compare that to Singh's address which talked of cooperation on a range of issues from counterterrorism, the economy, agriculture, energy security, healthy policy, humanitarian assistance and disaster relief (HADR), democracy promotion, and global governance.

The speech yet to come

Modi will likely strike some similar themes, acknowledging the role that the U.S. Congress has played in shaping the relationship and expressing gratitude for its support. Like Vajpayee, particularly in a U.S. election year, Modi might note the bipartisan support the relationship has enjoyed in recent years. He'll undoubtedly talk about shared democratic values in America's "temple of democracy"--a phrase he used for the Indian parliament when he first entered it after his 2014 election victory. Modi will not necessarily mention the concerns about human rights, trade and investment policies, non-proliferation or India's Iran policy that have arisen on the Hill, but he will likely address them indirectly. 

For example, by emphasizing India's pluralism and diversity and the protection its Constitution gives to minorities, or the constructive role the country could play regionally (he might give examples such as the recently inaugurated dam in Afghanistan). Given the issues on the bilateral agenda, he'll likely mention the strategic convergence, his economic policy plans, terrorism, India's non-proliferation record, defense and security cooperation, and perhaps--like Vajpayee--the Asia-Pacific (without directly mentioning China). And like Vajpayee, he might be more upfront about Indian concerns and the need to accommodate them. 

While he might strike some similar themes as his predecessors and highlight aspects of continuity, Modi will also want to emphasize that it's not business as usual. He'll likely try to outline the change that he has brought and wants to bring. In the past, he has noted the generational shift that he himself represents as the first Indian prime minister born after independence and the Modi government's latest tag line is, of course, "Transforming India." And he might emphasize that this changed India represents an opportunity for the U.S.

He won't wade directly into American election issues, but might note the importance of U.S. global engagement. He might also try to address some of the angst in the U.S. about other countries taking advantage of it and being "takers." He could do this by making the case that India is not a free rider--that through its businesses, market, talent and diaspora it is contributing to American economy and society, through its economic development it will contribute to global growth, and through Indian prosperity, security and a more proactive international role--with a different approach than another Asian country has taken--it'll contribute to regional stability and order. He might also suggest ways that the U.S. can facilitate India playing such a role.

Unlike previous leaders, he has not tended to appeal to others not to ask India to do more regionally and globally because it's just a developing country and needs to focus internally. The Modi government has been highlighting the contributions of India and Indians to global and regional peace and prosperity--through peacekeeping, the millions that fought in the World Wars, HADR operations in its neighborhood, evacuation operations in Yemen in which it rescued not just Indian citizens, but Americans as well.

His government has been more vocal in joint contexts of expressing its views on the importance of a rules-based order in the Asia-Pacific and Indian Ocean regions--and we might hear more on this in his address. Overall, a theme will likely be that India is not just a "taker," and will be a responsible, collaborative stakeholder.

It'll be interesting to see whether the Indian prime minister notes the role that his predecessors have played in getting the relationship to this point. With some exceptions--for example, he acknowledged Manmohan Singh's contribution during President Obama's visit to India last year--he has not tended to do so. But there's a case to be made for doing so--it can reassure members of Congress that the relationship transcends one person or party and is based on a strategic rationale, thus making it more sustainable. Such an acknowledgement could be in the context of noting that it's not just Delhi and Washington that have built and are building this relationship, but the two countries' states, private sectors, educational institutions and people. 

This wouldn't prevent Modi from highlighting the heightened intensity of the last two years, particularly the progress in defense and security cooperation. (From a more political perspective, given that there has been criticism in some quarters of India-U.S. relations becoming closer, it can also serve as a reminder that the Congress party-led government followed a similar path).

Modi will be competing for media attention in the U.S. thanks to the focus in the U.S. on the Democratic primaries this week, but he'll have Congressional attention. But it's worth remembering that Indian prime ministers have been feted before, but if they don't deliver on the promise of India and India-U.S. relations that they often outline, disillusionment sets in. Modi will have to convince them that India is a strategic bet worth making--one that will pay off.

This piece was originally published by Huffington Post India.

       

The GOP presidential candidate said he would ban immigrants from sending money home to Mexico.

Donald Trump’s proposal to force Mexico to pay for a Wall guarding against the flux of immigrants into the U.S. made news this week, and rightfully so. Trump’s idea would be to curtail the ability of banks, credit unions, and wire transmission companies to send money abroad — a sharp departure from policy and law whose bipartisan aim has been to bring remittances to all countries into the financial mainstream and out from the shadowy illegal word of people moving cash in suitcases.

Encouraging remittances to go through the financial system benefits everyone: it enhances the ability to combat terrorist finance and money-laundering, it reduces crime in both the U.S. and abroad, it increases economic growth in the U.S. and overseas, and it provides for greater competition and market incentives to allow people to keep more of their hard-earned money to use as they see fit. Moving in the opposite direction would be a major mistake.

This is a big issue that affects a lot more people than one might think – more than just sending money to Mexico. In America today, more than 40 million people were born in other countries, a record number. This translates into just more than 1 in 8 Americans, a sharp increase from 1970 when fewer than 1 in 25 Americans were foreign born. Thus, it is not surprising that many people perceive America to have more foreign-born people than any time in their lifetime. However, that is not the case for the lifetime of America. Between the Civil War and the 1920s, America had as high — or higher — share of foreign born as we do today.

Remittances are not a new phenomenon. Most American families likely sent remittances at some point whenever their family first immigrated. My great-grand father sent money back to what is today the Czech Republic so that his wife and their children (including my grandmother) could come and join him and escape what became the Second World War. Today, remittance flows go toward the new generation of American immigrants and the children of those immigrants. More than $120 billion was sent abroad in 2012 according to the Pew Center and while it is true that Mexico received the largest amount at just under $23 billion, the rest of the top 5 countries may surprise you: China ($13 billion), India ($12 billion), Philippines ($10.5 billion), and Nigeria ($6 billion). And old habits remain as Germany ($2.5 billion) and France ($2 billion) are still among the top 15 countries that receive remittances from the United States.

This money comes in lots of small chunks, which can make sending it expensive. The typical new migrant worker sends money home around 14 times a year, which corresponds to once a month plus Mother’s Day and Christmas. These are usually small sums (less than $300) and represent an extraordinary level of savings given the worker’s income. The money goes through both the formal banking system including banks, credit unions, and wire transmitters who eventually use banks like Western Union and MoneyGram. Some goes through informal means, including “viajeros” who are people that literally carry cash in suitcases on planes that are often breaking the law and outside of the standard anti-money laundering and terrorist finance enforcement system. Why would anyone want to encourage that?

The idea of using this flow of funds to try to implement other policy objectives, such as border control, would be a sharp departure from current practice. The Patriot Act and subsequent federal law governing remittances in financial laws like the Dodd-Frank Act were never intended to be used to threaten to cut off the flow of migrant worker remittances. These laws were intended to track and crack down on the flow of money laundering or support for illegal and terrorist organizations while at the same time providing consumer protections to workers who are sending hard-earned cash back home to their parents, grandparents, and children. In fact, the bipartisan goal of policy concerning remittances has been to encourage the flow of money to come into the official system and to discourage the flow of funds through the underground network.

In 2004, then Federal Reserve Governor Ben Bernanke made clear that, “The Federal Reserve is attempting to support banks’ efforts to better serve immigrant populations, with remittances and other money transfers being a key area of interest.” House Financial Services Chairman Mike Oxley (R-OH) told President Bush’s then-Treasury Secretary John Snow, “Remittances between established and emerging economies foster growth in both types of economies simultaneously. I will be interested in hearing your views on how unnecessary costs can be eliminated in this area.” When Senator Paul S. Sarbanes (D-MD) introduced legislation that became the basis for today’s law that covers remittances, he had the simple goal to “increase transparency, competition and efficiency in the remittance market, while helping to bring more Americans into the financial mainstream.”

The longstanding bipartisan support for bringing remittances into the financial mainstream is based on the fact that most immigrants, regardless of whether they are U.S. citizens, legal residents, or undocumented, send remittances. A system that tried to assert proof of citizenship or legal status upon wiring money overseas would be burdensome, costly, and ineffective at best and if effective, it would simply drive more money into illegal transmission schemes while increasing crime here in the U.S. and abroad. Imagine if an entire community knew that someone would be walking through their immigrant neighborhood with a suitcase full of tens of thousands of dollars in cash.

Thought of another way, if I went to the bank to send money to my mother who lives in France part of the year, how would I prove that I’m a citizen? My driver’s license alone is not proof of legal status. Would I need to bring my passport? What if, like the majority of Americans, (62% according to the State Department) I don’t have a valid passport? Would I have to bring my birth certificate to the local Western Union? I guess the one positive thing from such a system is that it would help stop the email scams asking for money from a Nigerian Prince….

Aaron Klein is a fellow at the Brookings Institution and served as Deputy Assistant Secretary of the US Treasury Department from 2009 to 2012. He also serves as an unpaid member of the Clinton campaign’s Infrastructure Finance Working Group; he has not served as an advisor on any banking or finance issues.

Editor’s note: This piece originally appeared on Fortune.

      

On his fourth trip to the U.S. as Indian Prime Minister, Narendra Modi will spend some quality time on Capitol Hill on Wednesday, where he'll address a joint meeting of the U.S. Congress. House Speaker Paul Ryan will also host the Indian premier for a lunch, which will be followed by a reception hosted jointly by the House and Senate Foreign Relations Committees and the India Caucus. What's the significance of this Congressional engagement and what might be Modi's message? 

Given that all the most-recent Indian leaders who've held five-year terms have addressed such joint meetings of Congress, some have asked whether Ryan's invitation to Modi is a big deal. The answer is, yes, it is an honour and not one extended all that often. Since 1934, there have been only 117 such speeches. Leaders from France, Israel and the United Kingdom have addressed joint meetings the most times (8 each), followed by Mexico (7), and Ireland, Italy and South Korea (6 each). With this speech, India will join Germany on the list with leaders having addressed 5 joint meetings of Congress: Rajiv Gandhi in 1985, P.V. Narashima Rao in 1994, Atal Bihari Vajpayee in 2000 and Manmohan Singh in 2005. India's first premier, Jawaharlal Nehru, spoke to the House and Senate in separate back-to-back sessions in 1949 as well. 

Congress is a key stakeholder in the U.S.-India relationship and can play a significant supportive or spoiler role. While American presidents have a lot more lee-way on foreign policy than domestic policy, Congress is not without influence on U.S. foreign relations, and shapes the context for American engagement abroad. Moreover, the breadth and depth of the U.S.-India relationship, as well as the blurring of the line between what constitutes domestic and foreign policy these days means that India's options can be affected by American legislative decisions or the political mood on a range of issues from trade to immigration, energy to defense. 

The Indian Foreign Secretary recently said that the U.S. legislature was at "very much at the heart" of the relationship today. He noted it has been "very supportive" and "even in some more difficult days where actually the Congress has been the part of the US polity which has been very sympathetic to India." But India's had rocky experiences on the Hill as well--which only heightens the need to engage members of Congress at the highest levels. 

The speech and the other interactions offer Modi an opportunity to acknowledge the role of Congress in building bilateral relations, highlight shared interests and values, outline his vision for India and the relationship, as well as tackle some Congressional concerns and note some of India's own. He'll be speaking to multiple audiences in Congress, with members there either because of the strategic imperative for the relationship, others because of the economic potential, yet others because of the values imperative--and then there are those who'll be there because it is important to their constituents, whether business or the Indian diaspora. There is also the audience outside Congress, including in India, where the speech will play in primetime. What will Modi's message be? A glimpse at previous speeches might offer some clues, though Modi is likely also to want to emphasize change. 

The speeches that came before

The speeches of previous prime ministers have addressed some common themes. They've acknowledged shared democratic values. They've mentioned the two-way flow of inspiration and ideas with individuals like Henry David Thoreau, Mahatma Gandhi, Martin Luther King getting multiple mentions. They've noted the influence of American founding documents or fathers on the Indian constitution. They've highlighted India's achievements, while stressing that much remains to be done. 

They've noted their country's diversity, and the almost-unique task Indian leaders have had--to achieve development for hundreds of millions in a democratic context. Since Gandhi, each has mentioned the Indian diaspora, noting its contributions to the U.S. Each prime minister has also expressed gratitude for American support or the contribution the U.S. partnership has made to India's development and security. They've acknowledged differences, without dwelling on them. They've addressed contemporary Congressional concerns that existed about Indian policy--in some cases offering a defense of them, in others' explaining the reason behind the policy.

Many of the premiers called for Congress to understand that India, while a democracy like the U.S. and sharing many common interests, would not necessarily achieve its objectives the same way as the U.S. And each subtly has asked for time and space, accommodation and support to achieve their goals--and argued it's in American interests to see a strong, stable, prosperous, democratic India.

In terms of subjects, each previous speech has mentioned economic growth and development as a key government priority, highlighting what policymakers were doing to achieve them. Since Gandhi, all have mentioned nuclear weapons though with different emphases: he spoke of disarmament; Rao of de-nuclearization and concerns about proliferation; two years after India's nuclear test, Vajpayee noted India's voluntary moratorium on testing and tried to reassure Congress about Indian intentions; and speaking in the context of the U.S.-India civil nuclear talks, Singh noted the importance of civil nuclear energy and defended India's track record on nuclear non-proliferation.

Since Rao, every prime minister has mentioned the challenge that terrorism posed for both the U.S. and India, with Vajpayee and Singh implicitly noting the challenge that a neighboring country poses in this regard from India's perspective. And Rao and Singh made the case for India to get a permanent seat on the U. N. Security Council.

The style of the speeches has changed, as has the tone. Earlier speeches were littered with quotes from sources like Christopher Columbus, Swami Vivekananda, Abraham Lincoln, Lala Lajpat Rai and the Rig Veda. Perhaps that was reflective of the style of speechwriting in those eras, but perhaps it was also because there were fewer concrete issues in the bilateral relationship to address. The evolution in the areas of cooperation is evident in the speeches. 

Rao's speech about two decades ago, for instance, listed U.S.-India common interests as peacekeeping, environmental crises, and combating international terrorism and international narcotics trafficking. Compare that to Singh's address which talked of cooperation on a range of issues from counterterrorism, the economy, agriculture, energy security, healthy policy, humanitarian assistance and disaster relief (HADR), democracy promotion, and global governance.

The speech yet to come

Modi will likely strike some similar themes, acknowledging the role that the U.S. Congress has played in shaping the relationship and expressing gratitude for its support. Like Vajpayee, particularly in a U.S. election year, Modi might note the bipartisan support the relationship has enjoyed in recent years. He'll undoubtedly talk about shared democratic values in America's "temple of democracy"--a phrase he used for the Indian parliament when he first entered it after his 2014 election victory. Modi will not necessarily mention the concerns about human rights, trade and investment policies, non-proliferation or India's Iran policy that have arisen on the Hill, but he will likely address them indirectly. 

For example, by emphasizing India's pluralism and diversity and the protection its Constitution gives to minorities, or the constructive role the country could play regionally (he might give examples such as the recently inaugurated dam in Afghanistan). Given the issues on the bilateral agenda, he'll likely mention the strategic convergence, his economic policy plans, terrorism, India's non-proliferation record, defense and security cooperation, and perhaps--like Vajpayee--the Asia-Pacific (without directly mentioning China). And like Vajpayee, he might be more upfront about Indian concerns and the need to accommodate them. 

While he might strike some similar themes as his predecessors and highlight aspects of continuity, Modi will also want to emphasize that it's not business as usual. He'll likely try to outline the change that he has brought and wants to bring. In the past, he has noted the generational shift that he himself represents as the first Indian prime minister born after independence and the Modi government's latest tag line is, of course, "Transforming India." And he might emphasize that this changed India represents an opportunity for the U.S.

He won't wade directly into American election issues, but might note the importance of U.S. global engagement. He might also try to address some of the angst in the U.S. about other countries taking advantage of it and being "takers." He could do this by making the case that India is not a free rider--that through its businesses, market, talent and diaspora it is contributing to American economy and society, through its economic development it will contribute to global growth, and through Indian prosperity, security and a more proactive international role--with a different approach than another Asian country has taken--it'll contribute to regional stability and order. He might also suggest ways that the U.S. can facilitate India playing such a role.

Unlike previous leaders, he has not tended to appeal to others not to ask India to do more regionally and globally because it's just a developing country and needs to focus internally. The Modi government has been highlighting the contributions of India and Indians to global and regional peace and prosperity--through peacekeeping, the millions that fought in the World Wars, HADR operations in its neighborhood, evacuation operations in Yemen in which it rescued not just Indian citizens, but Americans as well.

His government has been more vocal in joint contexts of expressing its views on the importance of a rules-based order in the Asia-Pacific and Indian Ocean regions--and we might hear more on this in his address. Overall, a theme will likely be that India is not just a "taker," and will be a responsible, collaborative stakeholder.

It'll be interesting to see whether the Indian prime minister notes the role that his predecessors have played in getting the relationship to this point. With some exceptions--for example, he acknowledged Manmohan Singh's contribution during President Obama's visit to India last year--he has not tended to do so. But there's a case to be made for doing so--it can reassure members of Congress that the relationship transcends one person or party and is based on a strategic rationale, thus making it more sustainable. Such an acknowledgement could be in the context of noting that it's not just Delhi and Washington that have built and are building this relationship, but the two countries' states, private sectors, educational institutions and people. 

This wouldn't prevent Modi from highlighting the heightened intensity of the last two years, particularly the progress in defense and security cooperation. (From a more political perspective, given that there has been criticism in some quarters of India-U.S. relations becoming closer, it can also serve as a reminder that the Congress party-led government followed a similar path).

Modi will be competing for media attention in the U.S. thanks to the focus in the U.S. on the Democratic primaries this week, but he'll have Congressional attention. But it's worth remembering that Indian prime ministers have been feted before, but if they don't deliver on the promise of India and India-U.S. relations that they often outline, disillusionment sets in. Modi will have to convince them that India is a strategic bet worth making--one that will pay off.

This piece was originally published by Huffington Post India.

      

Editors’ Note: Presumptive Republican presidential nominee Donald Trump has proposed, in various forms and iterations, banning Muslims from entering the United States “until we figure out what’s going on,” in his words. Shadi Hamid responds to this proposal below, in an excerpt from a longer piece in The Atlantic in which Uri Friedman surveys various experts on the issue.

If Donald Trump is really interested in understanding the roots of anti-Americanism, there’s a solution: to read the hundreds of books and articles written on why, exactly, “Muslims” might not be particularly enthused about American policy in the Middle East (there’s little evidence to suggest that large numbers of Muslims have any particular antipathy toward Americans as people).

But it’s possible that Trump is just being imprecise. Perhaps what he really wants to say is not that Muslims “hate” Americans, but rather that they may be ambivalent about or even opposed to certain liberal values that are associated with being American. Obviously, it is impossible to generalize about an entire religious group, but polling does suggest that majorities in Arab countries like Egypt and Jordan, as well as non-Arab countries like Indonesia and Malaysia, aren’t quite classical liberals when it comes to issues like apostasy, religiously derived criminal punishments, gender equality, or the relevance of religious law in public life more generally.

If this happens to be Trump’s argument, it would be ironic, since Trump himself cannot be considered a liberal in the classical sense. In fact, he fits the definition of an “illiberal democrat” quite well, as I argued in a recent essay here in The Atlantic. That said, I have to admit that I’m concerned about anti-Muslim bigots misconstruing my own arguments around “Islamic exceptionalism”—that Islam has been and will continue to be resistant to secularization—after the attacks in Orlando. It’s undoubtedly true that large numbers of Muslims in both the West and the Middle East consider homosexual activity to be religiously unlawful, or haram, but let us be careful in drawing a link between such illiberalism (which many Christian evangelicals and Republican politicians share) and the desire to kill. That’s not the way radicalization works. We would never argue, for instance, that Senators Ted Cruz or Marco Rubio are “at risk” individuals who may, if we don’t keep a close eye on them, commit mass murder against gay Americans.

In any case, conservative Muslims, orthodox Jews, Christian evangelicals (or for that matter Trump supporters residing in Poland who want to emigrate to the U.S. if Trump wins) have the right to be “illiberal” as long as they express their illiberalism through legal, democratic means. These are rights that are protected by the American constitution, enshrined in the Bill of Rights.

Perhaps Trump is thinking specifically about violence perpetrated by Muslims, as he suggested in comments after the Orlando attacks. The interesting thing though—and something that is rarely acknowledged by U.S. politicians—is that the preponderance of Middle Eastern violence in recent decades has been perpetrated not by Islamists but by secular autocrats against Islamists, in the name of national security. These, as it happens, are the very strongmen that Trump seems to have such a soft spot for.

Ultimately, Trump cannot, through the force of arms or his genuinely frightening anti-Muslim rhetoric, compel the many conservative Muslims in the Middle East to be something they’re not, or would rather not be. To suggest that Muslims need to be secular or irreligious (by Trump’s own arbitrary standards) is dangerous. The message there is one that ISIS would find appealing for its own divisive purposes: that an increasingly populist and bigoted West has no interest in respecting or accommodating Islam’s role in public life, even when expressed legally and peacefully. The sad fact of the matter, though, is simple enough: Trump has less respect for the American constitution than the vast majority of American Muslims, many of whom, like me, are the children of immigrants. In Trump’s America, it so happens, my parents would have been banned from ever entering in the first place.

       

In a rare Kumbaya moment, the nation's leaders of both parties have decided that rebate checks and a flurry of other short-term measures are needed to help stave off an economic slowdown.

Unfortunately, but predictably, we're hearing far less from Capitol Hill and the campaign trail about the bigger picture and the long-term challenges facing the American economy.

Increasing competition from nations like China and India, the impending retirements of the baby boomers, and the highly unequal distribution of benefits from the recent expansion all signal the potential for slower U.S. economic growth in the future.

These challenges, and our responses, will resonate throughout the Puget Sound region.

Already, the region is one of America's economic juggernauts. According to the Paris-based Organization for Economic Cooperation and Development, the Seattle-Tacoma-Bellevue metropolitan area is the fourth-most productive in the world. And the ports of Seattle and Tacoma together form the eighth-largest gateway for foreign goods nationwide.

In that strength — and the strength of other metropolitan areas around the country — are the seeds of solutions.

Like the call for "three T's" in the stimulus debate — measures that are timely, targeted and temporary — policies to improve our nation's long-run economic performance and address its overhanging challenges would instead do well to focus on the "three I's" — innovation, intellect and infrastructure.

Innovation has always served to propel economic growth. Here, Puget Sound companies lead the world in the fields of aerospace, software and retailing, developing new ideas and products that trump the labor-cost advantages of offshoring.

Yet as a nation, we have fallen behind European competitors in innovative new-growth fields like alternative energy, where none of the world's 10 largest solar-cell manufacturers, and only one of the world's 10 largest wind-turbine manufacturers, is a U.S. company.

Intellect — the knowledge and skills of our people — translates into economic growth by raising worker output and incomes and creating more of the first "I," innovation.

Yet, while the United States sends the highest share of its young people to college worldwide, our rank falls to 16th when you measure who actually graduates. And though the Puget Sound region boasts one of the most-educated adult populations in the nation, the feeder system (especially Seattle's public schools) loses too many young people along the pathway to higher education.

Infrastructure supports long-term economic growth in many ways. High-quality transportation infrastructure — roads, transit, rail and ports — speeds the movement of goods and people within and across markets.

Yet, the Seattle area succeeds economically despite the real hurdles it faces on this front. Even taking into account high performers like Sea-Tac Airport and King County Metro, rising congestion highlights the lack of cogent plans for key corridors like Highway 520 and the Alaskan Way Viaduct, as well as the need for a renewed commitment to rail transit.

To its credit, the Puget Sound region, like other metropolitan areas around the country, has tried to tackle some of these issues on its own.

But, because the route to resolving our long-term challenges runs through areas like Seattle, its issues demand national attention.

For instance, shouldn't the federal government — through direct investments in scientific research and favorable tax treatment for corporate investment in research and development — help put innovative regions like Puget Sound ahead of the curve in cutting-edge "green" industries?

To upgrade our nation's intellectual capacity, shouldn't the federal government partner with states, localities and the private sector to support the diffusion of successful, entrepreneurial urban education models for districts like Seattle?

And on infrastructure, shouldn't the federal government deploy its roughly $50 billion in annual transportation expenditures in smarter ways to help relieve congestion and promote sustainability in key trade corridors like the Seattle-Tacoma area?

Once we get past the stimulus frenzy, let's have a real debate about the blueprint for bolstering America's long-term economic growth.

Building on the strengths, and addressing the challenges, of the "three I's" in regions like Seattle ought to be another strategy leaders in our nation's capital can agree upon.

Alan Berube is research director of the Metropolitan Policy Program at the Brookings Institution in Washington, D.C. David Jackson is a policy analyst with the program.

      

Seattle likes to compare itself to its neighbors. On issues from light rail to cycling-friendly streetscapes to the business climate and innovation, Puget Sound residents look to places like Portland and San Francisco and wonder whether the region needs improvement or is doing it better than others.

Generally, those are matters of political and public will, leavened of course with the realities of public finance.

But in the coming decade, the demographic changes that metropolitan Seattle will face should prompt a look at another set of places more like the region than its West Coast neighbors.

Over the 2000s, the Puget Sound region ranked above the national average on measures of growth, educational attainment and racial and ethnic diversity. The Seattle region faces challenges and opportunities distinct from those in the less-diverse Portland area, or the much slower-growing San Francisco Bay area.

New Brookings research instead counts Seattle among a series of growing, highly educated, diverse "Next Frontier" regions like Austin, Denver, and Washington, D.C.

Despite being bookended by two recessions, the past decade surely counts Seattle, like its demographic peers, as one of the success stories of the 2000s.

The region grew by nearly 10 percent from 2000 to 2008. People are moving and immigrating to Seattle and the number of married couples with children is growing — important factors as the baby boomers begin to retire next year.

As in other Next Frontier regions, however, the Seattle area's overall demographic success masks deeper challenges.

On growth, the Puget Sound region has long grappled with issues of sprawl and density. Yet despite these efforts — and increasing public-transit use — the fastest-growing places in the region are on the suburban fringe, increasing commuting costs for the families that settle there and offsetting efforts to reduce greenhouse-gas emissions.

On education, although 36 percent of all Puget Sound-area adults hold four-year college degrees — the 11th-highest rate among the nation's 100 largest metro areas — the rate for whites in the region is now twice as high as for blacks and Hispanics. The region continues to import college graduates from elsewhere while its younger, more racially diverse residents are not attaining at anything close to the levels of their elders.

But as the baby boomers retire, what is bemoaned as the minority educational "achievement gap" will rapidly become a competitiveness gap. The result could be more of what we saw in the 2000s in Seattle — increasing wages for the highest earners and overall, masking the falling wages for those at the low end.

These challenges are not entirely new but they are intensifying as the nation goes through its biggest demographic transformation since the massive immigration of the early 20th century. Over the next 15 years, the United States is predicted to add a staggering 43 million residents, most of them minorities. All signs point to the Puget Sound region remaining on the front lines of that transformation.

To make the most of its demographic potential, Seattle's first order of business should be increasing regional cohesion to address what are increasingly regionwide challenges.

For instance, nearly twice as many immigrants and poor people now live in the metro area's suburbs as in its big cities. Older, larger jurisdictions like the city of Seattle and its nonprofits have valuable experience and institutional capacity to build upon in helping the region's low-income families, and meeting the human-services needs of the children of immigrants.

The Seattle region can also look to its demographic peers for innovative strategies to address its challenges. One model is Denver's regional council of governments, which successfully and with regional agreement built a major light-rail system very quickly. Likewise, despite the long tenure of growth management in the state, there are lessons in the Sacramento region's Blueprint, which provides a comprehensive road map for addressing future growth in a fiscally and environmentally sustainable manner.

Seattle can also lead its peers in confronting its large educational disparities by race and geography common in Next Frontier metros as the Community Center for Education Results is attempting.

Similarly, Seattle already has a head start on many other places around the country thanks to the efforts of groups like OneAmerica (on immigrant and refugee communities) and the College Success Foundation. And like other Next Frontier metro areas, Seattle retains an economic advantage from its built-in stocks of human capital, innovative firms and research institutions, and livable urban core that attracts highly educated workers.

The Puget Sound region has made admirable efforts to capitalize on those strengths, but challenges ahead will require a regionwide commitment to maintain Seattle's rank among the nation's most demographically vibrant metro areas.

      

Over the past two decades, the Puget Sound area’s innovation-driven economy has become a magnet for highly educated people from across the country and around the world. Drawn to the region by some of the nation’s most innovative companies—Microsoft, Boeing, Nintendo, Amazon, Genentech and the Fred Hutchinson Cancer Research Center, to name a few—the Puget Sound region ranks well on measures of educational attainment. Of the nation’s largest 100 metro areas, the Seattle-Tacoma-Bellevue area is 11th in bachelor’s degree holders and 17th in graduate degree attainment.

But for all its brainpower, the region has fallen behind in terms of cultivating homegrown talent, particularly in less affluent school districts located in South Seattle and South King County. Starting from an early age, low-income students and children of color in these communities tend to lag behind on important indicators of educational success. The effects of this achievement gap worsen with time, putting these students at a serious disadvantage that often affects their ability to find jobs and their earning potential. 

In an effort to address this achievement gap, the Community Center for Education Results has teamed up with the city of Seattle, the University of Washington, the Seattle Community Colleges District, the Puget Sound Educational Service District, the Bill & Melinda Gates Foundation and others to form the Road Map Project, a coalition working to double the number of South Seattle and South King County students pursuing a college diploma or career credential by 2020.

What’s innovative about the Road Map Project is its focus on collective action and community engagement. By bringing together key stakeholders to collaborate on shared goals, the project is creating a new model for efforts to reduce inequality in educational attainment. Its cradle-to-college-and-career approach aims to improve student outcomes beginning with access to prenatal care and kindergarten readiness all the way through to elementary and secondary schooling and beyond. Through a combination of community outreach and partnership building, data-driven goal-setting and performance management, the project supports area organizations working to boost student success and close the achievement gap in South Seattle and South King County.

In December, the Project released its baseline report, which provides a detailed snapshot of student achievement in the Road Map region during the 2009-2010 school year. With this initial data in hand, the project will be able to work with area organizations to encourage and track progress on a wide variety of indicators, ranging from birth weight and full-day kindergarten enrollment to proficiency in reading, math, and science, parent engagement to graduation rates and postsecondary enrollment. “Demographics should not determine the destiny of children in this region,” says Mary Jean Ryan, executive director of the Community Center for Education Results. “The children who grow up here deserve as good of an education as the people who show up here.”

      

Martha Ross spoke to the Advisory Board of the Community Foundation for Prince George’s County, describing research on the suburbanization of poverty both nationally and in the Washington region.

Despite perceptions that economic distress is primarily a central city phenomenon, suburbs are home to increasing numbers of low-income families. She highlighted the need to strengthen the social service infrastructure in suburban areas.

Full Presentation on Poverty in the Washington-Area Suburbs » (PDF)

Downloads

• Full Presentation

       

Midway through Hong Kong’s second public consultation on the method of electing the next chief executive (CE), both pro-democracy “pan-democrat” legislators and the Hong Kong government and Chinese Central government are still holding their cards close. Following the current public consultation, members of Hong Kong’s Legislative Council (LegCo) will cast an historic vote on political reform. Hong Kong’s mini-constitution, the Basic Law, states that “the ultimate aim is the selection of the CE by universal suffrage upon nomination by a broadly representative nominating committee in accordance with democratic procedures” (Basic Law Art. 45). Pan-democrat LegCo members currently plan to vote against the eventual resolution on political reform, given their dissatisfaction with the reform process to date. Observers predict that passage of a resolution will happen only if the Hong Kong and Central governments can swing a few pan-democrats over to their side in the final hour.

The problem is a prickly one: Is it possible to design an electoral system that is sufficiently open and democratic in the eyes of the Hong Kong people and, at the same time, that guarantees to the Central Government that the elected leader of this special administrative region accepts the supremacy of the Chinese Communist Party? Even as politicians on each side reiterate the near “impossibility” of changing their positions (see e.g., RTHK Backchat discussion with Justice Secretary Rimsky Yuen at 4:25), thought-leaders from Hong Kong’s universities are inventing creative proposals with the potential to break the deadlock.

The Ground Rules

A 2004 decision of the Standing Committee of the National People’s Congress (NPCSC), China’s national legislature, interpreted the Basic Law to require a “Five-Step Process” in order to amend the selection method for the CE. Hong Kong is now between Steps 2 and 3.

• Step 1: The current CE must submit a report to the NPCSC on the need to amend the electoral system. That submission took place on July 15, 2014 after a five-month initial public consultation process. The CE’s report faced heavy criticism in Hong Kong for not accurately reflecting public opinion.
• Step 2: The NPCSC must issue a decision affirming the need for the amendment. The NPCSC announced that decision on August 31, 2014. It endorsed a system by which citizens may directly vote for the CE but imposed restrictive conditions on the nomination procedure of eligible candidates. The decision triggered 79 days of protest and civil disobedience – what activists and the media have referred to as the “Umbrella Movement.”
• Step 3: The Hong Kong government must introduce the political reform bill in LegCo, and two-thirds of legislators must endorse it. The vote in LegCo is scheduled to take place during the first half of 2015, although a precise date has not been set. The purpose of the second-round public consultation is to forge consensus behind political reform within the parameters set out in the August 31 NPCSC decision.
• Steps 4 and 5: In the event that LegCo endorses the bill, the CE must provide his consent and report the amendment to the NPCSC for its final approval.

If the bill does not receive two-thirds endorsement of LegCo (or if it does, but the NPCSC does not approve) then political reform would fail. Hong Kong would be left with the status quo, and Hong Kong people would lose the opportunity to vote for their chief executive for at least the next seven years.

Limited Room for Negotiation

The terms set out by the August 31 NPCSC decision limit the range of possible political reform options. For that reason, one of the core demands of the Umbrella Movement was to scrap the decision and re-start the Five-Step Process; that didn’t happen, however. In January 2015, the Hong Kong government issued a public consultation document framing the discussion in the lead up to the vote in LegCo. The consultation document hews closely to the NPCSC decision:

• The Nominating Committee (NC) will resemble the previous committee that elected the CE with the same number of members (1,200) belonging to the same limited number of subsectors (38). The Wall Street Journal recently described that committee as “a hodgepodge of special interests.” During the consultation, citizens may discuss adding new subsectors to make the committee more inclusive and representative (such as adding new subsectors to represent the interests of women or young voters), but restructuring will necessarily mean disrupting and eliminating the positions of existing subsectors or committee members. Therefore, the consultation document suggests these changes are unlikely to be achieved (Consultation Document, Chapter 3, Sec. 3.08 p. 10).
• The NC will nominate two to three candidates, and each candidate will require endorsement from at least half of the NC membership. (Given the difficulty of restructuring the subsectors or their electoral bases, these terms would effectively exclude any pan-democrats from nomination.) In order to make this more palatable, the consultation document proposes that citizens discuss a two-stage nomination process. In the first stage, a quorum of 100-150 committee members would “recommend” individuals for nomination. The committee would then elect the nominees from this recommended group (Consultation Document, Chapter 4, Sec. 4.09 p. 14). In theory, the meetings when recommendation and nomination votes take place could be staggered in order to allow campaigning and public debate. The idea is that NC members would take public opinion into consideration before casting their second vote.
• On the voting arrangements, citizens may discuss a “first-past-the-post” arrangement with either a single-round, two-round, or instant runoff vote systems (Consultation Document, Chapter 5, Sec. 5.06 p. 17-19).

Both sides in this negotiation have fired shots across the bow. At the launch of the second public consultation on January 7, Chief Secretary Carrie Lam remarked, “there is no room for any concessions or promises to be made in order to win over support from the pan-democratic members.” For their part, the pan-democrats vowed to boycott the public consultation and veto a resolution that conforms to these terms. They argue that the proposed method of electing the chief executive does not improve upon the status quo.

Most pan-democrat legislators are directly elected from geographical constituencies, and public opinion could provide legitimate grounds for shifting their position. According to polling by the Hong Kong University Public Opinion Programme last month, a plurality of respondents view the Hong Kong government’s proposal as neither a step forward nor a step backward for democracy. If the government were to commit to making the electoral system more democratic in the next CE election in 2022, a clear majority of respondents would then support the government’s plan.

Inventing Options and Finding Common Ground

The two-stage nomination mechanism in the government’s proposal is an acknowledgement that the NC ought to be responsive to public opinion. But without additional tinkering, this procedure does not materially change the incentives of NC members. What if the public had the power to reject the slate of candidates nominated by the committee?

Since the first public consultation, a few academics, including Simon Young at Hong Kong University (HKU), have considered at least two ways this could happen. An “active” approach would allow Hong Kong voters to cast blank votes and require a minimum percentage of affirmative votes for the winning candidate. A “passive” approach would require a minimum voter turnout rate for a valid election. NC members might then have to take public opinion into account.

Early last month, Albert Chen, also a professor at HKU and a legal advisor of the NPCSC, began to advocate publicly for a proposal that employs a ballot with a none-of-these-candidates option (see RTHK Jan. 13 edition of The Pulse). Under his proposal, if a majority of people vote for “none-of-these-candidates,” the slate of candidates put forward by the NC will be voided. When the public votes down the candidates, the NC could revert back to an election committee and choose a provisional CE. Alternatively, the Chief Secretary could assume CE duties during a six-month interim period prior to a new election (drawing upon Basic Law Art. 53). Chen argues that his proposal would give the Hong Kong people—not pan-democrat politicians—decision-making power to accept the new NC and its slate of candidates or to revert back to the status quo.

More recently, Johannes Chan, HKU professor and human rights advocate, floated a competing proposal that would provide voters with the option for negative voting. A 20 percent “no” vote for an otherwise leading candidate would trigger a re-vote. Between the first and second elections, the candidates would have additional time to campaign. If after the second election, still 20 percent of voters oppose the leading candidate, the candidate would be disqualified, and the NC would nominate new candidates. Given Hong Kong’s governance problems and increasing public polarization, the 20 percent veto ensures that no CE will be saddled with a substantial block of Hong Kong society affirmatively opposed to him or her from day one.

Albert Chen’s proposal received a tepid if supportive response in pro-Beijing quarters. Jasper Tsang, the Speaker of LegCo and member of the largest pro-establishment political party, and Rita Fan, a member of the NPCSC, affirmed their view that the none-of-these-candidates mechanism does not violate the Basic Law. While the government’s consultation document does not expressly mention the none-of-these-candidates concept, Hong Kong’s Justice Secretary indicated that the proposal should be considered. Starry Lee, another leader of the biggest pro-establishment party in LegCo, countered that technical difficulties and limited time for discussion would pose obstacles to the none-of-these-candidates ballot proposal.

Pan-democrats so far have tended to rebuff government overtures to engage on the topic. A few legislators, such as the Civic Party’s Ronny Tong, have been willing to engage (with Albert Chen on the Jan. 13 edition of The Pulse) but have reservations about what happens after a voided election, and feel that the threshold for public veto is too high. Law Chi-kwong, a founding member of Hong Kong’s Democratic Party and also a member of the HKU faculty, suggested that the winning candidate ought to receive an absolute majority of votes with blank votes counted. (E.g., when one candidate receives 45 percent, another receives 35 percent, and none-of-these-candidates receives 20 percent, that would lead to a void election.) However, other scholars associated with the Democratic Party have distanced themselves from the blank vote debate and Law’s statements.

The Merits of Blank Voting

The debate over blank and negative voting in Hong Kong unfolds in a global context where none-of-these-candidates has become an increasingly common political choice. Several democracies have institutionalized the practice. Proponents cite instrumental rationales, such as improved accountability and transparency. However, these benefits are not necessarily guaranteed. More broadly, people recognize the inherent value of the “no” vote as a form of political expression.

In the U.S. state of Nevada, for example, a none-of-these-candidates option has appeared on the ballot for all statewide and national elections since 1975. During the 2012 presidential cycle, the Secretary of State of Nevada argued that removing a none-of-these-candidates option would harm Nevada voters by taking away a “legitimate and meaningful ballot choice.” There is precedent for none-of-these-candidates winning a plurality of votes in a congressional primary; in that case, Republican Walden Earnhart finished behind the none-of-these-candidates option but still “won” the primary and got the nomination. More typically, the ballot option plays a “spoiler role.” In the 1998 Senate race, for example, 8,125 votes for none-of-these-candidates dwarfed the 395-vote margin between Harry Reid and John Ensign. This allowed Reid, the incumbent, to be re-elected.

It is hard to find examples where none-of-these-candidates has won a majority of the popular vote. Hong Kong’s pan-democrats may be right to question whether this possibility would meaningfully affect the calculus of the NC. Colombia is one of the few jurisdictions where blank votes can have institutional consequences. The right of citizens to cast a blank vote was established by the Colombian Constitution in 1991, and later codified in political reform statutes in 2003 and 2009. Similar to Albert Chen’s proposal in Hong Kong, if the number of blank votes equals a majority of the total number of votes cast, the election must be repeated. The original candidates cannot participate in the second election.

The Colombian experience suggests that the blank vote is more consequential in races with fewer candidates. Colombian voters have never nullified a slate of candidates at the national-level, where the field is crowded. In the city of Bello, however, the blank vote won the mayoral election in 2011. In that case, the electoral authority disqualified the one opposition candidate. This led to a one-man race and united all opposition forces around the blank vote in order to reject the establishment Conservative Party candidate. In the second round election, the replacement Conservative Party candidate (Carlos Alirio Muñoz López) won 59 percent of the vote. In the end, his party benefited with a resounding popular mandate. By this logic, the blank vote could matter in the two- to three-candidate race contemplated for Hong Kong.

Empirical evidence also suggests that local conditions in Hong Kong could support a relatively high turnout for none-of-these-candidates. Based on data from Spain and Italy, Chiara Superti at Harvard finds that blank voting is a sophisticated political choice, more likely to take place in municipalities with highly educated and politically engaged electorates. Hong Kong would qualify.

Beyond candidate selection, voting is a highly expressive act. A citizen’s vote is an expression of identity as well as a channel for protest. Echoing this view, the Supreme Court of India recently held that the country’s constitutional guarantees of freedom of speech and expression confer on Indian citizens a right to reject all candidates and to exercise their right to affirmatively vote for none-of-these-candidates in secrecy. As a people who define themselves by “core values,” including freedom of expression, this resonates with Hongkongers. More fundamentally, the ballot serves a powerful safety-valve function. At the time universal suffrage was introduced in England and France, the vote was presented as a way to channel political turmoil into more moderate political expression—and this, too, resonates in Hong Kong today.

Views expressed in the article are the author's personal views.

       

WALK SCORE, a new Web site popular with urbanists and environmentalists (walkscore.com), rates places for their walkability—the ease of meeting daily needs on foot.

The popularity of the site is an indicator that how the American Dream plays out on the ground has been fundamentally changing over the last 10 to 15 years.

The Ozzie and Harriet drivable suburban version of the American Dream is being supplemented by the Seinfeld vision of "walkable urbanism." Led by late-marrying young adults and empty-nester baby-boomers, many households are looking for the excitement and options living and working in a walkable urban place can bring. With almost nine of 10 new households over the next 20 years being singles or couples without children, this trend promises to continue.

A recent Brookings Institution survey of the largest 30 metro areas in the country identifies the 157 walkable urban places that play a regionally significant role. It also ranks the Top 30 metros in per capita number of walkable urban places. The Philadelphia metropolitan area ranks as the 13th highest on the number of walkable urban places per capita.

Certainly the many already revived downtowns like those in Denver, Washington, Portland, Seattle and San Diego are the most visible signs of the walkable urban trend. But there are many other places you might not suspect.

This includes the emergence of "downtown-adjacent" places like Chelsea and Union Square in New York, suburban town centers like Pasadena and Long Beach in the L.A. area and even built-from-scratch spots like Reston Town Center near Dulles Airport, 30 miles outside Washington.

A major benefit of walkable urban development is that it keeps and attracts young adults to the metro area, many of whom willingly trade crushing car commutes and high gas prices for lively walkable places to live and work.

Walkable urban places seem to attract the well-educated, the so-called "creative class."

Approximately 26 percent of Americans over 25 have college degree - but 99 percent of the new residents moving to Center City this decade have a college degree.

Walkable urbanism increases the economic development potential of the metro area in the knowledge economy. If many of the Gen X-ers and the Millennial generations do not get this lifestyle, they'll move to New York or Washington, depriving Philadelphia of the entrepreneurs it needs to grow.

Walkable urbanism is also essential to create sustainable places to live and work, reducing greenhouse-gas emissions. It is probable that walkable urban households emit less than half the greenhouse gas as driving suburban households - they walk more and unavoidably share heat with upstairs neighbors.

Center City and Society Hill are the most obvious, though not the only, locations of this trend in the Philadelphia region. The recent emergence of University City around Penn and Drexel, Manayunk and New Hope are other significant walkable urban places in the Delaware Valley.

Missing are additional places in the suburbs, particularly around commuter and subway stations.

Rail transit is crucial for walkable urbanism places to emerge.

The investment has already been made for this comprehensive, if underfunded, rail system. Building high-density, mixed-use places around these stations will fulfill pent-up market demand, promote economic growth, lower greenhouse emissions and even give their suburban neighbors a great place for a restaurant within walking distance.

Over the next few years, Philadelphia metro will no doubt see its ranking in the Brookings survey rise while more households will see their Walk Score numbers soar. Seinfeld is coming to Philadelphia. *

Leinberger is a visiting fellow at the Brookings Institution, professor at the University of Michigan and a limited partner in Arcadia Land Co., which has projects in the Philadelphia and Kansas City areas. His most recent book is "The Option of Urbanism: Investing in a new American dream" (Island Press, 2007).

      

Ruy Teixeira joins NPR's Talk of the Nation host Neal Conan to discuss the Pennsylvania primary and the working-class vote.

NEAL CONAN: With us here in Studio 3A is Ruy Teixeira, a visiting fellow at Brookings Institution, co-author of the report "The Decline of the White Working Class and the Rise of a Mass Upper Middle Class." He's kind enough to be with us here. Thanks very much for coming in, nice to see you again.

RUY TEIXEIRA: Great to be here.

NEAL CONAN: And, what are some of the common themes that we see around these working class voters that Sherry Linkon was talking to us about?

RUY TEIXEIRA: Well, I think Sherry touched on a number of them. I think one critical theme, obviously, for this election is their level of economic discontent and their sense that the economic ground has shifted underneath their feet, and they are sort of wondering where they are going to go in the future, where their kids are going to go, sort of, where their way of life is going to go.

This is a matter of great concern to these voters because the last, you know, actually the last several years, have not been kind to them. But more broadly, you can look back, you know, 35 years and say the last 35 years has not been very kind to them. This has been a period when America, by and large, has grown not as fast as it did and incomes have not risen as fast as they used to, but it's been particularly bad for these voters.

Anyone with less than a four-year college degree has really done rather poorly since about the middle 1970s. So, there's a real question in their minds of what America has in store for them in the future. And they are very interested to hear what politicians have to say about it. So far, it hasn't seemed to work out quite so well.

And the other side of it is really touched on by the controversy that you're referring to which is their sense of cultural traditionalism, their sense that, especially the Democrats, perhaps, seem out of touch with that at times. It seems like they don't respect their way of life. It seems like their social liberalism gets in the way of connecting to these voters and really hearing what they have to say and what their commitments and priorities really are and a sense of elitism on their part.

And that's really what, I think, Obama's getting slammed on this, you know, in general, and of course, obviously the McCain and Clinton campaigns have some interest in pushing this, but it did give them an opening to raise this issue and argue that, in fact, he is elitist. And Democrats, if they wish to get away from this, they have to adopt - I think it's a little bit unfair to the remark once you look at it in context.

But nevertheless, the perception was there particularly, I think the stuff about guns and about religion. I mean, can't you, like, own a gun and go to church and not be clinging to it? Because you know, your economic way of life is deteriorating. Again, I don't think that's what he meant. But that's how it's being interpreted. And that's where the discussion is.

Listen to the entire interview »

      

There's been a lot of talk of Pittsburgh's "new economy" as a key reason for the city's star turn as host of this week's G-20 summit, but little has been said about the region's "next economy" -- what comes after the current slump.

It's beginning to be created under our noses.

Though seemingly abstract, the G-20's big-picture decisions -- on dialing down the extraordinary fiscal and monetary steps taken in the past year, building a new regulatory architecture for global finance, and starting the process towards a more balanced global economy and sustainable future -- have big implications for metropolitan areas.

Pittsburgh's stake in the G-20 deliberations goes beyond filling up local hotels and restaurants or hiring additional police -- and even beyond showcasing the region's resilience to the recession.

The fact is that Pittsburgh already is a global metropolis, with deep and growing ties to many of the G-20 countries because of its position as a supplier to the global steel industry (and still a maker of some types of steel), its burgeoning involvement in clean-energy sectors and its established position as a global center of education and health care.

Bayer, the German pharmaceutical conglomerate, has its U.S. headquarters in Pittsburgh, employing some 2,700 workers, including 1,200 at local medical-device manufacturer Medrad. Gamesa, the Spanish wind-energy giant, opened its first North American plant in Ebensburg, about 75 miles east of Pittsburgh. All told, more than 300 international firms from 26 different countries operate in the region, employing tens of thousands of people.

Pittsburgh's goods and services exports make up more than 14 percent of the region's gross metropolitan product, with the lion's share of goods headed to Canada, China, Japan and major economies in Europe -- all G-20 partners.

Given Pittsburgh's global status, the G-20 discussions have substantial implications for the future of the region's $100 billion economy.

The big question, at this summit and others in the future, is how to rebalance the global economy. The Great Recession followed a period of excessive consumption in the United States as Americans spent more on homes and consumer goods than they produced.

The fix is easy to state, but difficult to engineer. As Larry Summers, the head of the White House National Economic Council, said recently, "The rebuilt American economy must be more export-oriented and less consumption-oriented."

This rebalancing will require major and sustained action on currency values and trade policy in the United States as well as in large export economies like China, Germany and Japan (which will need to consume more). As this occurs, U.S. metro areas like Pittsburgh could benefit substantially given their unique assets and special niches.

While this won't quite be a 21st-century version of the equation "what Pittsburgh makes, the world takes," the combination of a more export-oriented trade policy and higher costs for carbon emissions (also to be discussed at the G-20 summit) present the region's economy with both opportunities and threats.

On the plus side, Pittsburgh could export more to the rest of the world and its steel-industry suppliers could benefit from increased exports by U.S. steelmakers. Higher prices for gasoline and jet fuel could mean that manufacturers and retailers in the United States would move away from far-flung networks of global suppliers and rely more on U.S. companies.

There is a potential downside for Pittsburgh, as well: for instance, as steelmakers in Germany and other countries export less and face higher costs of using U.S.-based suppliers, they might rely less on machinery and repair services from Pittsburgh.

To help ensure that the benefits of a rebalanced U.S. economy and a new climate regime outweigh the costs to the Pittsburgh area, local corporate, labor, political, university and civic leaders need a sharp regional business plan to guide the economic policies and innovation investments that they and the federal and state governments make in the Pittsburgh area.

Pittsburgh will have to continue to reclaim polluted industrial "brown fields" for post-industrial use -- an example for cities around the country and world.

Pittsburgh also will need to figure out how to draw more international traffic to its metropolitan airport, which currently offers only one direct flight to Europe.

The upshot: It is time for U.S. metropolitan regions to become more globally fluent and for national leaders to connect their big-picture policies to the fortunes of the urban areas that drive their economies. Only in this way can the United States, and Pittsburgh, move to the next stage of their economic evolution.

       

Cities across America are undergoing massive demographic change, and Philadelphia is no exception. Understanding this change, and effectively managing it, will be key to our national progress and prosperity in this decade and beyond.

A new report from the Brookings Institution, "The State of Metropolitan America," describes a nation that has grown larger, more diverse, more suburban, and more educated in the first decade of this century. These characteristics offer the potential for a tremendous advantage among industrialized nations as the global economy becomes more integrated and more competitive.

The Philadelphia region, for instance, is now home to 92 colleges and universities - more than the renowned concentration of higher education institutions in the Boston area. In our research on the demographic transformation of the nation, we refer to Philadelphia as a "skilled anchor" - one of 19 metro areas, including Baltimore, Rochester, N.Y., and Boston, that have made a transition from manufacturing and shipping to service-based economies. Medical and educational institutions have often driven this transformation, along with specialized manufacturing.

Skilled anchors face challenges, however, due to other trends. While 32 percent of Philadelphia area residents over the age of 25 hold bachelor's degrees, only 21 percent of residents of the city itself have been educated beyond high school.

That is cause for concern, especially as baby boomers begin to retire - most notably in the suburbs, where more than 40 percent of the residents are boomers and seniors. The young people who will take their place in the workforce are not completing college education at the same rate as their predecessors. This is problematic considering that median household income declined during the 2000s, and higher education is closely correlated with higher wages.

Meeting the region's future workforce challenges - that is, connecting residents to high-quality jobs in the education, medicine, life-sciences, and pharmaceutical sectors - will require education policies that prepare all children for successful postsecondary education, so they can build on the economic momentum of the retiring baby boomers.

As part of the national Achieving the Dream Initiative, several foundations are working together to help community colleges in Michigan, Ohio, and Indiana improve completion rates for minority and low-income students who are most at risk of dropping out and not getting the skills and credentials they need to succeed in the workforce.

Other demographic trends represent challenges as well as opportunities. The Philadelphia region's foreign-born population grew by 30 percent in the 2000s, albeit from a relatively small base. Efforts to incorporate immigrants into the mainstream of economic and civic life - such as Philadelphia's language-access policy, its one-stop education office, and the region's emerging Metropolitan Caucus - are all praiseworthy. But more is required.

At the same time, while solutions must be built from the ground up, the Philadelphia region can't go it alone. The federal government can't wait for megacities such as Philadelphia to work out the massive transformation under way by themselves. There are macro-level federal responses to these trends that could and should emanate from Washington.

Among them are comprehensive immigration reform that includes explicit means for improving the integration of new Americans into our society and economy; a revamping of transportation and housing policy that reduces energy-inefficient sprawl, accommodates seniors, and provides access to employment centers; programs to increase postsecondary education for our emerging workforce; and a redoubling of efforts to make work pay for working families, such as the Earned Income Tax Credit.

Over the past decade, between two recessions, Philadelphia has made much progress. Today, the region must capitalize on its hard-earned gains and address emerging challenges with similar conviction.

Philadelphia and America are changing in front of our eyes. Public policy decisions crucial to our health, prosperity, and security need to be informed by what's happening now. We cannot afford to look for our future in the rearview mirror.

       

In a series of pieces during the past two weeks (see here, here, and here), I've laid out the evidence for two propositions: The president's economic record will be at the heart of the 2012 election, and he cannot win without focusing on the heartland — the swing states stretching from Pennsylvania to Iowa.

The case for the first proposition goes as follows:

To an extent that we haven't seen since 1992 (and maybe not even then), the 2012 election will focus on a single issue: economic growth and job creation.

For that reason above all, President Obama will be waging an uphill battle for reelection, because the American people are giving his management of the economy very low grades. (Recent CBS/NYT surveys have placed approval of his performance on the economy and job creation at below 40 percent.)

While for understandable reasons the president's campaign team wants to turn the election into a choice between two futures, the odds of success for that strategy seem low. Most political scientists who have studied the question conclude that when there's an incumbent in the race, the principal issue is that candidate's job performance. (That's why Reagan's "Are you better off..." was such a killer question against Carter in 1980.)

President Obama, therefore, has no choice but to address the economic question head-on, which will require him to offer a much more persuasive defense of his record than he has up to now.

The case for my second proposition — the Heartland Strategy — is this:

The president's team hopes to recreate the "new majority" strategy that expanded the playing field and led to victories in states such as Virginia, North Carolina, Colorado, and Nevada in 2008 and perhaps Arizona and Georgia as well in 2012. This does not seem realistic, however: while the president's support among African Americans remains strong, it has dropped sharply among Hispanics disappointed by what they see as his failure to push for comprehensive immigration reform and his administration's aggressive deportation strategy. And every survey and focus group points to diminished enthusiasm among the young adults whose relentless networking on Obama's behalf contributed significantly to his historic victory.

To make matters worse, the president's numbers in Florida are dismal, he trails likely Republican nominee Mitt Romney by 10 points in New Hampshire, and he has no chance of repeating his 2008 miracle victory in Indiana.

These facts underscore the crucial importance of the heartland states — especially Ohio and Pennsylvania. As a matter of history and simple arithmetic, is very unlikely that President Obama can be reelected without carrying them both.

Although Pennsylvania is usually 3 to 4 points more Democratic than Ohio, the evidence suggests that Obama is surprisingly weak there and needs to do some real work to shore up his standing in a state that Democrats often regard as being in the bag.

As for Ohio, the last Democrat to take the White house without winning that state was John Kennedy, who did it with electoral votes from Texas and other southern states that Obama will not receive. (The last Republican to win the presidency without Ohio? There hasn't been one since the founding of the party in the 1850s.)

Ohio is pivotal, election after election, because it is a demographic and political microcosm of the country. If a presidential candidate can win a majority there, he or she can almost certainly do so in the nation as well. And that's why both parties should pay close attention to the results of last week's election, in which the Ohio electorate overwhelmingly rejected both Gov. Kasich's assault on public sector unions and the individual mandate at the heart of President Obama's health reform law.

If these two core propositions are correct — if the 2012 election will be about Obama's economic stewardship and will be won or lost in the heartland — then the key question is this: How can the president defend his economic record in a region much of which has not enjoyed robust growth for quite some time?

Let's look at some basics:

It's hard to imagine Obama losing Illinois or winning Indiana in 2012. That leaves six key heartland states. Note what they have in common: despite widely varying rates of unemployment, none of them has experienced a rapid decline in that rate over the past year. Because there's no sense of dynamism in the region, hope and confidence in the future are at a low ebb. That's the reality the president must speak to, there and elsewhere.

How can Obama recast the economic discussion? Here's my best shot:

First, he must acknowledge Americans' sense of being stuck and then explain why recovery from this downturn has been so painfully slow — in particular, the impact of the financial collapse and our excessive debt burden, private as well as public.

Second, he must display some humility and acknowledge that he didn't get everything right. It was a mistake not to underscore the difficulty of our circumstances right from the start. It was a mistake to predict that unemployment would peak at 8 percent if his stimulus bill were enacted. While it was necessary to save the big financial institutions from a total meltdown, it was a mistake to ask so little from them institutions in return. And it was a mistake to act so timidly in the face of a housing and mortgage crisis that has cost the middle class many trillions of dollars in lost wealth.

Third, he should emphasize what most Americans believe: without the steps his administration took at the depth of the crisis, there might well have been a second Great Depression. Sure, "It could have been much worse" isn't much of a bumper sticker, but it's a place to start, and it has the merit of being true.

Fourth, what he has done so far has not only halted the decline but has yielded more than twenty consecutive months of growth in private sector jobs — progress that would be more noticeable if states and localities hadn't been shedding so many employees in response to the squeeze on their budgets.

Fifth, while most Americans didn't like it when his administration intervened to save GM and Chrysler, it was the right thing to do, not only for auto workers, but for much of the heartland's economy as well. Allowing these two firms to dissolve would have broken the back of regions already struggling with double-digit unemployment. Leadership means doing what's necessary and right, even when it's unpopular.

Sixth, we now have the opportunity to build on the foundation laid during this painful period in our history. Obama can emphasize steps such as: a bold new response to housing foreclosures and underwater mortgages; an infrastructure bank that mobilizes both domestic and foreign capital to put Americans back to work on projects that will strengthen our economy; and a tougher stance vis-à-vis Chinese policies that have taken their toll on American workers and firms. And yes, we need to come together around fundamental spending and tax reform that can stabilize our fiscal future without further undermining the hard-pressed middle class.

That's the guts of the affirmative case Obama can make. (No doubt he believes he's already doing it, but he hasn't been frank, comprehensive, and persistent enough to break through.) And if he does make it relentlessly until next Labor Day, he can then pivot and ask, What's the alternative? What is my opponent offering? If you think that an agenda of deregulation for big polluters, more tax breaks for the wealthy, and a laissez-faire policy that allows the housing sector to "hit bottom" is the way to jump start job creation, the by all means vote for him. If you don't, you have a chance to continue moving down a path that can move us from the shadows of stagnation to the sunlight of opportunity and to build a new economy in which all Americans — not just a favored few — enjoy the fruits of growth.

       

       

       

Editor’s Note: An interactive feature, highlighting the key findings from this report, can be found here.

Over a billion people worldwide live on less than $1.25 a day. But that number is falling. This has given credence to the idea that extreme poverty can be eliminated in a generation. A new study by Brookings researchers examines the prospects for ending extreme poverty by 2030 and the factors that will determine progress toward this goal. Below are some of the key findings:

1. We are at a unique point in history where there are more people in the world living right around the $1.25 mark than at any other income level. This implies that equitable growth in the developing world will result in more movement of people across the poverty line than across any other level.

2. Sustaining the trend rate of global poverty reduction requires that each year a new set of individuals is primed to cross the international poverty line. This will become increasingly difficult as some of the poorest of the poor struggle to make enough progress to approach the $1.25 threshold over the next twenty years.

3. The period from 1990 to 2030 resembles a relay race in which responsibility for leading the charge on global poverty reduction passes between China, India and sub-Saharan Africa. China has driven progress over the last twenty years, but with its poverty rate now down in the single digits, the baton is being passed to India. India has the capacity to deliver sustained progress on global poverty reduction over the next decade based on modest assumptions of equitable growth. Once India’s poverty is largely exhausted, it will be up to sub-Saharan Africa to run the final relay leg and bring the baton home. This poses a significant challenge as most of Africa’s poor people start a long way behind the poverty line.

4. As global poverty approaches zero, it becomes increasingly concentrated in countries where the record of and prospects for poverty reduction are weakest. Today, a third of the world’s poor live in fragile states but this share could rise to half in 2018 and nearly two-thirds in 2030.

5. The World Bank has recently set a goal to reduce extreme poverty around the world to under 3 percent by 2030. It is unlikely that this goal can be achieved by stronger than expected growth across the developing world, or greater income equality within each developing country, alone. Both factors are needed simultaneously.

Download the full report »

Downloads

• Download the full report

      

In the United States, the official poverty rate for 2012 stood at 15 percent based on the national poverty line which is equivalent to around $16 per person per day. Of the 46.5 million Americans living in poverty, 20.4 million live under half the poverty line. This begs the question of just how poor America’s poorest people are.

Poverty, in one form or other, exists in every country. But the most acute, absolute manifestations of poverty are assumed to be limited to the developing world. This is reflected in the fact that rich countries tend to set higher poverty lines than poor countries, and that global poverty estimates have traditionally excluded industrialized countries and their populations altogether.

An important study on U.S. poverty by Luke Shaefer and Kathryn Edin gently challenges this assumption. Using an alternative dataset from the one employed for the official U.S. poverty measure, Shaefer and Edin show that millions of Americans live on less than $2 a day—a threshold commonly used to measure poverty in the developing world. Depending on the exact definitions used, they find that up to 5 percent of American households with children are shown to fall under this parsimonious poverty line.

Methodologies for measuring poverty differ wildly both within and across countries, so comparisons and their interpretation demand extreme care.

These numbers are intended to shock—and they succeed. The United States is known for having higher inequality and a less generous social safety net than many affluent countries in Europe, but the acute deprivations that flow from this are less understood. A crude comparison of Shaefer and Edin’s estimates with the World Bank’s official $2 a day poverty estimates for developing economies would place the United States level with or behind a large set of countries, including Russia (0.1 percent), the West Bank and Gaza (0.3 percent), Jordan (1.6 percent), Albania (1.7 percent), urban Argentina (1.9 percent), urban China (3.5 percent), and Thailand (4.1 percent). Many of these countries are recipients of American foreign aid. However, methodologies for measuring poverty differ wildly both within and across countries, so such comparisons and their interpretation demand extreme care.

This brief is organized into two parts. In the first part, we examine the welfare of America’s poorest people using a variety of different data sources and definitions. These generate estimates of the number of Americans living under $2 a day that range from 12 million all the way down to zero. This wide spectrum reflects not only a lack of agreement on how poverty can most reliably be measured, but the particular ways in which poverty is, and isn’t, manifested in the U.S.. In the second part, we reexamine America’s $2 a day poverty in the context of global poverty. We begin by identifying the source and definition of poverty that most faithfully replicates the World Bank’s official poverty measure for the developing world to allow a fairer comparison between the U.S. and developing nations. We then compare the characteristics of poverty in the U.S. and the developing world to provide a more complete picture of the nature of poverty in these different settings. Finally, we explain why comparisons of poverty in the U.S. and the developing world, despite their limitations and pitfalls, are likely to become more common.

Downloads

• Download the full paper

       

The Girls’ Education Imperative

In 1948, the world’s nations came together and agreed that “everyone has a right to education,” boys and girls and rich and poor alike. This vision set forth in the Universal Declaration of Human Rights has been reinforced over the decades and today the girls who still fight to be educated are not cases for charity but actively pursuing what is rightfully theirs. In recent years, girls’ education has also received attention because, in the words of the United Nations, “education is not only a right but a passport to human development.” Evidence has been mounting on the pivotal role that educating a girl or a woman plays in improving health, social, and economic outcomes, not only for herself but her children, family, and community. Educating girls helps improve health: one study published in The Lancet, the world’s leading medical journal, found that increasing girls’ education was responsible for more than half of the reduction in child mortality between 1970 and 2009. The economic benefits are clear: former chief economist at the World Bank and United States Secretary of the Treasury Lawrence Summers concluded that girls’ education “may well be the highest-return investment available in the developing world” due to the benefits women, their families and societies reap. And because women make up a large share of the world’s farmers, improvements in girls’ education also lead to increased agricultural output and productivity.

Progress in Girls’ Education

Given the importance of girls’ education, for girls’ own dignity and rights and for a broad sweep of development outcomes, it is no surprise that global agendas have focused heavily on it. For more than two decades, girls’ education has been recognized as a global priority and incorporated into development targets, which has rallied governments, nongovernmental organizations (NGOs), foundations and international organizations. From the 1990 Education for All (EFA) Goals to the 1995 Fourth World Conference on Women in Beijing and to the 2000 Millennium Development Goals (MDGs), girls’ education has been a priority, particularly in international development communities. Perhaps the most influential of these has been the MDGs, which reinforce parts of the EFA goals by focusing two of their eight goals on education, namely on achieving universal primary education and achieving gender parity in both primary and secondary school.

Progress in enrolling children, especially girls, into primary school is seen by many as a development success story. Indeed there is much to celebrate. Since 1990, the number of girls in low-income countries enrolling in primary school has increased two-and-a-half times, from 23.6 million to nearly 63 million in 2012. This has translated into a large increase in the girl-boy ratio in low-income countries, from 82 to 95 girls per 100 boys in primary school. For low- and lower-middle-income countries combined, the number of girls enrolled reached over 200 million girls in 2012, an almost 80 percent increase, and globally two-thirds of countries have near-equal numbers of boys and girls enrolled at the primary level. 

In 1990, in South and West Asia, there were only 74 girls enrolled in primary school for every 100 boys, but by 2012 the region had achieved equal numbers of boys and girls in school.

This progress was largely made by the leadership of developing country governments that prioritized expansion of primary schooling opportunities and by the global community’s support of governments focused on reaching the MDGs. Some of the biggest gains have been in regions struggling the most. In 1990, in South and West Asia, there were only 74 girls enrolled in primary school for every 100 boys, but by 2012 the region had achieved equal numbers of boys and girls in school. Similarly, sub-Saharan Africa, which had the lowest levels of girls in school in 1990, has experienced marked improvement, with the girl-boy ratio increasing from 83 to 92 girls per 100 boys in primary school.

The focus on getting girls into school has helped close gender gaps in relation to other factors too, such as wealth and location of residence. The fact that family income and urban or rural locality are now the most likely indicators of school enrollment is a big victory for girls’ education. The World Inequality Database on Education (WIDE) shows that in India, for example, 38 percent of girls and 25 percent of boys of primary school age were not in school in 1992. By 2005, that gap had narrowed to 24 percent of girls and 22 percent of boys. However, today the gap between the richest and poorest children’s attendance is much starker—37 percent of children from the poorest 20 percent of families versus just 11 percent of the richest 20 percent are out of school. And in many areas, girls actually outpace boys, especially at higher levels of education. In one third of countries, there are now more girls than boys enrolled in secondary school. Also, girls often do better once in school, with boys making up 75 percent of grade-repeaters in primary school.

Downloads

• Download the paper (PDF)

       

This presentation by Alan Berube to the Cleveland EITC Forum explains how boosting low-income families' participation in tax credits can help put the city's workers, neighborhoods, and the local economy itself on more solid financial ground.

The metro program hosts and participates in a variety of public forums. To view a complete list of these events, please visit the metro program's Speeches and Events page which provides copies of major speeches, powerpoint presentations, event transcripts, and event summaries.

Downloads

• Download

       

Before the City Club in Cleveland, Bruce Katz emphasized the importance of Ohio's older industrial cities for the state's overall prosperity and outlined, despite seemingly grim statistics, why now is the time for a rebirth of those places and how it can be achieved.

Downloads

• Download
• Download Remarks by Lt. Gov. Fisher

       

For over 100 years, the driving force of Ohio’s economy has been the state’s so-called Big Eight cities—Columbus, Cleveland, Cincinnati, Toledo, Akron, Dayton, Canton, and Youngstown. Today, though, the driving reality of these cities is sustained, long-term population loss. The central issue confronting these cities—and the state and surrounding metropolitan area—is not whether these cities will have different physical footprints and more green space than they do now, but how it will happen.

The state must adopt a different way of thinking and a different vision of its cities’ future—and so must the myriad local, civic, philanthropic, and business leaders who will also play a role in reshaping Ohio’s cities. The following seven basic premises should inform any vision for a smaller, stronger future and subsequent strategies for change in these places:

• These cities contain significant assets for future rebuilding
  
• These cities will not regain their peak population
  
• These cities have a surplus of housing
  
• These cities have far more vacant land than can be absorbed by redevelopment
  
• Impoverishment threatens the viability of these cities more than population loss as such
  
• Local resources are severely limited
  
• The fate of cities and their metropolitan areas are inextricably inter-connected
  

These premises have significant implications for the strategies that state and local governments should pursue to address the issues of shrinking cities.

Full Paper on Ohio's Cities » (PDF)
Paper on Shrinking Cities Across the United States »

Downloads

• Full Paper

       

Throughout the 2000s, Chinese demand for primary goods like oil, iron, copper, and zinc helped Africa reduce poverty more than it had in decades. Even so, China’s total investment in the continent’s natural resources has been smaller than many imagine, and, with growth moving away from manufacturing and toward consumption, China’s appetite for raw materials will continue to diminish. China’s shifting economic growth model aligns with Sub-Saharan Africa’s imminent labor force boom, presenting a significant opportunity for both sides. Maximizing mutual gain will depend on China and Africa cooperating to address a host of challenges: Can African countries limit the flow of Chinese migrants and foster domestic industries? Will Chinese investors adopt global norms of social and environmental responsibility? Where does the West fit in?

This study aims to objectively assess China’s economic engagement on the African continent, the extent to which African economies are benefiting, prospects for the future, and ways to make this relationship more productive. David Dollar marshals evidence about the scale of trade, investment, infrastructure cooperation, and migration between China and Africa, all of which are relatively recent phenomena. In addition, Dollar addresses the question of whether and how China’s involvement differs from that of Africa’s other economic partners. The concluding chapter provides some tentative recommendations for African countries, China, and the West.

Downloads

• China's engagement with Africa: From natural resources to human resources

       

       

Premier Li Keqiang's government work report was a pragmatic and concrete one, pointing out challenges as well as strengths and opportunities, according to a US-based China scholar.

The report, delivered by Premier Li at the opening of the fourth session of the 12th National People's Congress (NPC) on Saturday, is now being deliberated by some 3,000 deputies.

Cheng Li, director of the John L. Thornton China Center of the Brookings Institution, said the report tells people that the Chinese economy is facing difficulties as a result of structural reforms, the need for better environmental protection and the impact of a sluggish global economy.

"It tells the public that such economic challenges will last for a period of time, so the report does not give the public an unachievable expectation," Cheng Li said.

Meanwhile, the report has also elaborated on China's strength, such as the potential to be unleashed in urbanization, the development of the service sector, the employment policy and the innovation policy, according to Cheng Li.

"So this is a report that neither gives the public too high an expectation nor disappointment," said Cheng Li, whose research has focused on the transformation of Chinese leaders and technological development in China.

Cheng Li believes that this is especially important during the coming two years, or the beginning years of the 13th Five-Year Plan (2016-2020), when there won't be excessive high economic growth rate, something he said China also does not need.

In the work report, China's gross domestic product (GDP) growth in 2016 has been set between 6.5 percent and 7 percent. It is the first time since 1995 for the target to be in a range rather than one single number.

China's economy grew by 6.9 percent in 2015, the lowest in a quarter of a century, but it was still among the highest in the world.

According to the report, an average annual growth of at least 6.5 percent should be maintained in the coming five years in order to achieve the goals of doubling GDP and household income by 2020 from the 2010 levels.

It also says that by 2020, the contribution from scientific and technological advances should account for 60 percent of GDP growth.

Cheng Li said structural reforms will bring a lot of challenges, all of which would require dealing with by the Chinese government.

He described the goals in the work report as very specific. "There isn't much empty content and slogan type of things," he said.

"It is what the Chinese public wants to see... and it's a relatively balanced and good report, one quite pertinent to China's situation today," Cheng Li said.

He hoped that the report had emphasized more that many of the challenges are also opportunities. "It is just the beginning and the potential is huge," he said, citing how areas such as environmental protection could help job creation and business opportunities.

To Cheng Li, the potential opportunities will help small- and medium-sized companies, large companies, Chinese companies overseas and foreign-funded companies in China break new ground.

Cheng Li said the growth targets set in the 13th Five-Year Plan are quite reasonable. "More than 90 percent of what's in the 12th Five-Year Plan (2011-2015) had been achieved, and there is a better reason to achieve what's in the 13th Five-Year Plan," he said.

This piece was originally published by China Daily.

       

As expected, on August 10, Prime Minister Recep Tayyip Erdoğan from the Justice and Development Party (AKP) decisively won Turkey’s first directly-elected presidential election. He received just about 52 percent of the votes, falling somewhat short of the 55 percent that the polls were predicting.

At a time when Turkey’s neighborhood is in a state of chaos and the country is deeply polarized, what will his next steps as president be? Will he transform Turkey’s political system from a parliamentary to a presidential one? Will he be able to simultaneously run his party, control the prime minister and be the president of Turkey? Will he be able to overcome the authoritarian and abrasive politics of the last two years and replace it with politics reminiscent of the mid-2000s characterized by consensus building and liberal reforms? Or will it be a case of more of the same?

Traditionally, presidents were elected by members of the Turkish Parliament, and had limited powers. However, Erdoğan has been aspiring for a strong presidency since AKP won close to half of the votes at the national elections in June 2011. While serving as prime minister, Erdoğan attempted to write a new constitution, but resistance from opposition parties together with the May 2013 Gezi Park protests and the December 2013 corruption scandal prevented him from achieving his goal. Consequently, his fallback plan has been to emerge triumphant from the 2014 presidential elections,use the presidential powers in the current constitution to its full extent and aim to get AKP to emerge from the parliamentary elections scheduled for June 2015 with enough seats, enabling him to see to the adoption of a new constitution. This new constitution would transform Turkey’s parliamentary system into a presidential one and give Erdoğan the possibility to run the country until 2023, the Republic’s centenary.

Erdoğan’s Opponents: İhsanoğlu and Demirtaş

Ekmeleddin İhsanoğlu and Selahattin Demirtaş were Erdoğan’s main opponents. Although neither constituted major challenges for Erdoğan, each represent something significant for Turkey. The left-leaning secularist Republican People’s Party (CHP) and right-wing Nationalist Movement Party (MHP) joined forces to support İhsanoğlu’s candidacy. İhsanoğlu, born and raised in Cairo, a prominent religious scholar, and a secretary-general of the Organization of Islamic Cooperation from 2004 to 2010, was seen as the best candidate to attract former AKP members, and votes from the wider conservative electorate. Though he lacked political experience and visibility in Turkey, he managed to receive more than 38 percent of the votes. This performance falls short of the 44 percent that CHP and MHP garnered at the local elections in March this year, but would still be considered as a respectable performance.

Demirtaş, a prominent figure amongst Turkey’s Kurdish minority population and a keen partner in government efforts to find a political solution to the Kurdish problem in Turkey, ran for presidency on a secular and somewhat leftist agenda, sensitive to the interests of especially minorities and women. He received almost 10 percent of the votes, one point short of most poll predictions, but almost twice the amount that his party, Peace and Democracy Party (BDP), received in March local elections. This suggests that Demirtaş received support not just from Kurdish, but also Turkish voters, a very significant development in terms of politics in Turkey.

How Has the Turkish Political System Worked in the Past?

With Erdoğan’s victory, Turkey is now at an important crossroad. Since World War II, Turkey has been a parliamentary system. The prime minister was the head of the executive branch of government and the president, elected by the parliament, held a ceremonial role. This changed after General Kenan Evren led the 1980 military coup d’état. In 1982, Evren introduced a new constitution that empowered the president with some executive powers intended to exert some control over civilian politicians. However, with the exception of Evren and his successor, Turgut Özal, subsequent presidents, Süleyman Demirel and Ahmet Necdet Sezer, refrained from using these constitutional powers in any conspicuous manner. So where did the notion of a directly-elected president come from?

The idea of a president elected directly by the electorate, rather than by the parliament, is an outcome of the military’s interference in politics in 2007. As the end of the staunchly secular and politically shy Sezer’s term approached, the military in a rather undemocratic manner, tried to prevent the then-Minister of Foreign Affairs, Abdullah Gül, from becoming president. The military and the judicial establishment deeply distrusted Gül’s, as well as the AKP’s, commitment to secularism. The government overcame the challenge by calling for an early snap election that AKP won handsomely, opening the way for Gül’s election as the new president. Furthermore, the electoral victory encouraged Erdoğan to hit back at the military by calling for a referendum on whether future presidents should be directly elected by the people or by the parliament. Erdoğan’s initiative received support from 58 percent of the electorate, thereby quite decisively demonstrating to his opponents the very extent of his popularity while allowing him to emphasize the “will of the people” as the basis of his understanding of democracy.

The Campaigns: Two Approaches to Turkey’s Future

The 2014 presidential campaign unfolded as a competition between two political approaches to the future of governance in Turkey. The first approach, represented by Erdoğan, calls for a narrow and majoritarian understanding of democracy based on the notion of the “will of the people” (milli irade) at the expense of constitutional checks and balances and separation of powers. In return for such an authoritarian form of governance, Erdoğan promises a prosperous Turkey that will grow to be the 10th largest economy by 2023 and become a major regional, if not global power. It is with this in mind that Erdoğan aspires for a powerful presidential system dominated by him alone. The second approach, especially pushed for by İhsanoğlu, advocates the maintenance of the existing parliamentary system and warns that a hybrid system where both the prime minister and the president is elected directly by the people, risks creating instability, tension and polarization within the country. He advocated for a president who would be above party politics and who would focus on protecting freedoms and the rule of law.

Does Erdoğan Have a Mandate?

What will Erdoğan do now? He is confident that he enjoys wide-spread popularity among the masses. However, it is difficult to conclude if the electorate went to the polls on Sunday with a referendum to change the political system in mind. If they did, then they did so with a rather slim margin. Nevertheless, it is likely that Erdoğan will interpret the results of the elections as an explicit approval of his political agenda, and will thus proceed to transform Turkey towards a presidential system. However, a number of challenges will be awaiting his project. The first and immediate challenge will emerge with respect to the next prime minister. As a prominent Turkish columnist put it, Erdoğan will want a prime minister who will always be “one step behind”. But will politics allow for this to occur? Can Erdoğan find a loyal and unquestioning prime minister? The current constitution requires the president to resign his/her political party affiliations. Once he takes up his position as president at the end of August, will he be able to continue to enjoy control over AKP from a distance? This is not a challenge to be taken lightly considering that there will be parliamentary elections in 2015 and the ranks of AKP will be quite restless both in terms of the selection of candidates, as well as the prospects of ensuring a victory at the polls. Lastly, with ISIS’s growing power, political instability in many neighboring countries, a troubled relationship with the European Union and the United States and continued bloodbath in Syria, keeping the Turkish economy on course may turn out to be Erdogan’s greatest challenge. The coming months are going to be critical in terms of whether Erdoğan will overcome these challenges and succeed in transforming Turkey’s political system. The outcome will illustrate if Erdoğan is actually bigger than Turkey or vice versa. However, whatever happens in the next few months, it will largely determine if in 2023, Turkey will celebrate its centenary as a liberal or illiberal democracy. In the meantime, the fact that Erdoğan plans to use a constitution that was drawn up under military tutelage to achieve his presidential ambitions is both ironic, but also not very promising in terms of Turkey’s democracy turning liberal.

Editor's Note: Ranu Nath, the Turkey Project intern in the Foreign Policy Program at Brookings, contributed to this piece.

       

Less than four months after ascending the throne, Saudi King Salman bin Abdul Aziz Al Saud has made unprecedented changes in the line of succession that benefit his own son Prince Mohammed bin Salman. These shifts come as Salman pursues the most assertive foreign policy in recent Saudi history.

The king removed the sitting Crown Prince Muqrin, his half brother, and promoted the third in line Prince Mohammed bin Nayef, his nephew, up to number two. Salman made his own son, Mohammed bin Salman, the new number three. The King also replaced the ailing foreign minister, Prince Saud al Faisal with a non-royal, the current ambassador to Washington, Adel al Jubeir. Prince Saud had been Foreign Minister since 1975.

According to the royal palace, Prince Muqrin asked to be replaced, but no reason was given. No crown prince has ever given up the position in the history of the modern kingdom, founded in 1902. When Salman ascended the throne in January, the press trumpeted Muqrin as heir and there was no sign he was not eager to be the next in line. Many will assume he was asked to quit.

Speculation will be intense about why that might be. Muqrin was a protégé of the late King Abdullah. He is not close to Salman's branch of the family, the Sudeiris. He also appeared less enthusiastic about Salman's war in Yemen. As a former fighter pilot Muqrin understands the limits of air power, and he may have had doubts about the wisdom of what was initially called Operation Decisive Storm, but has now become a stalemate.

The new crown prince, 55-year-old Mohammed bin Nayef, is famous for defeating Al Qaeda's violent attempt to overthrow the House of Saud a decade ago. MBN, as he is known, led a four-year counter-terrorist campaign that decimated Al Qaeda in the Kingdom and drove its remnants into Yemen. In the process MBN survived at least four assassination plots. His father, the late Crown Prince Nayef, was so reactionary he was nicknamed the Black Prince. But MBN studied in Oregon and with the FBI and Scotland Yard before joining the Saudi interior ministry. He also holds the position of chairman of the Kingdom’s security and political committee coordinating all security issues.

Mohammed bin Salman, MBS, is the face of the Yemen war. He became defense minister in January and has been constantly on Saudi TV appearing to direct the war effort and meeting with foreign leaders to win support for the campaign against the pro-Iranian Zaydi Shia Houthi rebels. He is considered ruthlessly ambitious and is very close to his father. He has given up his position as chief of the royal court but he will undoubtedly keep control of access to the king.

Unlike most Saudi princes, MBS was not educated in the west. Instead he studied at King Saud University. There is controversy over his age, reputed to be anywhere from 29 to 34 (officially his birthday is July 24, 1980). He is chairman of a number of young people's organizations in the Kingdom and seeks to portray himself as the leader of the next generation of Saudis. He also chairs the powerful development and economics committee that coordinates economic policies, including oil price and supply.

In promoting his nephew and son, King Salman is passing the torch to the next generations of royals. Since 1902 the Kingdom has been ruled by the founder of the modern Kingdom Ibn Saud Abd Al Aziz or his sons. Now, Salman will be the last son to reign.

These changes have all been endorsed by the Allegiance Council, the committee of the sons and grandsons of Ibn Saud, but the legitimacy of selecting the next generation has been a question mark over the succession process for years. The king hopes it is now all settled.

The late King Abdullah's own son, Prince Mitab, has kept his powerful position as commander of the Saudi National Guard. The SANG is the family’s praetorian guard, it defends the capital, the holy mosques in Mecca and Medina and the oil industry. SANG troops have occupied Bahrain, the Kingdom’s tiny island neighbor, since the Arab Spring in 2011 to keep a minority Sunni monarchy in power.

The new lineup is solidly pro-American but riven with doubts about American reliability. The royals believe George W. Bush foolishly let Iran gain dominance in Iraq and fear Barack Obama is too eager for a nuclear deal with Iran and a grand rapprochement with Tehran. Repeated assurances by Obama and concrete support for the Yemen war have not altered Saudi doubts about America.

Salman's decision to wage war in Yemen so soon after coming to the throne reflected his acute concern that Iran was gaining a foothold on the Arabian Peninsula in what has always been the soft underbelly of Saudi Arabia, Yemen. The Zaydi Houthi rebels are not pawns of Tehran but they did initiate direct air flights between Sanaa and Tehran early this year, offered Iran port facilities and negotiated a lucrative oil deal. A few Iranian Revolutionary Guard advisers have been assisting the Zaydis for the last few years covertly. From Riyadh's view Iran already dominated decision-making in Baghdad, Damascus and Beirut, it does not want a fourth Arab capital to be aligned with Tehran.

But Salman's intense effort to secure wide Islamic backing for the war has been less than a success. Oman, Yemen's other neighbor, has opted not to join with the other five members of the Gulf Cooperation Council in the fighting, instead staying on the sidelines. The Pakistani parliament voted unanimously to keep neutral and rebuff repeated Saudi requests for ground troops to aid the war effort. Pakistani officials have privately suggested Salman panicked into the war without a viable strategy to get the Houthis out of Sanaa. Even Egypt, which benefits from billions in GCC aid, has opted not to send troops. although it's navy is supporting the Saudi blockade of Yemen.

The Yemen war is part Saudi-Iranian regional rivalry, part the unfinished business of the Arab Spring revolutions and part sectarian Sunni-Shia animosity. It is above all the Salmans’ war, father and son together. The surprise elevation of MBN and MBS underscores how the stakes in this war are crucial, not only to Yemen's future but increasingly to the future of the House of Saud.

This piece was originally published by The Daily Beast.

       

       

INTRODUCTION

U.S. public diplomacy with Cuba — or the United States engaging with Cuban public opinion — is an intriguing subject. The principal reason for this is because it has never been tried. There was no attempt before the 1959 Revolution because the United States had no need to convince the Cuban government and people of why the United States mattered to them. In almost every aspect of life it was impossible to conceive of Cuba without the United States. Fidel Castro’s Revolution changed that. And since the Revolution, the Castro regime has carefully molded the United States as the arch enemy of the Cuban people. Successive U.S. administrations have made little effort to banish that impression while U.S. public diplomacy has been largely aimed at the Cuban-American exile community.

The public diplomacy challenge for the United States with Cuba is exciting but also formidable. The Cuban Government has had many years experience of controlling access to information and shackling freedom of expression. The public diplomacy messages that the United States will send will be distorted and blocked. Nevertheless there are growing signs that Cubans on the island are accessing new technologies so information does get through, particularly to residents of the major cities. Expansion of people-to-people exchanges and a lifting of the travel ban on ordinary Americans would greatly assist any public diplomacy campaign. But public diplomacy can start without this and the Cuban government’s capacity to block messages is no argument for not transmitting them.

Downloads

• Download

       

       

Event Information

On July 30-31, 2004, more than 40 preeminent international leaders from the public, private, and non-profit sectors came together at the Aspen Institute to discuss "America's Role in the Fight Against Global Poverty" and to set out a forward-looking strategy for the United States.

Co-hosted by Richard C. Blum of Blum Capital Partners LP, the Brookings Institution's Poverty and Global Economy Initiative, the Aspen Institute, and Realizing Rights: The Ethical Globalization Initiative, the group's aim was to explore the dilemma of global poverty from different perspectives, to disaggregate the seemingly intractable problem into more manageable challenges, and to identify key elements of an effective U.S. policy agenda.

With roundtable participants hailing from around the world and representing diverse experiences and approaches, the dialogue was as multifaceted as the challenge of poverty itself. Rather than simply summarize conference proceedings, this essay attempts to weave together the thoughtful exchanges, impassioned calls to action, fresh insights, and innovative ideas that characterized the discussion, and to set the stage for ongoing collaboration in the struggle for human dignity.

Helping to define the issues, share and encourage what works, and build the intellectual framework for such an enterprise will be the guiding mission of the Richard C. Blum Roundtable in the years ahead.


View the full report »
View the conference agenda »
View the participant list »

      

Event Information

Register for the Event
From a bureaucratic backwater in the waning days of the Cold War, the fight against global poverty has become one of the hottest tickets on the global agenda. The cozy, all-of-a-kind club of rich country officials who for decades dominated the development agenda has given way to a profusion of mega philanthropists, new bilaterals such as China, "celanthropists" and super-charged advocacy networks vying to solve the world's toughest problems. While philanthropic foundations and celebrity goodwill ambassadors have been part of the charitable landscape for many years, the explosion in the givers' wealth, the messaging leverage associated with new media and social networking, and the new flows of assistance from developing country donors and diasporas together herald a new era of global action on poverty. The new scale and dynamism of these entrants offer hopeful prospects for this continuing fight, even as the new entrants confront some of the same conundrums that official aid donors have grappled with in the past.

On August 1-3, 2007, the Brookings Blum Roundtable gathered representatives reflective of this dynamic landscape to discuss these trends. Through robust discussion and continuing cross-sector partnerships, the conference hopes to foster lasting and widespread improvements in this new field of development.

2007 Brookings Blum Roundtable: Related Materials
	Read the roundtable report - Making Poverty History? How Activists, Philanthropists, and the Public Are Changing Global Development »  Download the participant list » (PDF)  Download the scene setter » (PDF)

---

2007 Brookings Blum Roundtable Agenda:

1. Fighting Global Poverty: Who'll Be Relevant In 2020?
   • Matthew Bishop, The Economist, "Fighting Global Poverty: Who'll Be Relevant In 2020?"
   • Homi Kharas, The Brookings Institution, "The New Reality Of Aid"
   • Jane Nelson, Harvard University, "New Development Players And Models"
2. Angelina, Bono, And Me: New Vehicles To Engage The Public
   • Darrell M. West, Brown University, "Angelina, Mia, And Bono: Celebrities And International Development"
   • Joshua Busby, University of Texas, Austin, "Is There A Constituency For Global Poverty? Jubilee 2000 And The Future Of Development Advocacy"
   • Ngozi Okonjo-Iweala, The Brookings Institution, "Nigeria's Fight For Debt Relief: Tracing The Path"
3. Leveraging Knowledge For Development
   • Ashok Khosla, Development Alternatives Group, "Leveraging Knowledge To End Poverty"
   • Eric Brewer, University of California, Berkeley, "Development And Engineering"
4. Social Enterprise And Private Enterprise
   Chaired by: Mary Robinson, Realizing Rights: The Ethical Globalization Initiative
   • J. Gregory Dees, Duke University, "Philanthropy And Enterprise: Harnessing The Power Of Business And Entrepreneurship For Social Change"
5. Africa's Economic Successes: What's Worked And What's Next
   Moderated by: Paul Martin, former Prime Minister of Canada
   Panelists
   • Donald Kaberuka, African Development Bank
   • Ngozi Okonjo-Iweala, The Brookings Institution
6. Effecting Change Through Accountable Channels
   • Jane Nelson, Harvard University, "Effecting Change Through Accountable Channels"
   • Simon Zadek, AccountAbility, "Accountability Compacts: Collaborative Governance For The 21^stCentury"
7. Global Impact: Philanthropy Changing Development
   • Mark R. Kramer, FSG Social Impact Advisors, "Philanthropy, Aid, And Investment: Creating A Common Language"
   • Joseph O'Keefe, The Brookings Institution, "Aid - From Consensus To Competition?"
8. Keynote Address
   • Former Vice President Al Gore, Generation Investment Management

       

Event Information

Lifting an estimated 1.2 billion people from extreme poverty over the next generation will require robust and broadly-shared economic growth throughout the developing world that is sufficient to generate decent jobs for an ever-expanding global labor force. Innovative but affordable solutions must also be found to meet people’s demand for basic needs like food, housing, a quality education and access to energy resources. And major investments will still be required to effectively address global development challenges, such as climate change and child and maternal health.  On all these fronts, the private sector, from small- and medium-sized enterprises to major global corporations, must play a significant and expanded role.

On August 4-6, 2013, Brookings Global Economy and Development is hosting the tenth annual Brookings Blum Roundtable on Global Poverty in Aspen, Colorado. This year’s roundtable theme, “The Private Sector in the New Global Development Agenda,” brings together global leaders, entrepreneurs, practitioners and public intellectuals to discuss how the contribution of the private sector be enhanced in the push to end poverty over the next generation and how government work more effectively with the private sector to leverage its investments in developing countries. 

Tweets about "#Blum2013"

Roundtable Agenda

Sunday, August 4, 2013

Welcome: 8:40AM - 9:00AM MST
Brookings Welcome
• Strobe Talbott, Brookings

Opening Remarks
• Richard C. Blum, Blum Capital Partners, LP and Founder of 
the Blum Center for Developing Economies at UC Berkeley
• Julie Sunderland, Bill and Melinda Gates Foundation
• Kemal Derviş, Global Economy and Development, Brookings

Session I: 9:00AM - 10:30AM MST
Framing Session: Reimagining the Role of the Private Sector
In this opening discussion, participants will explore the overarching questions for the roundtable: How can the contribution of the private sector be enhanced in the push to end poverty over the next generation? What are the most effective mechanisms for strengthening private sector accountability? How can business practices and norms be encouraged that support sustainable development and job creation? How can business build trust in its contributions to sustainable development?

Moderator
• Nancy Birdsall, Center for Global Development

Introductory Remarks
• Homi Kharas, Brookings Institution
• Viswanathan Shankar, Standard Chartered Bank
• Shannon May, Bridge International Academies


Session II: 10:50AM - 12:20PM MST
Private Equity
Participants will explore the following questions for the roundtable: What are the constraints to higher levels of private equity in the developing world, including in non-traditional sectors? How can early-stage investments be promoted to improve deal flow? How can transaction costs and technical assistance costs be lowered?

Moderator
• Laura Tyson, University of California, Berkeley

Introductory Remarks
• Robert van Zwieten, Emerging Markets Private Equity Association
• Runa Alam, Development Partners International
• Vineet Rai, Aavishkaar

Dinner Program: 6:45PM - 9:15PM MST
Aspen Institute Madeleine K. Albright Global Development Lecture

Featuring
• Dr. Paul Farmer, Chief Strategist and Co-Founder, Partners in Health

---

Monday, August 5, 2013

Session III: 9:00AM - 10:30AM MST
Goods, Services and Jobs for the Poor
Participants will explore the following questions for the roundtable: In what areas are the most promising emerging business models that serve the poor arising? What are the major obstacles in creating and selling profitable, quality, and beneficial products to the poor and how can they be overcome? What common features distinguish successful and replicable solutions?

Moderator
• Mary Robinson, Mary Robinson Foundation

Introductory Remarks
• Ashish Karamchandani, Monitor Deloitte
• Chris Locke, GSMA
• Ajaita Shah, Frontier Markets
• Hubertus van der Vaart, SEAF

Session IV: 10:50AM - 12:20PM MST
Blended Finance
Participants will explore the following questions for the roundtable: Can standard models of blended finance deliver projects at a large enough scale? How can leverage be measured and incorporated into aid effectiveness measures? Should governments have explicit leverage targets to force change more rapidly and systematically?

Moderator
• Henrietta Fore, Holsman International

Introductory Remarks
• Elizabeth Littlefield, OPIC
• Ewen McDonald, AusAID
• Laurie Spengler, ShoreBank International 

---

Tuesday, August 6, 2013 

Session V: 9:00AM - 10:30AM MST
Unlocking Female Entrepreneurship
Participants will explore the following questions for the roundtable: How is the global landscape for female entrepreneurship changing? What types of interventions have the greatest ability to overturn barriers to female entrepreneurship in the developing world? Who, or what institutions, should lead efforts to advance this agenda? Can progress be made without a broader effort to end economic discrimination against women?

Moderator
• Smita Singh, Independent

Introductory Remarks
• Dina Powell, Goldman Sachs
• Carmen Niethammer, IFC
• Randall Kempner, ANDE

Session VI: 10:50AM - 12:20PM MST
U.S. Leadership and Resources to Engage The Private Sector
Participants will explore the following questions for the roundtable: How can U.S. foreign assistance be strengthened to more effectively promote the role of the private sector? How can U.S. diplomacy support private sector development in the emerging economies and multinational enterprises investing in the developing world? What can the US do to promote open innovation platforms?

Moderator
• George Ingram, Brookings

Introductory Remarks
• Sam Worthington, InterAction
• John Podesta, Center for American Progress
• Rajiv Shah, USAID

Closing Remarks
• Richard C. Blum, Blum Capital Partners, LP and Founder of the Blum Center for Developing Economies at Berkeley
• Kemal Derviş, Global Economy and Development, Brookings

Public Event: 4:30PM - 6:00PM MST
Brookings and the Aspen Institute Present: "America's Fiscal Health and its Implications for International Engagement"
Global Economy and Development at Brookings and the Aspen Institute will host the 66th U.S. Secretary of State Condoleezza Rice and Administrator of the U.S. Agency for International Development Rajiv Shah for a discussion on the current state of the U.S.'s fiscal health and its impact on American diplomatic and development priorities. Moderated by Ambassador Nicholas Burns, Director, Aspen Strategy Group.

Moderator
• Nicholas Burns, Director, Aspen Strategy Group

Panelists
• Condoleezza Rice, 66th United States Secretary of State
• Rajiv Shah, Administrator of the United States Agency for International Development

 

Event Materials

• BBR Participant List 2013_FINAL

       

       

During the height of the Ebola crisis in September 2014 there were 21 confirmed cases of the virus and 8 deaths in Nigeria. The African nation has the continent’s largest population, a high poverty rate, and the government spends relatively little on health care. At the time many were worried about a scenario where the virus spread throughout Nigeria. But, the Nigerian Minister of Health Onyebuchi Chukwu disagreed with that assessment. He commented to Forbes, “Nigeria will be as clean as any other country as far as Ebola virus disease is concerned.” His comments were proven to be accurate in the coming months. There were a variety of factors that contributed to Nigeria’s success at combating the disease. One important factor was the use of mobile electronic health records programs.

How mobile fights disease

1. Training Healthcare Workers

Training health care providers was a priority at the beginning of the Ebola outbreak. A survey found that 85 percent of health care workers in the country believed you could avoid Ebola by abstaining from handshakes or touching. Correcting these myths about the disease was a critical part of the response effort, especially for health care workers.

2. Rapid Deployment

One of the virtues of mHealth is its speed and flexibility. Mobile allows officials to quickly disseminate the latest information to front line health care workers. Increasing the speed of communication is a general boon to any large public health response.

3. Virtual Records

Ebola Treatment Units (ETU) greatly benefitted from using digital rather than paper records. Paper records cannot be removed from an ETU. Deborah Theobald co-founder of Vecna Technologies that created the mHealth platform in Nigeria has pointed out that, “If the patient is isolated, so is their paperwork”. Electronic records are easy to share and also lower the risk of infection for health care workers.

Mobile health policy challenges

Despite the potential benefits of mHealth, barriers in some countries prevent the full positive impact of these technologies from coming into effect. Many developing nations lack the electrical infrastructure that is necessary to power mobile devices. Health care regulations are often too overly bureaucratic and burdensome. This makes it difficult for innovators to develop and equip workers with mobile tools and applications. It often takes an emergency situation like the Ebola crisis to make substantive changes. Success in the long term is only possible if leaders create an environment that is more hospitable to mHealth.

Mobile interventions have also demonstrated potential to address important public health issues. Recently experts gathered at the Brookings Institution to discuss how mHealth can improve health outcomes. Apps like Mobile Midwife and Text4Baby can encourage healthy pregnancies by providing valuable tips to expecting mothers. Mobile health platforms are successful because they directly inform caregivers. The proliferation of mobile phones through the developing world presents a health opportunity to communicate with the people who need help.

      

La monnaie électronique a émergé dans les pays de l'Union Economique et Monétaire Ouest Africaine, à la faveur de l'adoption, en 2006, d'une Instruction de la Banque Centrale, instaurant un cadre réglementaire souple et incitatif pour l’exercice de cette activité. L'implication des opérateurs de télécommunications dans l'offre de services financiers basés sur la téléphonie mobile a donné,  dès 2009, une nouvelle dimension à cette activité par l'accroissement du nombre des utilisateurs et des volumes de transactions.

Une activité en expansion

A fin septembre 2015, 22 millions de personnes, soit près d'un quart de la population de l'Union, ont souscrit à des services financiers via la téléphonie mobile. Environ 30% de ces abonnés réalisent au moins une opération sur une période de 90 jours.

Près de 500 millions de transactions ont été aussi réalisées au cours des neuf premiers mois de l'année 2015. La valeur cumulée des transactions atteint 5000 milliards de FCFA (8,5 milliards USD) à fin septembre 2015. De septembre 2013 à septembre 2014, cette valeur est passée de 1000 milliards à 2068 milliards de F CFA, soit une hausse de 107%.

Le réseau de distribution des services financiers via la téléphonie mobile suit également cette tendance haussière, en passant de 93 621 points de services en 2014 à plus de 132 658 points de services à fin septembre 2015.

Source: BCEAO

Le contexte socioéconomique de l'Union explique pour une large part, le succès des services de paiement via la téléphonie mobile. En effet, ce mode de prestation des services de transfert ou de paiement se révèle particulièrement adapté pour les personnes n'ayant pas accès au système bancaire classique, tout en offrant l'opportunité à des institutions non bancaires, en contrepartie de dépôt d'espèces, de mettre à la disposition des usagers une monnaie autre que fiduciaire, dont l'encours leur permet d'effectuer des transactions financières diverses.

L'implication croissante des opérateurs de télécommunications

Les partenariats entre les banques et les opérateurs de télécommunications occupent une place dominante sur le marché. En fin 2015, sur les 33 émetteurs de monnaie électronique sous licence, 25 appartenaient aux dits partenariats.

Au titre du modèle non bancaire, sept acteurs non bancaires ont été agréés pour émettre la monnaie électronique en qualité d'Etablissement de Monnaie Electronique (EME).[1]

Source: BCEAO

Un cadre réglementaire rénové

A la faveur de l'expansion des services financiers via la téléphonie mobile et de l'implication croissante des opérateurs de télécommunication, la Banque Centrale a rénové son cadre réglementaire afin de renforcer la sécurité et la qualité des services de paiement adossés à la monnaie électronique. Les principaux axes d'amélioration portent sur:

• une responsabilisation accrue des émetteurs en clarifiant leurs rôles dans les partenariats avec des prestataires techniques. Ainsi, les activités de prestataire technique sont limitées, sous la responsabilité de l'émetteur, au traitement technique de la monnaie électronique ou à sa distribution. De même, les émetteurs demeurent responsables, de l’intégrité, de la fiabilité, de la sécurité, de la confidentialité et de la traçabilité des transactions réalisées par chacun de leurs distributeurs;


• une stimulation de la concurrence par la transparence de la tarification avec l'obligation faite aux émetteurs de publier leurs tarifs;


• la formulation d'exigences spécifiques en matière de gouvernance et de contrôles interne et externe pour les établissements de monnaie électronique, en exigeant l'honorabilité des dirigeants, le respect du secret professionnel et des audits réguliers des infrastructures;


• une protection accrue des détenteurs de monnaie électronique avec d'une part, le cantonnement des fonds dans  des comptes dédiés, et l'exigence d'une équivalence continue entre l'encours de monnaie électronique et les soldes des comptes de cantonnement et d'autre part, l'obligation de la mise en place d'un mécanisme de recueil et de traitement des réclamations des porteurs de monnaie électronique;


• le renforcement du dispositif de supervision, par la réduction des délais de reporting des activités des émetteurs à la Banque Centrale, et l'adoption de sanctions pour les infractions aux dispositions réglementaires.

L'offre de services financiers via la téléphonie mobile

L'offre de services financiers via la téléphonie mobile comprend trois catégories de services. Il s'agit des services qui impliquent l'usage des espèces (monnaie fiduciaire), de ceux qui sont effectués en monnaie électronique et des services dits de « deuxième génération ».

Le premier type de services concerne essentiellement les dépôts d'espèces ou rechargements de porte-monnaies électroniques, ainsi que les retraits. Ils représentent 24% des transactions effectuées par les utilisateurs. Les dépôts d'espèces sont prédominants et permettent aux clients d'approvisionner leurs comptes de monnaie électronique.

La monnaie électronique rechargée est utilisée à hauteur de 76%, prioritairement pour les achats de crédit téléphonique, les paiements de factures, l'exécution de transferts de personne à personne, de personne à entreprise et aux Administrations publiques. Les principaux services de paiement dans l'UEMOA sont liés au règlement des factures relatives à la consommation d'eau, d'électricité, l'abonnement à des chaînes de télévision satellitaires, l'achat de marchandises dans les grandes surfaces ou de carburant dans les stations-service.

Des paiements d'impôts et taxes auprès des Administrations publiques et le remboursement des échéances de microcrédit sont également effectués, mais de façon très marginale.

Dans l'UEMOA les services dits de « deuxième génération », à savoir la micro-assurance, la micro-épargne et le micro-crédit, font leur apparition. Leur développement pourrait constituer une opportunité de bancarisation des utilisateurs de ces services.

Enfin, un début d'interopérabilité est mis en œuvre sur la base de conventions bilatérales entre les acteurs, notamment en vue d’offrir des services de paiement transfrontaliers entre les Etats membres de l'Union.

Les défis à relever

L'examen de l’évolution des services financiers via la téléphonie mobile dans l'UEMOA fait ressortir quelques obstacles à un développement plus rapide de ces services financiers au sein de l'UEMOA. Il s'agit de:

• la faiblesse du taux d'utilisateurs actifs, en raison du coût élevé des services;
• la méconnaissance des services, du fait d'une éducation financière insuffisante;
• la faible digitalisation des circuits de paiement des Administrations publiques;
• l'insuffisance des partenariats entre les émetteurs bancaires et non-bancaires pour le développement d'une offre de services plus inclusifs, dits de « seconde génération »

En collaboration avec toutes les parties prenantes, la Banque Centrale a développé une stratégie d’inclusion financière visant à améliorer l’accès et l’utilisation de divers services financiers personnalisés et aux prix abordables. La mise en place de ces actions, comme décrite dans la stratégie d’inclusion financière conçue par la BCEAO, devrait résoudre les défis mentionnés ci-dessus.

Lire en anglais »

---

[1] EME: toute personne morale, autre que les banques, les établissements financiers de paiement, les systèmes financiers décentralisés, habilitée à émettre des moyens de paiement sous forme de monnaie électronique et dont les activités se limitent à l'émission et la distribution de monnaie électronique.