Why Growth Matters (33 page)

12
. See Chapter 6.

13
. The phrase appears to have been coined by a former journalist, Joshua Cooper Ramos, writing in 2004 at the Foreign Policy Center in England.

14
. For other economic reasons that China's growth rate should slow down as labor becomes scarce, see also Bhagwati (2011a).

15
. The East Asian and Indian experiences diverge on freedom of capital flows. East Asia crashed by freeing capital flows; India was saved by prudence in that regard. That India was right in its prudence, as was China, is generally conceded now. The IMF's embrace of capital account convertibility, which led it to denounce Bhagwati (1998) for his noting the asymmetry between the case for free trade and for free capital flows that he argued for in a much-cited essay in
Foreign Affairs
, has now been renounced. See Bhagwati's posting on the
World Affairs Journal
blog, March 9, 2011; this has been revised and posted on his Columbia University website as “IMF Does
Mea Culpa
After All,” April 15, 2011 (
www.Columbia.edu/~jb38
).

16
. See Chapter 3.

17
. See Bhagwati (1988).

18
. Obviously this is not the problem in a few countries, such as Saudi Arabia in the Middle East, which have money coming out of their ears. But Allah often afflicts them with a different problem: the “resource curse.”

19
. See Chapter 8.

1
. Winston Churchill was among the orators whose speeches were his own handiwork; as Lord Birkenhead remarked, “Winston has spent the best years of his life writing impromptu speeches.” By contrast, John F. Kennedy flew to great heights on wings supplied by Ted Sorenson.

2
.
It is interesting, for example, that President Barack Obama is notorious for the use of the teleprompter even though he won the White House with stirring speeches. This also means that he mispronounces names wherever he goes, obviously because his speechwriters do not take care to rehearse the names included in the speeches. He did this several times, including in the address he gave to the Indian Parliament, leading the Members of Parliament to warn Bhagwati, who addressed the Parliament a few weeks later, to avoid reading a speech and to speak extempore and from the heart, with wit and humor. Obama was mispronouncing names during his visit to Japan as well. One can only dread the prospect of his battling with the tonalities of Chinese names!

3
. Italics added. That electoral democracy without institutions such as an independent judiciary and a free press would be hollow was not a thought that would have been foreign to Nehru's
Weltanschauung
.

4
. We have written extensively on the subject elsewhere. See, in particular, Bhagwati (2011), Panagariya (2011e, 2011g), and Gupta and Panagariya (2011a, 2011b, and 2012).

1
. We provide historical details corroborating this proposition in Appendix 1.

2
. See Bhagwati and Desai (1975).

3
. “Socialism” under Jawaharlal Nehru is set out in greater depth in Appendix 1, while “socialism” under Indira Gandhi is discussed immediately below in the text. The former was like a medium Merlot, while the latter was a full-bodied Cabernet Sauvignon.

1
. For further details, see Chakrabarty (1992).

2
. We say more on redistribution below. Our quote from the first five-year plan, however, has it right. Redistribution was not regarded as a strategy that could take us far, given the extent of the poverty. The
principal strategy had to be “growing the pie.” Also, among the social objectives was not just poverty reduction, which was an overarching objective, but also, for example, prevention of concentrated economic power that, in the wrongheaded way in which it was pursued, wound up detracting gratuitously from the poverty-reduction objective.

3
. Thus, when it comes to stating the party's key economic objective, the document describes it as: “Further broadening and deepening of economic reforms, based on a self-reliant approach, for sustained double-digit GDP growth rate to achieve complete eradication of poverty and unemployment” and also to end “regional and social disparities; and bridge the urban-rural divide” (from the BJP
Vision Document
;
www.indian-elections.com/partymanifestoes/party-manifestoes04/bjp.html
; accessed September 11, 2011).

4
. As we document below, these are not cursory side remarks but get full-length treatment in the Plan documents. There are also program evaluation reports, which address the progress and the shortfalls in reaching targets in these areas. We might add that even the membership of the Planning Commission, which was quite a prestigious affair at the time, included Shrimati Durgabai Deshmukh, who was a child widow and an articulate and effective advocate for women's issues. There was also a health portfolio in the cabinet and the incumbent was another remarkable woman, Rajkumari Amrit Kaur.

5
. See Nundy (2005) for further details.

6
. Whether the revenues would have resulted in intended outcomes is a question that remains pertinent today. We consider this question in the recent context in Part III.

7
. See Balachandran (2010) for details.

8
. See Government of India (2005), p. 48.

9
. We do not mean to imply that resources are a sufficient condition of improving health. They are, however, a necessary condition. How best to use the resources to get a good, if not the best, bang for the buck is an extremely important issue today. We return to this issue in depth in Part IV.

10
. The underlying growth models used in the two plans were different, however. The First Five-Year Plan essentially worked with the “flow”
Harrod-Domar model, whereas the Second reflected the “structural,” “putty-clay” model associated with the Soviet economist Feldman and the Indian statistician Professor Prasanta Chandra Mahalanobis.

11
. Bhagwati produced two substantial papers, one on income distribution estimates for India, and one on the cross-country income distributions, when he worked for Pitambar Pant. The argument in the text was in the latter paper. Produced in the early 1960s before the advent of photocopy machines and computers, these two “cyclostyled” papers were not preserved by Bhagwati due to a lack of storage space since he lived in different temporary locations. But they may still be gathering dust on the shelves in the Planning Commission or in the Indian Statistical Institute in Calcutta.

12
. Specifically, Haq (1972) wrote (as quoted in Sau, 1972, p. 1572), “It appears that within a period of less than two decades, China has eradicated the worst forms of poverty; it has full employment, universal literacy and adequate health facilities; it suffers from no obvious malnutrition or squalor. What's more, it was my impression that China has achieved this at fairly modest rates of growth.” Haq's statements about standing economic theory “on its head” and the “GNP rat race” are nothing but rhetorical hand waving, of course. Economic theory has well-known models that lead even to immiserisation from growth (e.g., Bhagwati's 1958 model). It would be nice also to know which rats Haq has in mind!

13
. Later, some anti-growth-strategy economists in India would shift to Kerala as their icon of development. And when “Kerala Shining” became hard to argue plausibly, this group shifted to citing Bangladesh. On this issue, we will draw below on the claims to that effect by Amartya Sen (2011) recently and refutations thereof by Panagariya (2011a, 2011b).

14
. The private final consumption expenditure is estimated at 1999–2000 prices from the National Account Statistics (NAS). It consists of gross national product net of gross capital formation and current government spending. The average expenditures estimated by the National Sample Surveys are generally below the NAS expenditures.

15
.
Note that Myth 2.3 declares that growth is not
necessary
for alleviating poverty, whereas Myth 2.4 claims that growth is not
sufficient to
do so.

16
. Maybe Haq was thinking of his native Pakistan, where the army, as we know now, was siphoning off the entire gains from aid and more than the gains from growth. But then one cannot help wondering why he went back from the US to join the cabinet under Zia's military dictatorship. In fairness to Haq, it should be added that the world divides into those, like Solzhenitsyn, who confront dictatorships and those, like Tvardovsky, who work for reforms from within. The latter edited
Novy Mir
and in fact managed to publish Solzhenitsyn's
One Day in the Life of Ivan Denisovich
in
Novy Mir
in November 1962, A fascinating account of Solzhenitsyn's subsequent assault on Tvardovsky on this issue and a spirited defense of Tvardovsky appears in Vladimir Laksin,
Solzhenitsyn, Tvardovsaky, and Novy Mir
(Cambridge, MA: MIT Press, 1980).

17
. See Sau (1972) and Ranadive (1973).

18
. The quotation can be found in Ranadive (1973), p. 834.

19
. This additional effect through easing of the revenue constraint was precisely what Bhagwati (1988) had pointed out almost a quarter century ago in the Vikram Sarabhai Lecture, in Ahmedabad, on “Poverty and Public Policy.” Evidently, if the revenues are spent instead on other purposes, this additional effect on helping the poor will not follow.

20
. See the detailed evidence on South Korea in Panagariya (2008a, Chapter 6) and on Taiwan in Panagariya (2011c). The same can be argued for China, whose phenomenal growth in the Guangdong province helped increase the demand for labor dramatically, raising wages and improving labor standards.

21
. See Dehejia and Panagariya (2012) for further elaboration on this point.

22
. Mukim and Panagariya (2012) provide systematic charts relating per capita incomes to poverty levels.

23
. Establishing causation that is beyond objection by econometricians on a relationship that does not lend itself to setting up a randomized experiment, as is the case with most of the important issues of
macro-level economic policy, is a very difficult task. But evidence from Cain, Hasan, and Mitra (2012) and Mukim and Panagariya (2012) suggests a link between per capita income and poverty. We note as an aside that while many micro-level programs on which many recent development economists like to concentrate do lend themselves to the randomized trials approach, the integral sum of their importance to development policy is far exceeded by that of macro-level policy issues, such as those relating to international trade.

1
. Marathe (1989, Chapter 4), who retired as secretary of industry in 1980, offers a fascinating insider's account of policy-making during this period. He states, “By the early seventies there was sufficient evidence and a corresponding awareness of the inadequacy or ineffectiveness of some of the main elements of the industrial policy and particularly of the decision-making and administrative apparatus. The objective of ‘growth with social justice' . . . was beginning to run into difficulties. It was increasingly evident that there was a conflict between the number of individually desirable objectives of policy, . . . and that the system seemed incapable of resolving these conflicts with the result that in actual practice there was neither adequate growth nor was there a discernible move towards greater social justice” (pp. 91–92). Later in the chapter, referring to the liberalizing measures during 1975–1976, the author states, “By far the most important reason why this phase of liberalization did not add up to much was that there was an unwillingness at the political level to recognize or accept that a change in direction was needed. . . . In the words of a distinguished civil servant who had retired by then, the attempt was ‘to go by stealth' and necessarily, therefore, the amount of good that could be done had to be modest” (p. 100).

2
. Bhagwati has suggested two additional factors helping the cause of the reforms. First, the growing Indian diaspora consisted of the families of nearly all influential bureaucrats and politicians. They brought home to these leaders that India's policies were so bad that India had become
a laughingstock. Second and related, these leaders, who thought Indian civilization entitled them to a superiority complex, faced the problem that the country's dismal economic performance produced an inferior status. The worst psychological situation is where a superiority complex confronts an inferior status. The dissonance that follows was obviously a strong spur to reform.

3
. The details of these policy changes are set out in Panagariya (2008a, Chapters 2–5).

4
. Rodrik and Subramanian (2005) further develop this point. Srinivasan (2005) offers a scathing critique of these authors.

5
. The discussion below also draws on Panagariya (2004; 2008a, Chapter 1), among others.

6
. In reporting the latter of these two periods, the year 1991–1992 is excluded because this was the crisis year for which the reforms could not be blamed. If we include 1991–1992, we should also include the high-growth years of 1988–1991, as done in Figure 3.1, which culminated in the 1991 crisis due to the fiscal expansion that partially fueled growth in the late 1980s.

7
. We may mention here the earlier work of Wallack (2003), which tries to divide the years between 1951–52 and 2001–2002 into two or more periods based on statistically significant differences in growth rates. She finds one such breakpoint, which is 1980–1981 if we consider the GDP series, and 1987–1988 if we consider the GNP series. Given that the GDP and GNP growth-rate series are virtually identical, the vast differences between the cutoff points in the two series indicate extreme sensitivity of her statistical method to small variations in the data. In contrast, the method used by Ghate and Wright is robust.