C.P. Chandrasekhar and Jayati Ghosh

A perception has been gaining ground that the United Progressive Alliance (UPA) coalition suffered politically because of its commitment to welfare schemes and “handouts” to the poor rather than economic growth. The murmurs began during the election campaign—fed by the BJP’s strident denunciation—and have gained ground especially since the UPA’s and Congress Party’s comprehensive electoral defeat nationally.

The argument goes something like this: The past five years of UPA-2 were years of “policy paralysis” in which economic growth slowed down because projects were stalled by environmental and other hurdles and slow clearances; and no new “reforms” were undertaken such as deregulating whatever little is left of formal employment in the organised sector. Instead the government frittered away time and resources on “populist” schemes that were corrupt and wasteful, which the country cannot afford, and which anyway the people do not really want. This argument, in various forms, is being repeated so often that once again people assume that it must be true.

In fact it is wrong on practically all counts. To begin with, while the elections do indeed reveal the extent of public dissatisfaction with the UPA, only one-fifth of the electorate actually voted for the BJP, and many of them did so because of effective communal polarization in the Hindi heartland. The slower growth of the second UPA tenure was related not only to effects of the global economic crisis but equally the result of the mess in the infrastructure sector, with massively leveraged investments not bearing sufficient fruit for private sector interest to be retained and a looming crisis of bad debt especially for power and aviation loans of public sector banks.

Most of all, the argument that UPA-2 wasted the country’s resources on “populist” schemes is both conceptually flawed and empirically unjustified. It is analytically misconceived because it does not recognize the crucial role played by social spending on countercyclical consumption stabilizing, as well as on ensuring domestic demand and positive multiplier effects on economic activity, or the impact on future productivity because of a better fed and healthier population.

But it is also empirically wrong: UPA-2 did not really spend on these important schemes. In fact, it can be forcibly argued that the Congress and its allies would have been much better off if the government had actually put its money where its mouth was. As it happens, the UPA parties barely trumpeted any of these measures in their electoral campaigns, whether because of a lack of conviction in them or because of the guilty feeling that they had not lived up to their own promises.

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Deepankar Basu and Amit Basole, Guest Bloggers

Deepankar Basu is an assistant professor of economics at the University of Massachusetts-Amherst. Amit Basole is an assistant professor of economics at the University of Massachusetts-Boston. This blog post summarizes the findings from their recent Political Economy Research Institute (PERI) working paper “Fueling Calorie Intake Decline: Household Level Evidence from Rural India.” The full paper is available here.

The Indian “Calorie Consumption Puzzle” has attracted a lot of attention recently. The puzzle is that average per capita calorie intake has been declining over the past few decades, even as real per capita expenditures and incomes have been rising. According to National Sample Survey (NSS) data, between 1983 and 2009-10, average inflation-adjusted monthly expenditure increased by 28% but calorie intake declined by 16% in rural India (Figure 1). Since, at any given point in time, calorie intake tends to increase with income, the Indian time trend is unexpected and puzzling.

Figure 1: Average real monthly per capita expenditure (MPCE) and calorie intake in rural India. Real MPCE is obtained by deflating nominal MPCE by the consumer price index for agricultural labourers (with 1986-87 as the base year). Source: Report 508 and 538 of the National Sample Survey Organization, India and authors’ calculation from unit-level data.

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Sunita Narain

The 2014 general election, it would seem, is becoming a referendum on the so-called Gujarat model and the something-UPA model. In the heat, dust and filth of elections, rhetoric is high, imagery is weak and facts are missing. Very broadly, the Gujarat model is seen to be corporate-friendly, with emphasis on economic growth at any cost and little focus on social indicators of development. The UPA [United Progressive Alliance] model, on the other hand, is seen to promote distributive justice and inclusive growth. And our conclusion could well be that this model does not work because we see little difference—high inflation pinches our purse; poverty and malnutrition persist; and crony capitalism thrives.

In this way, the referendum on May 16, when the counting is done, could well be seen as a go-ahead to rampant growth without a human face. But this, I believe, will be missing the key point.

If there is a referendum, it must be on the lack of delivery of programmes for social justice and inclusive growth. It cannot be a decision against the idea of rights-based development. That would be disastrous for India. So, what we need to do is to think about what went wrong. And the next government’s agenda must be to fix it. Not to throw out the baby with the bathwater.

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Jesse Griffiths, Guest Blogger

Jesse Griffiths is Director of the European Network on Debt and Development (Eurodad). He was one of the co-authors, together with Matthew Martin (Development Finance International), Javier Pereira, and Tim Strawson (Development Initiatives) of the European Parliament’s report “Financing for Development Post-2015: Improving the Contribution of Private Finance.”

The European Parliament has just released a major report with a clear message for all those engaged in the growing debate about the role of external private finance in development: quality matters far more than quantity. As the post-2015 debate on financing development continues, and the UN gears up for a major Financing for Development conference in 2015 or 2016, this timely paper – authored by four experts (I was one of the co-authors) gives clear recommendations on how European governments can ensure that fighting poverty stays at the heart of this agenda.

The Current Picture

Firstly, here are the main findings of the report’s review of all available data on global private finance flows:

  • Domestic private investment is significant and growing. Public and private investment, taken together, have grown as a proportion of GDP, from 24.1 % in 2000 to 32.3 % in 2011.
  • Outflows of private financial resources are extremely large. Most are not productive investments in other countries but repayments on loans (over USD 500 billion in 2011), repatriated profits on foreign direct investment (FDI) (USD 420 billion) or illicit financial flows (USD 620 billion).
  • Figures greatly overstate the real net financial private flows to developing countries. Foreign Direct Investment (FDI) is the largest resource flow to developing countries, but outflows of profits made on FDI were equivalent to almost 90% of new FDI in 2011. In addition, FDI includes the reinvestment of earnings from within the ‘destination’ country: not an inflow.

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Erinç Yeldan

The concept of the “middle-income trap” had been brought into fashion by Barry Eichengreen and colleagues (see their recent NBER Working Paper). The concept is used to describe the challenges, for countries with GDP per capita of around $16,000 (at 2005 prices), in achieving productivity growth and key institutional transformations.

Many economists have taken note of the fact that, as economies converge to this middle-income level, “easily-accessible” sources of growth based on the transfer of virtually unlimited supplies of labor from rural agriculture to urban centers and towards capital-investment-led high profit sectors gradually lose their stimulating impact. Technologies grow mature and finally become worn out. After this threshold is reached, sources of growth must be derived from technological and institutional advances and productivity gains, which can only be achieved by investments in human capital, research and development (R&D), and institutional reforms. This, however, is no easy task, and countries often get “trapped” at this stage of development, hence the middle-income trap.

Yet, as such, the middle-income trap is an average concept defined by national boundaries. Recent work reveals, however, that divergences persist, and often times are reinforced, between regions embedded within national economies and even within municipalities. In many instances, poverty-stricken regions co-exist side by side with rich and highly productive regions. The persistent co-existence of such divergent structures leads us to ask whether poverty is in fact being reproduced by the workings of the market mechanism favoring high-income regions. This observation has its roots in a long tradition in development economics of duality and dependency theories.

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Timothy A. Wise

Timothy A. Wise, the Director of the Research and Policy Program at the Global Development and Environment Institute (GDAE) and a regular Triple Crisis contributor, announces GDAE’s annual Leontief Prize for Advancing the Frontiers of Economic Thought.

Today my institute will award its annual Leontief Prize for Advancing the Frontiers of Economic Thought to economists Angus Deaton and James K. Galbraith for their work on poverty, inequality, and well-being. Angus Deaton’s most recent book, The Great Escape: Health, Wealth, and the Origins of Inequality, is a must-read on the issue. James K. Galbraith’s Inequality and Instability: A Study of the World Economy Just Before the Great Crisis locates inequality in the context of the recent financial crisis.

As Global Development and Environment Institute co-director Neva Goodwin said in awarding the prizes, “Angus Deaton has demonstrated that inequality is about much more than income differences, focusing on how inequality affects the health and well-being of societies. James Galbraith has shown that inequality isn’t an outcome driven by factors outside of our control, but instead is often a direct result of the policy choices we make.”

You can read more about the Leontief Prize and its illustrious laureates, and about about this year’s prize. You can also watch the ceremony live, including lectures from Deaton and Galbraith on the theme “Health, Inequality, and Public Policy.” The stream below will run from 12:30-2:00 EDT on April 4, 2014.

Triple Crisis welcomes your comments. Please share your thoughts below.

Timothy A. Wise

Cross-posted from Global Post.

LILONGWE, Malawi — Visit this small, landlocked country in late January and you will have a hard time believing its people often go hungry.

It is mid-rainy season, and in and around the capital city the landscape is lush and green.

Look more closely and you’ll notice that nearly every inch of unpaved space seems planted with maize (corn); the green stalks rise up to five feet above moist, rich soil. Outside of the city, along the road leading south toward the former colonial capital of Zomba, the hills roll with maize, not in vast tracts reminiscent of Iowa but in small, neatly bordered plots.

It certainly doesn’t seem like a land that cannot feed itself. But until recently, that is what Malawi has been.

Droughts often threaten the country’s one rainy season, and with per capita incomes at around $900 per year, hunger, and even starvation, stalk the countryside. The World Food Program has permanent offices here, and for good reason.

Even this season, when the rains have come strong but late, more than 10 percent of the country’s 16 million people face severe food insecurity. According to news reports, some have starved.

It is paradoxical only to outsiders that this greenest of seasons is also the hungriest. By planting time late in the year, many peasant farmers have consumed the last of their saved grain, even following a decent harvest like they had last year. Until the new crop comes in late March or April they have to rely on meager cash income to feed themselves and their families.

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Sunita Narain

Cross-posted from Centre for Science and Environment.

Chulhas—cookstoves of poor women who collect sticks, twigs and leaves to cook meals—are today at the centre of failing international action. Women are breathing toxic emissions from stoves and these emissions are also adding to the climate change burden. The 2010 Global Burden of Disease established that indoor air pollution from stoves is a primary cause of disease and death in South Asia. As many as 1.04 million pre-mature deaths and 31.4 million disability adjusted life years (DALYs)—measure of years lost due to ill-health, disability or early death—are related to exposure to biomass burning in poorly ventilated homes.

But what has spurred action is the science that there is a connection between local air and global air pollution. The particles formed during incomplete combustion—in diesel cars and cookstoves—are seen as powerful “climate forcers” because they absorb light and convert it into heat. It is also found that these particles or aerosols interact with clouds and affect rain pattern. They also fall on snow or ice surfaces and make them melt faster.

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Edward B. Barbier

At the 2014 World Economic Forum in Davos, Switzerland, the founder of Microsoft and leading global philanthropist Bill Gates, along with his wife Melinda, released the 2014 Gates Annual Letter “3 Myths That Block Progress for the Poor”.  In the letter, Gates notes that, since 1960, more than a billion people have risen out of extreme poverty.  He then goes on to make this bullish prediction:

“By 2035, there will be almost no poor countries left in the world… Every nation in South America, Asia, and Central America (with the possible exception of Haiti), and most in coastal Africa, will have joined the ranks of today’s middle income nations.”

I have no quarrel with such a prediction, optimistic though it might be.  I also don’t question the global poverty trends—they pretty much match what is stated in “The State of the Poor” of the World Bank’s Poverty Reduction and Economic Management Network (PREM).  According to the World Bank, extreme poverty has fallen by 25% in the past 30 years for the developing world.

However, what Bill Gates did not mention is the following.

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Arjun Jayadev

Who does it hurt? The IMF on fiscal consolidation

In 2010 Alberto Alesina from Harvard University was celebrate by Business Week for his series of papers on fiscal consolidation. This was ‘his hour’ the article argued. The surprising argument that he and his coauthors made that was that the best way forward for several countries facing debt issues was to undertake “Large, credible and decisive spending cuts”. Such cuts would work to change the expectations of market participants and bring forward investment that was held back by the uncertainty surrounding policies in the recession.

The idea of ‘expansionary austerity’ has failed spectacularly by any account. Martin Wolf’s latest article in the New York Review of Books goes over this, as does Paul Krugman’s earlier piece in the same outlet. In a forthcoming paper written by Josh and I  (which I will blog about later), we argue that austerity succeeded at least in part because of the nature of consensus macroeconomics (by which we mean both New Keynesian and Real Business Cycle approaches).

One paper that I had wanted to write was to discuss the distributional implications of austerity. For many reasons, including those elucidated by Jim Crotty, Josh and Jerry Epstein, austerian policies and should really be seen as class conflict—protecting the interests of the wealthy and attacking those of the poor.

I never got to the empirical tracing out of this argument- but the IMF has. And the abstract really does say it all:

This paper examines the distributional effects of fiscal consolidation. Using episodes of fiscal consolidation for a sample of 17 OECD countries over the period 1978–2009, we find that fiscal consolidation has typically had significant distributional effects by raising inequality, decreasing wage income shares and increasing long-term unemployment. The evidence also suggests that spending-based adjustments have had, on average, larger distributional effects than tax-based adjustments

In other words—it does hurt, and it hurts the relatively poor more. Even more importantly, the claim that spending cuts are ‘better’ for the economy than tax raises as argued by Alesina and some coauthors forgets to ask for whom this is better. The IMF’s answer is that spending cuts are definitely not good for the working class and that advocating spending cuts rather than tax increases imposes distributional costs to those least capable of bearing it.

What a surprise!

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