A Tale of Two States

Abstract

In this paper Lahiri and Yi study the decline of West Bengal relative to Maharashtra, historically two of the most important states of India. In 1960, West Bengal’s per capita income exceeded that of Maharashtra, the third richest state at the time. By 1993, it had fallen to just 69 percent of Maharashtra’s per capita income. They employ a "wedge" methodology based on the first order conditions of a multi-sector neoclassical growth model to ascertain the output and factor market sources of the divergent economic performances.

Their diagnostic analysis reveals that a large part of West Bengal’s development woes can be attributed to: (a) low sectoral productivity, especially in manufacturing and services; and (b) sectoral misallocation in labor markets between the manufacturing sector and the other sectors of the economy. They also present evidence on the labor market, the manufacturing sector, and public infrastructure that suggest a systematic worsening of the business environment in West Bengal during this period.

Lahiri A and K Yi (2008), " A Tale of Two States: Maharashtra and West Bengal", Federal Reserve Bank of Philadelphia, April.

Arthakranti

Simplitstic ideas abound and there is no reason why economics should be an exception. Arthakranti (economic revolution) would defintely count as one of such ideas. Here is why I think so.

Education and Growth

Peter Lindert argues that there is a relationship between democracy and economic growth. However, very few studies confirm this link empirically. One of the reasons why this is the case is that they do not specify the political process in enough details. The nature of policies that will be chosen and implemented in equilibrium will depend on whether voters have 'voice' or not. If voters have voice then government will spend more on public goods that benefit masses rather than elites. Does having a democracy or extensive franchise ensure that voters will have voice? Not necessarily.

Let us measure the elitist bias in government spending policies. If voters have voice then the government will spend more schools than on higher education and we will find the proportion of spending on schools in total spending higher relative to a situation where voters do not have voice. Thus, higher voice means more spending on primary education and hence lower elitist bias. How do various democracies fare on this count? All the economically successful democracies spend significant portion of their education expenditure on primary education than higher education. This signifies lower elitist bias and hence better human capital and hence growth. What is the catch? Yes, you got it right-its India.

India is the biggest but also the poorest democracy in the world. It turns out that among million reasons why India is poor, the elitist bias in its spending policies infact might be a significant one. We have an impressive list of higher education institutions but our primary schools remain of abysmal quality and quantity. As a result we have some 200 million people with access to somewhat decent higher education but remaining 800 million or so have to survive on schools with one class room and absent teachers!

Lindert argues that even though India is a full fledged democracy by all standards, its voters do not have voice or voice is distributed more unequally than votes. So while other economically successful democracies got it right in terms of primary education, India lags behind because of a massive illiterate and undereducated human pool. So whats the moral of the story? Massively expand and improve schooling in India.

This is important because all other policies of ensuring equal access do not work or work only in the limited sense if basic education is not right. For example in a recent article in EPW, Chakravarty and Somananthan found that SC/ST students earn significantly lower wages in IIMA's placements. However, the difference between the wages of SC/ST and open category candidates vanishes once controlled for the GPA. Thus, the wage differentials account for differences in human capital endowments of the SC/ST versus the open category students. These inequalitties in endowments can be taken care of only if all the castes have access to quality education and a way to do that is to spend more on schools than on universities and colleges.


Chakravarty S and S Somanathan (2008), Discrimination in an Elite Labor Market? Job Placements at IIM-Ahmedabad, Economic and Political Weekly, November 1.

Lindert P (2003), Voice and Growth: Was Churchill Right?, The Journal of Economic History, 63, 2, 315-350.

Caste, Gender and School Choice

What is the relation between caste, gender and school choice in a globalized economy? This paper is an interesting effort to understand and answer this question. It addresses the question of how traditional institutions interact with the forces of globalization to shape the economic mobility and welfare of particular groups of individuals in the new economy. The authors explore the role of the caste system—in shaping career choices by gender in Bombay using new survey data on school enrollment and income over the past 20 years.

They find that male working-class—lower-caste—networks continue to channel boys into local language schools that lead to the traditional occupation, despite the fact that returns to nontraditional white-collar occupations rose substantially in the 1990s, suggesting the possibility of a dynamic inefficiency. In contrast, lower-caste girls, who historically had low labor market participation rates and so did not benefit from the network, are taking full advantage of the opportunities that became available in the new economy by switching rapidly to English schools.


Munshi K & Rosenzweig M (2006), Traditional Institutions Meet the Modern World: Caste, Gender, and Schooling Choice in a Globalizing Economy, American Economic Review, 96(4):1225-1252.

Caste, Parochial Politics, and Governments

This paper by Kaivan Munshi & Mark Rosenzweig proposes a novel explanation for the emergence and persistence of parochial politics, based on the idea that strong social institutions can discipline the leaders they put forward, successfully substituting for secular political institutions when they are ineffective. Using unique data on Indian local governments at the ward level over multiple terms, and exploiting the randomized election reservation system, they find that the presence of a numerically dominant sub-caste (caste equilibrium) is associated with the selection of leaders with superior observed characteristics and by greater public goods provision. This improvement in leadership competence occurs without apparently diminishing leaders' responsiveness to their constituency.

Caste Discrimination in Urban India

Does caste discrimination express itself in terms of difference in salaries and wages in urban India? I am afraid the answer is a qualified yes; qualification being it seems to depend on the level of aggregation we are addressing the issue. There seems to be some evidence for discrmination in the overall urban sector but little or no evidence in software and call industry in particular.

Madheswaran and Attewell use National Sample Survey (NSS) data and find that employees from SC/STs in urban salaried jobs in 1999-2000 received wages that were about 30 per cent lower on average than those of other castes. About 15 per cent of this differential could not be explained by the measures of education and work experience available in the NSS data. Of course, how much of this unexplained differential acutally can serve as an evidence of discrimination will depend on how finer the measures of education and work experience are in the NSS data.

In yet another paper Banerjee and his coauthors find less dicrimination in the call center industry and no discrimination in the software industry. So now the interesting question is why does discrimination persisit in some industries and not in others. It would be intersting to see a model where employers choose to discrminate in equilibrium conditional on some factors.

Banerjee, A, M Bertrand, S Dutta and S Mullainathan(2007): ‘Caste and Religion in India’s ‘New Economy’:Evidence from a Field Experiment on Labour Market Discrimination in Delhi’, Mimeo.

S Madheswaran & Paul Attewell (2007), Caste Discrimination in the Indian Urban Labour Market: Evidence from the National Sample Survey, Economic and Political Weekly, VOL 42 No. 41 October 13 - October 19.

Returns to Education in India

This paper studies the determinants of personal income, including the returns to education. In the process it estimates how incomes are affected by characteristics such as gender, caste, language, etc. Using a maximum likelihood probability model, private returns to education are estimated; it emerges that greater levels of education increase both the likelihood of being employed as well as the income earned from work. However, the returns from elementary (primary and middle) education are quite low. Also, ceteris paribus, women, lower social groups, rural residents, non-English speakers have both significantly lower incomes and a lower likelihood of being employed. The results indicate that quality of education delivery and ensuring that the child remains in school should form important elements of education policy.


Bhandari L, Bordoloi M (2006), Income Differentials and Returns to Education, Economic and Political Weekly, VOL 41 No. 36 September 09 - September 15.

Education and Growth

The relationship between education growth and economic growth is a bit puzzling. More education does seem to benefit the individual, but it may not necessarily translate into increasing per capita incomes. So how do we resolve this micro-macro paradox?

As William Easterly argues in his book The Elusive Quest for Growth, its all about incentives. And so do in a way, Playforth & Schündeln who have worked with Indian data. They think that government is the culprit!

They hypothesize that educated people find privately rewarding jobs (which would contribute to the high estimates of returns to education at the micro level) in a sector in which social returns are low relative to the private returns (which would contribute to small or negative coefficients
on education growth in regressions at the macro level), namely the government sector.


Private versus Social Returns to Human Capital: Education and Economic Growth in India by John Playforth & Matthias Schündeln.

Dismantling the License Raj

What was the effect of dismantling the license raj? A very pertinent question in which the proponents of liberalization as well as the critiques would be equally interested in!

Aghion et.al., try to answer this question in a very interesting difference in difference estimation framework. The main argument of the paper is that the response to the ending of the license raj would be different in different states as they differ in terms of their institutional set up.

One of the institutional dimension on which states differ is the labor market regulation. There are some states which have more pro- labor regulations, some which have pro-employer regulations and a few which can be categorized as neutral. The main finding of the paper is that output rose more in pro-employer states than it did in pro-worker states in response to same delicensing reform. This result stands up to several robustness checks and the delicense-labor regulation interaction coefficient is similar in size and significance across a range of specifications.

This paper could not have come out at a more appropriate time when the debates about the effect of labor regulation on industrial performance abound and have important implications for understanding India's trade competitiveness vis-a-vis China. Similarly it also sheds light on what may be one of the important factors driving the differences in regional growth rates.

Reference:

Aghion P, Burgess R, Redding S, & Zilibotti F (forthcoming), "The Unequal Effects of Liberalization: Evidence from Dismantling License Raj in India", American Economic Review.

Affirmative Action in Education

Abstract:

Many countries mandate affirmative action in university admissions for traditionally disadvantaged groups. Little is known about either the efficacy or costs of these programs. This paper examines affirmative action in engineering colleges in India for "lower-caste" groups. We find that it successfully targets the financially disadvantaged: the marginal upper-caste applicant comes from a more advantaged background than the marginal lower-caste applicant who displaces him. Despite much lower entrance exam scores, the marginal lower-caste entrant does benefit: we find a strong, positive economic return to admission. These findings contradict common arguments against affirmative action: that it is only relevant for richer lower-caste members, or that those who are admitted are too unprepared to benefit from the education. However, these benefits come at a cost. Our point estimates suggest that the marginal upper-caste entrant enjoys nearly twice the earnings level gain as the marginal lower-caste entrant. This finding illustrates the program's redistributive nature: it benefits the poor, but costs resources in absolute terms. One reason for this lower level gain is that a smaller fraction of lower-caste admits end up employed in engineering or advanced technical jobs. Finally, we find no evidence that the marginal upper-caste applicant who is rejected due to the policy ends up with more negative attitudes towards lower castes or towards affirmative action programs. On the other hand, there is some weak evidence that the marginal lower-caste admits become stronger supporters of affirmative action programs.

Reference:

Bertrand M, Hanna R, & Mullainathan S (2008), Affirmative Action in Education: Evidence From Engineering College Admissions in India, NBER Working Paper 13926.

Women as Policy Makers

I am sure many of us must have watched movies where the theme was women's reservation. Though, most of them turn out to be a 'cliche', they at least bring out the complexities involved in implementing such policies. One can also occasionally find journalistic write ups on the issue. However, all said and done, most of these articles turn out to be anecdotal at best and unfortunately movies cannot constitute any substantive evidence either! This is where this article becomes important.

Do reservations for women at the Panchayat level work? This is the focus of the article. The authors use political reservations for women in India to study the impact of women's leadership on policy decisions. They use data collected from 256 village councils from West Bengal and Rajasthan and compare the type of public goods provided in reserved and unreserved village councils.

The authors find that women elected as leaders under the reservation policy invest more in the public goods more closely related to women's concerns: drinking water and roads in West Bengal and drinking water in Rajasthan. They invest less in public goods that are more closely linked to men's concerns: education in West Bengal and roads in Rajasthan. These results seem to largely attributable to the gender of the Pradhan as they are unaffected by other characteristics of Pradhan.

According to the authors, these results contradict the simple intuition behind the Downsian model and the idea that political decisions are the outcomes of a Coasian bargaining process. In both of these views of the world, the fact that a woman is the head of the Gram Panchayat should not influence policy decisions. These results also suggest that direct manipulation of the identity of the policy maker can have important effects on policy.

It will be interesting to carry out similar type of analysis in other states and see what emerges. This is a very pertinent issue, not only from the point of view of gender empowerment but as noted by authors, also from the design of decentralized political institutions and their efficacy point of view.

Reference:
Chattopadhyay R & Duflo E (2004), "Women as Policy Makers: Evidence from a Randomized Policy Experiment in India", Econometrica, 72, 5, 1409-1443.

Land Reforms

If any body has been even near CESP, JNU, he or she cannot miss one simple prognosis for almost all of India's economic ills- lack of land reforms! I think Tim Besley & Robin Burgess definitely did not miss it. In a very interesting article, they undertake the task of econometrically investigating the relationship between land reforms, poverty and growth in India. They find a robust link between land reform and poverty reduction. However, they argue that a closer scrutiny reveals that, in an Indian context, this is due primarily to land reforms that change the terms of land contracts rather than actually redistributing land.
Some points worth noting:

1. In an IV regression, they find that Congress and soft left decrease the probability of enacting land reform legislation, while hard left exerts a positive influence and Hindu parties are insignificant. If you think this is a cudos for left governments, note that the overall positive influence of hard left parties seems to originate principally through strong positive effect on the passage of land ceiling legislation and the authors do not find any evidence that such land reforms reduce poverty.
2. Land reforms have a positive significant effect on agricultural wages, though this effect primarily comes from abolition of intermediaries.
3. Tenancy reform has negative impact on agricultural output while land consolidation has the opposite effect.

Thus, according to the authors, although the effects on poverty are likely to have been greater if large scale redistribution of land had been achieved, the results are interesting as they suggest that partial, second best reforms which mainly affect production relations in agriculture can play a significant role in reducing rural poverty. Comparing the effect of land reforms on poverty with effect of changes in per capita income, the authors find that implementing a land reform has a similar effect on poverty reduction to a 10 percent increase in per capita income, or around four to five years growth at all-India average growth rate over period (1958-1992).

The article also has a good summary of the kind of land reforms undertaken by various states till now.


Besley Timothy & Burgess Robin (2000), Land Reform, Poverty Reduction, and Growth: Evidence from India, The Quarterly Journal of Economics, May.

Dams

I always wondered what keeps the movements like the Narmada Bachao Andolan going, especially in the face of claims made that they might have hindered the possibility of the displaced being well compensated. However, this article was an eye opener. It also showed something more than that- the innovative use of an instrumental variable strategy in order to asses the impact of dams on rural poor.

It seems intuitive enough that dams will have a differential impact on down stream districts than the upstream districts or the district where the dam was built. This accords well with the engineering fact that dam construction requires some gradient for the river, a low but a non zero one more suited for irrigation dams. The authors exploit variation in dam construction induced by differences in river gradient across districts within Indian states to obtain IV estimates.

The main findings of the paper are as follows:

1. Dam construction leads to a significant increase in irrigated area and agricultural production in districts located down stream and they also provide insurance against the rainfall shock in these districts. However, in the own district a dam induces something like a mean preserving spread in agricultural production.
   
2. Each dam is associated with a significant poverty increase of 0.77 percent in its own district. However, poverty reduction in the down stream district is significantly lower than that. As per the authors there are 1.75 districts down steam and thus the poverty reduction in down stream districts is insufficient to compensate for the increase in poverty in upstream districts.
3. The poverty impact of dam construction is accentuated in districts with a history of relatively more extractive institutions (as captured by their historical land tenure system). This is in accordance with Banerjee and Iyer (2000) who show that the ability of of the population to organize themselves and obtain public goods exhibited marked differences across regions with different historical land tenure legacies (as mentioned on pp. 637).

Ever wonder why the displaced choose to stay in their village than move else where? The answer lies in the relation between income and risk aversion. Risk aversion decreases with income. So if dams increase poverty in the own district, it means in absence of credit and insurance markets, the affected will not choose to migrate. Does that seem too much out of line?

This article is definitely a good read and all those who are interested in the economics of public policy should definitely browse through.


References:

Duflo E & Pande R, (2007), Dams, The Quarterly Journal of Economics, May, pp: 601-646.

Banarjee A & Iyer L, (2005), History, Institutions and Economic Performance: The Legacy of Colonial Land Tenure Systems in India, American Economic Review, XCV (4), 1190-1213.

Obtaining a Driver's License in India

When I gave my driver's test in US, it certainly was a different experience. Though, I got my licence in India by taking a driver's test and without paying an agent, the test which I took in US was definitely more rigourous than the Indian one.
So when I saw this article in the QJE, I was very excited to see what the authors had to say about the process of obtaining driver's license in India. In particular I was interested in what these guys had to say about corruption and its efficiency.
The paper takes an experimental approach to studying corruption. It is based on the project financed by IFC, New Delhi which involved a group of actors recruited to obtain a driver's license. The experiment had built in incentive scheme to see how many of the participants obtain a driver's license with the help of an agent and how many of the total particiapants obtained a license without giving a driver's test. And as expected the numbers are not surprising but definitely embarrasing. They find that close to 71% of the license getters did not take the driver's test.
Now is this evidence of corruption also an evidence for distorted incentives which result from understaffing or from a system outnumbered by test takers? Though, one is tempted to answer this question positively, it cannot be overlooked that corruption in such a case should have been only a time saving device. As th eauthors put it, if the agents are simply offering time saving devices, why does it also mean that in most cases they can easily bypass the RTO test?
Thus, payment to the agents for getting a license goes beyond greasing the wheels and entails an important social cost: more bad drivers and hence more accidents!



Reference:

Bertrand M, Djankov S, Hanna R, & Mullainathan S, (2007), Obtaining Driver's License in India: An Experimental Approach to Studying Corruption, The Quarterly Journal of Economics, November.