Main Factors in the Origins of Reformation - Essay Example

Copyright 2006 M2 Communications Ltd All rights reserved M2 Presswire July 21, 2006 LENGTH: 2298 words HEADLINE: UN: Economic and Social Council reviews implementation of programme of action for least developed countries for decade 2001-2010; page 1 of 2 BODY: M2 PRESSWIRE-JULY 21, 2006-UN: Economic and Social Council reviews implementation of programme of action for least developed countries for decade 2001-2010; page 1 of 2 ©1994-2006 M2 COMMUNICATIONS LTD GENEVA - The Economic and Social Council this morning continued its discussion on the implementation of and follow-up to major United Nations conferences and summits, focusing on the review and coordination of the implementation of the Programme of Action for the Least-Developed Countries for the Decade 2001-2010. Introducing the annual progress report of the Secretary-General on the implementation of the Programme of Action for the Least Developed Countries for the Decade 2001-2010, Anwarul Chowdhury, Under-Secretary-General and High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States, said the Programme was a comprehensive poverty reduction and development strategy tailored to the special needs of least developed countries; it had been designed as a framework of partnership between the latter and their development partners, and was the foremost result-oriented programme which included 30 international development goals, including those contained in the Millennium Declaration. In the context of the debate, speakers said, among other things, that while the least developed countries constituted the most vulnerable segment of the international community, and while they still had the primary responsibility for their own development, the international community had a clear responsibility to support their efforts. Poverty eradication and the improvement of quality of life in the developing countries would depend on the success of the international community in addressing the problems of the most vulnerable in the least developed countries. Good governance was essential for sustainable development, and sound economic policies and solid democratic institutions that were responsive to the needs of the people were the basis for sustained economic growth, poverty eradication and employment creation. While the outcomes of all major United Nations summits and conferences might have laid the foundation to promote development, it was important to accept that what was actually needed now was the full implementation of all of those commitments. The international community should also fulfil the commitments and objectives of the Monterrey Consensus with respect to official development assistance (ODA) for the least developed countries and to other financial measures including the cancellation of bilateral and multilateral debts of the least developed countries. A fair global economic system, just international trading system, and equitable representation in the World Trade Organization, the World Bank and the International Monetary Fund were equally necessary components of the development equation. For progress and positive achievements to be sustained, the continuing support of the developed countries, the United Nations system, and the international financial and trade institutions was of critical importance, speakers underlined. Speaking this morning were representatives of South Africa for the "Group of 77" developing countries and China, Finland for the European Union, Benin, Turkey, Bangladesh, Tanzania, China, the Sudan, Lao Peoples Democratic Republic, the Russian Federation, Belarus, the United States, Guinea-Bissau, Vanuatu, Nepal, Libya, Guinea and Colombia. A draft resolution on the implementation of the Programme of Action for the Least-Developed Countries for the Decade 2001-2010 was introduced at the end of the meeting. The next meeting of the Council will be held at 3 p.m. this afternoon, when it will conclude the list of speakers under this item, and hold a panel discussion on mobilising resources and creating an enabling environment for poverty eradication in the least developed countries: including implementation of the 2004 ministerial declaration. Documents The report (E/2006/73) entitled summary by the President of the Economic and Social Council of the special high-level meeting of the Council with the Bretton Woods institutions, the World Trade Organization and the United Nations Conference on Trade and Development (New York, 24 April 2006) says the overall theme of the meeting was "coherence, coordination and cooperation in the context of the implementation of the Monterrey Consensus and the 2005 World Summit Outcome". The consultations resulted in agreement on four sub-themes that were the focus of substantive discussions in four parallel round tables that took place during the meeting. The four sub-themes were: (i) implementation of and support for national development strategies towards the achievement of the internationally agreed development goals, including the Millennium Development Goals; (ii) fulfilling the development dimension of the Doha work programme: next steps, including in the area of "Aid for Trade"; (iii) external debt: implementing and building on current initiatives to enhance debt sustainability; and (iv) supporting the development efforts of middle-income developing countries. The report (E/2006/74) entitled implementation of the Programme of Action for the Least Developed Countries for the Decade 2001-2010 shows that despite improved economic performance, extreme poverty appears to be decreasing in very few of the least developed countries and increasing in many. In unprecedented reversal of historical trends, life expectancy is declining in several least developed countries, most affected by HIV/AIDS and civil strife. Other social indicators, including gender equality, are improving owing to the donor direct support to the social sectors but remain the lowest in the world. The report concludes that very few least developed countries can meet goals and targets of the Brussels Programme of Action, if current trends persist. The report shows that fast population growth, rapid urbanization, environmental degradation and HIV/AIDS aggravate extreme poverty in least developed countries. Climate change is emerging as a new challenge to sustainable development of the least developed countries, in particular those in Africa and the small islands. The report calls for continued commitment and renewed energy of least developed countries and their development partners to the implementation of the Programme of Action. It recommends that least developed countries integrate the objectives, goals and targets of the Programme of Action into their Millennium Development Goals-based national development strategies and calls on their development partners to support those strategies through the common country assessment/United Nations Development Assistance Fund and poverty reduction strategy papers processes. Those integrated investment and operational frameworks must be underpinned by a bottom-up and needs-based assessment and supported by a number of "quick-win" interventions. The report emphasizes that keeping promises on aid, debt relief, market access and technical assistance is crucial for breaking the poverty trap of least developed countries and for maintaining the credibility of the Programme of Action designed as a framework of partnership between least developed countries and their development partners. Statements Anwarul Chowdhury, Under-Secretary-General and High Representative for the Least Developed Countries, Landlocked Developing Countries and Small Island Developing States, introducing the annual progress report of the Secretary-General on the implementation of the Programme of Action for the Least Developed Countries for the Decade 2001-2010, said the Programme was a comprehensive poverty reduction and development strategy tailored to the special needs of least developed countries, and had been designed as a framework of partnership between the latter and their development partners, and was the foremost result-oriented programme which included 30 international development goals, including those contained in the Millennium Declaration. In recent years, the least developed countries had benefited from better economic performance, however, this growth, largely driven by the high demand for extractive commodities, had not resulted in meaningful reduction of extreme poverty in those countries. Some progress had been made in the increase of the volumes of the official development assistance (ODA) and untying aid to least developed countries. In addition, considerable attention had been given recently to new and innovative efforts for mobilisation of resources for least developed countries. Another area of progress in the past year had been the serious efforts made by least developed countries to address the critical issues of governance, and the United Nations systems support in this regard had yielded positive results. The Secretary-Generals report identified obstacles, constraints and emerging challenges to the implementation of the Programme. It emphasised that effective implementation of the Brussels Programme required strengthening country ownership, genuine partnership, an integrated approach, market consideration, and results-orientation. It also contained a number of specific policy recommendations to least developed countries and their development partners to enhance the implementation of the Programme in various areas. SHELDON MOULTON (South Africa), speaking on behalf of "Group of 77" developing countries and China, said follow-up was required on decisive action on each and every one of the commitments that had been made at the major United Nations summits and conferences in the economic, social and related fields. While the outcomes of all major United Nations summits and conferences might have laid the foundations to promote development, it was important to accept that what was actually needed now was the full implementation of all of those commitments. Anything less would undermine the good faith with which, all along, one had been assured that those commitments were made, and denigrate them to merely paying lip service to development. The right to development was something that the Group of 77 and China considered to be sacrosanct. The Group attached the utmost importance to the full implementation of the development commitments, including those relating to the strengthening of the Economic and Social Council, as made in the outcomes of the major United Nations conferences and summits in the economic, social and related fields. That included those commitments made in the 2005 World Summit Outcome. While the least developed countries constituted the most vulnerable segment of the international community that still had the primary responsibility for their own development, however, the international community had a clear responsibility to support their efforts. Such responsibility was accepted at the Millennium Summit in September 2000, where the Heads of State and Government resolved to address the special needs of those countries, and again at the World Summit of September 2005, where they reaffirmed their commitment. In spite of appropriated measures taken and tremendous efforts made by those least developed countries themselves to build enabling national environments for the implementation of the Brussels Programme of Action, the support received from their development partners in their efforts to pursue much needed development was still insufficient or completely lacking. JOUKO LEINONEN (Finland), speaking on behalf of the European Union, said the European Union, as a major development partner of the least developed countries, took this opportunity to reaffirm its full commitment to the implementation of the Brussels Programme of Action as a part of its wider commitment to the global development agenda. Sustainable economic growth and sound increase in trade flows were important factors in development, and to realise these objectives in the least developed countries, the European Union was supporting several concrete actions. The European Union remained fully committed to a universal, open, equitable, rules-based and non-discriminatory trading system. The special needs of the least developed countries should be taken into account. The European Union also remained convinced that trade liberation should be supported by various other actions, particularly in the least developed countries. In the centre of this challenge were the productive capacities and infrastructure, which should be strengthened and expanded. There was concern for the slow progress made in promoting gender equality. The Secretary-General should give further guidance in this regard while preparing the report for the coming Mid-term Comprehensive Global Review of the Brussels Programme of Action for the least developed countries. It should not be forgotten that good governance was essential for sustainable development. Sound economic policies and solid democratic institutions that were responsive to the needs of the people were the basis for sustained economic growth, poverty eradication and employment creation. The sustainable development of the least developed countries was at the heart of the broader development agenda, particularly in the implementation of the Millennium Development Goals. Poverty eradication and the improvement of quality of life in the developing countries would depend on the success of the international community in addressing the problems of the most vulnerable in the least developed countries. (M2 Communications Ltd disclaims all liability for information provided within M2 PressWIRE. Data supplied by named party/parties. Further information on M2 PressWIRE can be obtained at http://www.presswire.net on the world wide web. Inquiries to info@m2.com). LOAD-DATE: July 21, 2006 The India Model., By: Das, Gucharan, Foreign Affairs, 00157120, Jul/Aug2006, Vol. 85, Issue 4 Database: Business Source Premier The India Model Contents A 100-YEAR TALE PECULIAR REVOLUTION RISING DESPITE THE STATE REFORM SCHOOL PEOPLE POWER Section: The Rise of India AN ECONOMY UNSHACKLED ALTHOUGH THE world has just discovered it, Indias economic success is far from new. After three postindependence decades of meager progress, the countrys economy grew at 6 percent a year from 1980 to 2002 and at 7.5 percent a year from 2002 to 2006--making it one of the worlds best-performing economies for a quarter century. In the past two decades, the size of the middle class has quadrupled (to almost 250 million people), and 1 percent of the countrys poor have crossed the poverty line every year. At the same time, population growth has slowed from the historic rate of 2.2 percent a year to 1.7 percent today--meaning that growth has brought large per capita income gains, from $1,178 to $3,051 (in terms of purchasing-power parity) since 1980. India is now the worlds fourth-largest economy. Soon it will surpass Japan to become the third-largest. The notable thing about Indias rise is not that it is new, but that its path has been unique. Rather than adopting the classic Asian strategy--exporting labor-intensive, low-priced manufactured goods to the West--India has retied on its domestic market more than exports, consumption more than investment, services more than industry, and high-tech more than low-skilled manufacturing. This approach has meant that the Indian economy has been mostly insulated from global downturns, showing a degree of stability that is as impressive as the rate of its expansion. The consumption-driven model is also more people-friendly than other development strategies. As a result, inequality has increased much less in India than in other developing nations. (Its Gini index, a measure of income inequality on a scale of zero to 100, is 33, compared to 41 for the United States, 45 for China, and 59 for Brazil.) Moreover, 30 to 40 percent of GDP growth is due to rising productivity--a true sign of an economys health and progress--rather than to increases in the amount of capital or labor. But what is most remarkable is that rather than rising with the help of the state, India is in many ways rising despite the state. The entrepreneur is clearly at the center of Indias success story. India now boasts highly competitive private companies, a booming stock market, and a modern, well-disciplined financial sector. And since 1991 especially, the Indian state has been gradually moving out of the way--not graciously, but kicked and dragged into implementing economic reforms. It has lowered trade barriers and tax rates, broken state monopolies, unshackled industry, encouraged competition, and opened up to the rest of the world. The pace has been slow, but the reforms are starting to add up. India is poised at a key moment in its history. Rapid growth will likely continue--and even accelerate. But India cannot take this for granted. Public debt is high, which discourages investment in needed infrastructure. Overly strict labor laws, though they cover only 10 percent of the work force, have the perverse effect of discouraging employers from hiring new workers. The public sector, although much smaller than Chinas, is still too large and inefficient--a major drag on growth and employment and a burden for consumers. And although India is successfully generating high-end, capital- and knowledge-intensive manufacturing, it has failed to create a broad-based, labor-intensive industrial revolution--meaning that gains in employment have not been commensurate with overall growth. Its rural population, meanwhile, suffers from the consequences of state-induced production and distribution distortions in agriculture that result in farmers getting only 20 to 30 percent of the retail price of fruits and vegetables (versus the 40 to 50 percent farmers in the United States get). India can take advantage of this moment to remove the remaining obstacles that have prevented it from realizing its full potential. Or it can continue smugly along, confident that it will get there eventually-but 20 years late. The most difficult reforms are not yet done, and already there are signs of complacency. A 100-YEAR TALE FOR HALF a century before independence, the Indian economy was stagnant. Between 1900 and 1950, economic growth averaged 0.8 percent a year--exactly the same rate as population growth, resulting in no increase in per capita income. In the first decades after independence, economic growth picked up, averaging 3.5 percent from 1950 to 1980. But population growth accelerated as well. The net effect on per capita income was an average annual increase of just 1.3 percent. Indians mournfully called this "the Hindu rate of growth." Of course, it had nothing to do with Hinduism and everything to do with the Fabian socialist policies of Prime Minister Jawaharlal Nehru and his imperious daughter, Prime Minister Indira Gandhi, who oversaw Indias darkest economic decades. Father and daughter shackled the energies of the Indian people under a mixed economy that combined the worst features of capitalism and socialism. Their model was inward-looking and import-substituting rather than outward-looking and export-promoting, and it denied India a share in the prosperity that a massive expansion in global trade brought in the post-World War II era. (Average per capita growth for the developing world as a whole was almost 3 percent from 1950 to 1980, more than double Indias rate.) Nehru set up an inefficient and monopolistic public sector, over-regulated private enterprise with the most stringent price and production controls in the world, and discouraged foreign investment--thereby causing India to lose out on the benefits of both foreign technology and foreign competition. His approach also pampered organized labor to the point of significantly lowering productivity and ignored the education of Indias children. But even this system could have delivered more had it been better implemented. It did not have to degenerate into a "license-permit-quota raj," as Chakravarthi Rajagopalachari first put it in the late 1950s. Although Indians blame ideology (and sometimes democracy) for their failings, the truth is that a mundane inability to implement policy--reflecting a bias for thought and against action--may have been even more damaging. In the 1980s, the governments attitude toward the private sector began to change, thanks in part to the underappreciated efforts of Prime Minister Rajiv Gandhi. Modest liberal reforms--especially lowering marginal tax rates and tariffs and giving some leeway to manufacturers--spurred an increase in growth to 5.6 percent. But the policies of the 1980s were also profligate and brought India to the point of fiscal crisis by the start of the 1990s. Fortunately, that crisis triggered the critical reforms of 1991, which finally allowed Indias integration into the global economy--and laid the groundwork for the high growth of today. The chief architect of those reforms was the finance minister, Manmohan Singh, who is now prime minister. He lowered tariffs and other trade barriers, scrapped industrial licensing, reduced tax rates, devalued the rupee, opened India to foreign investment, and rolled back currency controls. Many of these measures were gradual, but they signaled a decisive break with Indias dirigiste past. The economy returned the favor immediately: growth rose, inflation plummeted, and exports and currency reserves shot up. To appreciate the magnitude of the change after 1980, recall that the Wests Industrial Revolution took place in the context of 3 percent GDP growth and 1.1 percent per capita income growth. If Indias economy were still growing at the pre-1980 level, then its per capita income would reach present U.S. levels only by 2250; but if it continues to grow at the post-1980 average, it will reach that level by 2066--a gain of 184 years. PECULIAR REVOLUTION INDIA HAS improved its competitiveness considerably since 1991: there has been a telecommunications revolution, interest rates have come down, capital is plentiful (although risk-averse managers of state-owned banks still refuse to lend to small entrepreneurs), highways and ports have improved, and real estate markets are becoming transparent. More than 100 Indian companies now have a market capitalization of over a billion dollars, and some of these--including Bharat Forge, Jet Airways, Infosys Technologies, Reliance Infocomm, Tata Motors, and Wipro Technologies--are likely to become competitive global brands soon. Foreigners have invested in over 1,000 Indian companies via the stock market. Of the Fortune 500 companies, 125 now have research and development bases in India--a testament to its human capital. And high-tech manufacturing has taken off. All these changes have disciplined the banking sector. Bad loans now account for less than 2 percent of all loans (compared to 20 percent in China), even though none of Indias shoddy state-owned banks has so far been privatized. For now, growth is being driven by services and domestic consumption. Consumption accounts for 64 percent of Indias GDP, Compared to 58 percent for Europe, 55 percent for Japan, and 42 percent for China. That consumption might be a virtue embarrasses many Indians, with their ascetic streak, but, as the economist Stephen Roach of Morgan Stanley puts it, "Indias consumption-led approach to growth may be better balanced than the resource-mobilization model of China." The contrast between Indias entrepreneur-driven growth and Chinas state-centered model is stark. Chinas success is largely based on exports by state enterprises or foreign companies. Beijing remains highly suspicious of entrepreneurs. Only 10 percent of credit goes to the private sector in China, even though the private sector employs 40 percent of the Chinese work force. In India, entrepreneurs get more than 80 percent of all loans. Whereas Jet Airways, in operation since 1993, has become the undisputed leader of Indias skies, Chinas first private airline, Okay Airways, started flying only in February 2005. What has been peculiar about Indias development so far is that high growth has not been accompanied by a labor-intensive industrial revolution that could transform the lives of the tens of millions of Indians still trapped in rural poverty. Many Indians watch mesmerized as China seems to create an endless flow of low-end manufacturing jobs by exporting goods such as toys and clothes and as their better-educated compatriots export knowledge services to the rest of the world. They wonder fearfully if India is going to skip an industrial revolution altogether, jumping straight from an agricultural economy to a service economy. Economies in the rest of the world evolved from agriculture to industry to services. India appears to have a weak middle step. Services now account for more than 50 percent of Indias GDP, whereas agricultures share is 22 percent, and industrys share is only 27 percent (versus 46 percent in China). And within industry, Indias strength is high-tech, high-skilled manufacturing. Even the most fervent advocates of service-based growth do not question the desirability of creating more manufacturing jobs. The failure of India to achieve a broad industrial transformation stems in part from bad policies. After Indias independence, Nehru attempted a state-directed industrial revolution. Since he did not trust the private sector, he tried to replace the entrepreneur with the government-and predictably failed. He shackled private enterprise with byzantine controls and denied autonomy to the public sector. Perhaps the most egregious policy was reserving around 800 industries, designated "small-scale industries" (SSI), for tiny companies that were unable to compete against the large firms of competitor nations. Large firms were barred from making products such as pencils, boot polish, candles, shoes, garments, and toys--all the products that helped East Asia create millions of jobs. Even since 1991, Indian governments nave been afraid to touch this "SSI holy cow" for fear of a backlash from the SSI lobby. Fortunately, that lobby has turned out to be mostly a phantom--little more than the bureaucrats who kept scaring politicians by warning of a backlash. Over the past five years, the government has been pruning the list of protected industries incrementally with no adverse reaction. In the short term, the best way for India to improve the lot of the rural poor might be to promote a second green revolution. Unlike in manufacturing, India has a competitive advantage in agriculture, with plenty of arable land, sunshine, and water. To achieve such a change, however, India would need to shift its focus from peasant farming to agribusiness and encourage private capital to move from urban to rural areas. It would need to lift onerous distribution controls, allow large retailers to contract directly with farmers invest in irrigation, and permit the consolidation of fragmented holdings. Indian entrepreneurs also still farce a range of obstacles, many of them the result of lingering bad policies. Electric power is less reliable and more expensive in India than in competitor nations. Checkpoints keep trucks waiting for hours. Taxes and import duties have come down, but the cascading effect Of indirect taxes will continue to burden Indian manufacturers until a uniform goods-and-services tax is implemented. Stringent labor law continue to deter entrepreneurs from hiring workers. The "license raj" may be gone, but an "inspector raj" is alive and well; the "midnight knock" from an excise, customs, labor, or factory inspector still haunts the smaller entrepreneur. Some of these problems will hopefully diminish with the planned designation of new "economic zones," which promise a reduced regulatory burden. Economic history teaches that the Industrial Revolution as it was experienced by the West was usually led by one industry. It was textile exports in the United Kingdom, railways in the United States. India, too, may have found the engine that could fuel its takeoff and transform its economy: providing white-collar services that are outsourced by companies in the rest of the world. Software and business-process outsourcing exports have grown from practically nothing to $20 billion and are expected to reach $35 billion by 2008. The constraining factor is likely to be not demand but the ability of Indias educational system to produce enough quality English-speaking graduates. Meanwhile, high-tech manufacturing, a sector where India is already demonstrating considerable strength, will also begin to expand. Perhaps in a decade, the distinction between China as "the worlds workshop" and India as "the worlds back office" will slowly fade as Indias manufacturing and Chinas services catch up. RISING DESPITE THE STATE IT IS AN amazing spectacle to see prosperity beginning to spread in todays India even in the presence of appalling governance. In the midst of a booming private economy, Indians despair over the lack of the simplest public goods. It used to be the opposite: during Indias socialist days, Indians worried about economic growth but were proud of their world-class judiciary; bureaucracy, and police force. But now, the old centralized bureaucratic Indian state is in steady decline. Where it is desperately needed--in providing basic education, health care, and drinking water--it has performed appallingly. Where it is not needed, it has only started to give up its habit of stifling private enterprise. Labor laws, for example, still make it almost impossible to lay off a worker--as the infamous case of Uttam Nakate illustrates. In early 1984, Nakate was found at 11:40 AM sleeping soundly on the floor of the factory in Pune where he worked. His employer let him off with a warning. But he was caught napping again and again. On the fourth occasion, the factory began disciplinary proceedings against him, and after five months of hearings, he was found guilty and sacked. But Nakate went to a labor court and pleaded that he was a victim of an unfair trade practice. The court agreed and forced the factory to take him back and pay him 50 percent of his lost wages. Only 17 years later, after appeals to the Bombay High Court and the national Supreme Court, did the factory finally win the right to fire an employee who had repeatedly been caught sleeping on the job. Aside from highlighting the problem of Indias lethargic legal system, Nakates case dramatizes how the countrys labor laws actually reduce employment, by making employers afraid to hire workers in the first place. The rules protect existing unionized workers--sometimes referred to as the "labor aristocracy"--at the expense of everyone else. At this point, the labor aristocracy comprises only 10 percent of the Indian work force. No single institution has come to disappoint Indians more than their bureaucracy. In the 1950s, Indians bought into the cruel myth, promulgated by Nehru, that Indias bureaucracy was its "steel frame," supposedly a means of guaranteeing stability and continuity after the British raj. Indians also accepted that a powerful civil service was needed to keep a diverse country together and administer the vast regulatory framework of Nehrus "mixed economy." But in the holy name of socialism, the Indian bureaucracy created thousands of controls and stifled enterprise for 40 years. India may have had some excellent business--even though civil servants, but none really understood they had the power to ruin it. Today, Indians believe that their bureaucracy has become a prime obstacle to development, blocking instead of shepherding economic reforms. They think of bureaucrats as self-serving, obstructive, and corrupt, protected by labor laws and lifetime contracts that render them completely unaccountable. To be sure, there are examples of good performance--the building of the Delhi Metro or the expansion of the national highway system--but these only underscore how often most of the bureaucracy fails. To make matters worse, the term of any one civil servant in a particular job is getting shorter, thanks to an increase in capricious transfers. Prime Minister Singh has instituted a new appraisal system for the top bureaucracy, but it has not done much. The Indian bureaucracy is a haven of mental power. It still attracts many of the brightest students in the country, who are admitted on the basis of a difficult exam. But despite their very high IQs, most bureaucrats fail as managers. One of the reasons is the bureaucracys perverse incentive system; another is poor training in implementation. Indians tend to blame ideology or democracy for their failures, but the real problem is that they value ideas over accomplishment. Great strides are being made on the Delhi Metro not because the project was brilliantly conceived but because its leader sets clear, measurable goals, monitors day-to-day progress, and persistently removes obstacles. Most Indian politicians and civil servants, in contrast, fail to plan their projects well, monitor them, or follow through on them: their performance failures mostly have to do with poor execution. The governments most damaging failure is in public education. Consider one particularly telling statistic: according to a recent study by Harvard Universitys Michael Kremer, one out of four teachers in Indias government elementary schools is absent and one out of two present is not teaching at any given time. Even as the famed Indian Institutes of Technology have acquired a global reputation, less than half of the children in fourth-level classes in Mumbai can do first-level math. It has gotten so bad that even poor Indians have begun to pull their kids out of government schools and enroll them in private schools, which charge $1 to $3 a month in fees and which are spreading rapidly in slums and villages across India. (Private schools in India range from expensive boarding schools for the elite to low-end teaching shops in markets.) Although teachers salaries are on average considerably lower in private schools, their students perform much better. A recent national study led by Pratham, an Indian nongovernmental organization, found that even in small villages, 16 percent of children are now in private primary schools. These kids scored 10 percent higher on verbal and math exams than their peers in public schools. Indias educational establishment, horrified by the exodus out of the public educational system, lambastes private schools and wants to close them down. NIIT Technologies, a private company with 4,000 "learning centers," has trained four million students and helped fuel Indias information technology revolution in the 1990s, but it has not been accredited by the government. Ironically, legislators finally acknowledged the states failure to deliver education a few months ago when they pushed through Parliament a law making it mandatory for private schools to reserve spots for students from low castes. As with so many aspects of Indias success story, Indians are finding solutions to their problems without waiting for the government. The same dismal story is being repeated in health and water services, which are also de facto privatized. The share of private spending on health care in India is double that in the United States. Private wells account for nearly all new irrigation capacity in the country. In a city like New Delhi, private citizens cope with an irregular water supply by privately contributing more than half the total cost of the citys water supply. At government health centers, meanwhile, 40 percent of doctors and a third of nurses are absent at any given time. According to a study by Jishnu Das and Jeffrey Hammer, of the World Bank, there is a 50 percent chance that a doctor at such a center will recommend a positively harmful therapy. How does one explain the discrepancy between the governments supposed commitment to universal elementary education, health care, and sanitation and the fact that more and more people are embracing private solutions? One answer is that the Indian bureaucratic and political establishments are caught in a time warp, clinging to the belief that the state and the civil service must be relied on to meet peoples needs. What they did not anticipate is that politicians in Indias democracy would capture the bureaucracy and use the system to create jobs and revenue for friends and supporters. The Indian state no longer generates public goods. Instead, it creates private benefits for those who control it. Consequently, the Indian state has become so "riddled with perverse incentives … that accountability is almost impossible," as the political scientist Pratap Bhanu Mehta reported. In a recent study of Indias public services, the activist and author Samuel Paul concluded that "the quality of governance is appalling." There are many sensible steps that can be taken to improve governance. Focusing on outcomes rather than internal procedures would help, as would delegating responsibility to service providers. But what is more important is for the Indian establishment to jettison its faith in, as the political scientist James Scott puts it, "bureaucratic high modernism" and recognize that the governments job is to govern rather than to run everything. Government may have to finance primary services such as health care and education, but the providers of those services must be accountable to the citizen as though to a customer (instead of to bosses in the bureaucratic hierarchy). None of the solutions being debated in India will bring accountability without this change in mindset. Fortunately, the people of India have already made the mental leap. The middle class withdrew from the state system long ago. Now, even the poor are depending more and more on private services. The government merely needs to catch up. REFORM SCHOOL INDIAS CURRENT government is led by a dream team of reformers--most notably Prime Minister Singh, a chief architect of the liberalization of 1991. Singhs left-wing-associated National Congress Party was swept into power two years ago even though the incumbent BJP (Bharatiya Janata Party) had presided over an era of unprecedented growth. The left boasted that the election was a revolt of the poor against the rich. In reality, however, it was an anti-incumbent backlash--specifically, a vote against the previous governments poor record in providing basic services. What matters to the rickshaw driver is that the police officer does not extort a sixth of his daily earnings. The farmer wants a clear title to his land without having to bribe the village headman, and his wife wants the doctor to be there when she takes her sick child to the health center. These are the areas where government touches most peoples lives, and the sobering lesson from Indias 2004 elections is that high growth and smart macroeconomic reforms are not enough in a democracy. Still, the left saw the Congress victory as an opportunity. Unfortunately, it stands rigidly against reform and for the status quo, supporting labor laws that benefit 10 percent of workers at the expense of the other 90 percent and endorsing the same protectionist policies that the extreme right also backs--policies that harm consumers and favor producers. Thus, Singh and his reformist allies often seem to be sitting, frustrated, on the sidelines. For example, the new government has pushed through Parliament the National Rural Employment Guarantee Act, which many fear will simply become the biggest "loot for work" program in Indias history. Although some of the original backers of the bill may have had good intentions, most legislators saw it as an opportunity for corruption. Indias experience with job-creation schemes is that their benefits usually do not reach the poor; and they rarely create permanent assets even when they are supposed to: the shoddy new road inevitably gets washed away in the next monsoon. There is also the worry that the additional 1 percent of GDP borrowed from the banks to finance this program will crowd out private investment, push up interest rates, lower the economys growth rate, and, saddest of all, actually reduce genuine employment. Singh knows that Indias economic success has not been equally shared. Cities have done better than villages. Some states have done better than others. The economy has not created jobs commensurate with its rate of growth. Only a small fraction of Indians are employed in the modern, unionized sector. Thirty-six million are reportedly unemployed. But Singh also knows that one of the primary reasons for these failures is rigid labor laws--which he wants to reform, if only the left would let him. Singhs challenge is to get the majority of Indians united behind reform. One of the reasons that the pace of reform has been so slow is that none of Indias leaders has ever bothered to explain to voters why reform is good and just how it will help the poor. (Chinese leaders do not face this problem, which is peculiar to democracies.) Not educating their constituents is the great failure of Indias reformers. But it is not too late for Singh and the reformers in his administration--most notably Finance Minister Palaniappan Chidambaram and the head of the Planning Commission, Montek Singh Ahluwalia--to start appearing ion television to conduct lessons in basic economics. If the reformers could convert the media and some members of Parliament, the bureaucracy, and the judiciary to their cause, Indians would be less likely to fall hostage to the seductive rhetoric of the left. If they were to admit honestly that the ideas India followed from 1950 to 1990 were wrong, people would respect them. If they were to explain that Indias past regulations suppressed the people and were among the causes of poverty, people would understand. PEOPLE POWER SHASHI KUMAR is 29 years old and comes from a tiny village in Bihar, Indias most backward and feudal state. His grandfather was a low-caste sharecropper in good times and a day laborer in bad ones. His family was so poor that they did not eat some nights. But Kumars father somehow managed to get a job in a transport company in Darbhanga, and his mother began to teach in a private school, where Kumar was educated at no cost under her watchful eye. Determined that her son should escape the indignities of Bihar, she tutored him at night, got him into a college, and, when he finished, gave him a railway ticket for New Delhi. Kumar is now a junior executive in a call center in Gurgaon that serves customers in the United States. He lives in a nice flat, which he bought last year with a mortgage, drives an Indica car, and sends his daughter to a good private school. He is an average, affable young Indian, and like so many of his kind he has a sense of lifes possibilities. Prior to 1991, the realization of these possibilities was open only to those with a government job. If you got an education and did not get into the government, you faced a nightmare that was called "educated unemployment." But now, Kumar says, anyone with an education, computer skills, and some English can make it. Indias greatness lies in its self-reliant and resilient people. They are able to pull themselves up and survive, even flourish, when the state fails to deliver. When teachers and doctors do not show up at government primary schools and health centers, Indians just open up cheap private schools and clinics in the slums and get on with it. Indian entrepreneurs claim that they are hardier because they have had to fight not only their competitors but also state inspectors. In short, Indias society has triumphed over the state. But in the long run, the state cannot merely withdraw. Markets do not work in a vacuum. They need a network of regulations and institutions; they need umpires to settle disputes. These institutions do not just spring up; they take time to develop. The Indian states greatest achievements lie in the noneconomic sphere. The state has held the worlds most diverse country together in relative peace for 57 years. It has started to put a modern institutional framework in place. It has held free and fair elections without interruption. Of its 3.5 million village legislators, 1.2 million are women. These are proud achievements for an often bungling state with disastrous implementation skills and a terrible record at day-to-day governance. Moreover, some of the most important post-1991 reforms have been successful because of the regulatory institutions established by the state. Even though the reforms have been slow, imperfect, and incomplete, they have been consistent and in one direction. And it takes courage, frankly, to give up power, as the Indian state has done for the past 15 years. The stubborn persistence of democracy is itself one of the Indian states proudest achievements. Time and again, Indian democracy has shown itself to be resilient and enduring--giving a lie to the old prejudice that the poor are incapable of the kind of self-discipline and sobriety that make for effective self-government. To be sure, it is an infuriating democracy, plagued by poor governance and fragile institutions that have failed to deriver basic public goods. But Indias economic success has been all the more remarkable for its issuing from such a democracy. Still, the poor state of governance reminds Indians of how far they are from being a truly great nation. They will reach such greatness only when every Indian has access to a good school, a working health clinic, and clean drinking water. Fortunately, half of Indias population is under 25 years old. Based on current growth trends, India should be able to absorb an increasing number of people into its labor force. And it will not have to worry about the problems of an aging population. This will translate into what economists call a "demographic dividend," which will help India reach a level of prosperity at which, for the first time in its history, a majority of its citizens will not have to worry about basic needs. Yet India cannot take its golden age of growth for granted. If it does not continue down its path of reform--and start to work on bringing governance up to par with the private economy--then a critical opportunity will have been lost. PHOTO (BLACK & WHITE): Masters of the Hindu growth rate: Prime Minister Jawaharlal Nehru with Indira Gandhi, New Delhi, 1955 PHOTO (BLACK & WHITE): A sign of the times: preparing for a software conference, Bangalore, December 8, 2005 ~~~~~~~~ By Gurcharan Das GURCHARAN DAS is former CEO of Procter & Gamble India and the author of India Unbound: The Social and Economic Revolution From Independence to the Global Information Age. The contents of Foreign Affairs are protected by copyright. © 2004 Council on Foreign Relations, Inc., all rights reserved. To request permission to reproduce additional copies of the article(s) you will retrieve, please contact the Permissions and Licensing office of Foreign Affairs. The Singapore Economic Review, Vol. 50, Special Issue (2005) 313–343 © World Scientific Publishing Company GROWTH ECONOMETRICS IN THE TROPICS: WHAT INSIGHTS FOR SOUTHEAST ASIAN ECONOMIC DEVELOPMENT?∗ HAL HILL† and SAM HILL‡ Division of Economics, Research School of Pacific and Asian Studies Australian National University, Canberra ACT 0200, Australia †hal.hill@anu.edu.au ‡sam.hill@anu.edu.au This paper attempts to distil the key conclusions from the very large literature on the empirics of growth and to apply them to the development record of the five major Southeast Asian economies for which we have reasonably long-term data — Indonesia, Malaysia, The Philippines, Singapore and Thailand. These five display a considerable range of development outcomes, ranging fromconsistently high growth, to episodes of boom and crisis, and to low average growth. After estimating a series of general empirical models froma large sample of countries, we examine how well these fit the observed outcomes in these particular Southeast Asian countries. Our broad finding is that the average model does reasonably well in explaining outcomes in Singapore and Thailand, but that the residuals for Indonesia, Malaysia and the Philippines are quite large and persistent across different specifications. Keywords: Economic growth; South-East Asia. 1. Introduction In this paper we ask whether, if at all, growth econometrics helps us to understand the underlying dynamics of Southeast Asian economic growth. There is arguably no more important topic in modern economics than an understanding of international differences in long term economic performance. As Lucas (1988) once remarked, “The consequences for human welfare…are simply staggering: Once we start to think about them, it is hard to think about anything else.” The literatures addressing this question have tended to proceed along two surprisingly unconnected paths. Country studies have provided a tremendous amount of historical and institutional depth. But they have rarely adopted explicit comparative frameworks and they have tended to eschew the broader issues of explaining performance. In contrast, the burgeoning growth econometrics literature has applied “universal” models with a focus on averages among large samples. Even with ever improving databases, more comprehensive equation specifications and more sophisticated econometric techniques, such ∗This paper was presented at the Singapore Economic Review Conference 2005, Singapore, August 4–6, 2005. We thank Euston Quah for the conference invitation, and we gratefully acknowledge helpful comments from Prema-Chandra Athukorala and conference participants. 313 314 The Singapore Economic Review an approach cannot reasonably be expected to incorporate the nuances of country-specific circumstances. Consequently, and as is increasingly recognized in the literature,1 significant insights into long-term country dynamics are more likely when these two approaches are combined. That is, when the growth econometric techniques are applied to a small group of countries, and married with detailed country knowledge. This paper offers an example of such an approach, with application to five diverse Southeast Asian economies: Indonesia, Malaysia, The Philippines, Singapore and Thailand. We choose these countries on the basis of their diversity, our knowledge of them, and the fact that data for the key variables are mostly available for over three decades. Apart from geographic location, membership of the developing world’s most durable regional association, and sub-periods of region-wide, above-average growth (in the developing world), the five share little in common. Their long-term growth averages differ significantly, from among the highest in the developing world to below average. Similarly, there is a large set of variables presumed to be important in explaining growth differentials. For example, their trade regimes vary from consistently among the most open in the world, to relatively inward-looking. Human capital indicators range from very high relative to per capita income to about average. Institutional quality ranges from very high to rather weak. The sample includes resource-rich and resource-poor countries. Everybody has their favorite theory of why countries do or do not perform well. For Southeast Asia, the following remarks and quotes are illustrative of the debates, both about the countries in the region, and more broadly. At a general level, there was once a popular view, still held by some, that geography condemned the tropics to permanent underdevelopment.According to one of themostwidely used development economics textbooks in the 1970s and 1980s, “…almost every successful example of modern economic growth has occurred in a temperate zone country, …[and low incomes in tropical countries indicate] the special difficulties caused directly or indirectly by differing climatic conditions.” (Todaro, 1981, p. 101) More recently, there has been a proliferation of theories. In a recent interview, the Malaysian Minister of Trade (and a one-time academic economist), when asked to explain why her country had vastly out-performed its natural comparator, Ghana,maintained that the keywas “planning” and “hard work”.An earlier literature on that country, implicitly employing Hla Myint’s vent-for-surplus model, emphasized its highly favorable land-labor ratios.2 In the Philippines, “culture”, “bad luck”, and the Marcos “crony capitalism” are often advanced as the major explanations for that country’s indifferent economic performance 1See, for example, Collier and Gunning (1999), Rodrik (2003) and Temple (1999). 2Illustrative of this view is the late Benjamin Higgins: “The relative success ofMalaysia among Asian countries since Independence is to be explained partly by differences in the impact of colonialism before Independence. Colonial economic penetration came late in Malaya, with rubber, in the last decade of the nineteenth century. Consequently, the population explosion also came late, population pressure on the land never became severe, and development strategy could take the form of frontier resource development for three decades after Independence.” (Higgins, unpublished, Chapter XV, p. 15) Growth Econometrics in the Tropics 315 since the 1970s.3 Moreover, as one of the country’s leading economists quipped, “We’re showing everyone else what they should avoid.” (Fabella, 1995, p. 224) In Singapore, the “LeeKuan Yewfactor” is widely considered to be central. Nevertheless (and not necessarily contradicting the key role of this leader), the country has also been central to the East Asian “perspiration v/s inspiration” debate, triggered by Krugman’s famous assertion that “[T]he [Singapore] miracle turns out to have been based on perspiration rather than inspiration: Singapore grew through a mobilization of resources that would have done Stalin proud.” (Krugman, 1994, p. 70) A key point to emphasize in thinking about these issues is that much remains unresolved, and unsettled, in the cross-country econometrics, and even more so when applied to individual country analysis. We therefore approach this subject cautiously, bearing in mind the sage advice of Harberger (1984, p. 427) that “…there is no magic formula [for economic growth] — no combination of one or two or even ten or twelve policy buttons that, once pushed in the right order, will guarantee economic growth.” The approach in this paper is to develop several empirical growth specifications featuring a range of statistically significant explanatory variables for as large a sample of countries as possible (generally around 100) using data for the period 1966–2000, and then to apply them as predictors to our Southeast Asian sample. Our organization is as follows. First, we review the growth literature, with a view to identifying the relevant methodologies and the variables commonly argued to be important in explaining cross-country growth differentials. Next, in Section 3, we provide a brief descriptive-analytical overview of the five economies, highlighting their performance record and some key “stylized facts” relevant to an understanding of their growth. Together with the Data Appendix, Section 4 summarizes our methodological framework, specifies the growth equations and describes our database. In Section 5, we present our main empirical findings for the five economies, and seek to link them to the country analytics elaborated in Section 2. We conclude in Section 6 with a summary of the results, their limitations, and some broader implications for both country studies and growth econometrics. 2. Insights from the Growth Empirics Literature The past few decades have seen an outpouring of empirical research that aims to identify the sources of long run economic growth. This work shares the common approach of analyzing partial correlations between some measure of output growth and a range of explanatory variables, using data for a wide sample of countries. There is, however, diversity in terms of the specific methodology employed. While some empirical studies are firmly grounded by theoretical considerations, others take amuchmore informal approach to specification. Early analyses tended to employ cross-section data but more recent contributions have used panel data that exploit within country variation. Motivated in part by advances in growth theory 3Proponents of the view that a cultural explanation of under-development is convincing fit neatly into the observation of Jim Riedel that “…for those who are baffled by the plethora of conflicting explanations and contradictory evidence, there is refuge in the cultural factor.” (Riedel, 1988, p. 2) 316 The Singapore Economic Review and the availability of new data, there has also been a trend towards examining the relevance of a range of new variables and incorporating these and existing variables using innovative approaches such as with interaction terms and in non-linear specifications. One of the major weaknesses of this literature is that, as most studies solely examine partial correlations between various factors and growth outcomes, the precise channels through which factors influence growth are often left unidentified. Nevertheless, it remains a useful approach for identifying common empirical regularities. Furthermore, advances in estimation techniques together with improved data availability have provided new options for dealing with long standing technical challenges such as endogeneity. The empirical growth literature is vast and no attempt is made here to provide a comprehensive review. However, in order to motivate the different empirical specifications considered in this analysis, a brief overview of some of the key results is presented in the following section. This discussion is arranged around three categories of dependent variables that either theory suggest are important or have been found to be robustly correlated with somemeasure of growth in a number of empirical studies. These are: measures of factor accumulation and initial conditions (which capture the process of conditional convergence); government and policy related variables; and other relevant factors. 2.1. Factor accumulation and convergence One of the key predictions of the seminal Solow-Swan growth model is that changes in the capital labor ratio cannot drive a perpetual expansion in labor productivity. However, with changes in the capital labor ratio adjusting slowly in response to changes in the savings and investment rate, a higher rate of investment will result in faster growth to the new steady state equilibrium. In an alternative theoretical framework, with an augmented production function that incorporates an additional factor of production such as human capital, diminishing returns to physical capital may be avoided and increases in the investment rate can drive faster perpetual growth. On the basis of either of these theoretical predictions, one would expect a positive relationship between the rate of capital accumulation and output growth. This is indeed a common empirical observation, with various proxies for the rate of capital accumulation found to be one of the most robustly correlated variables with long run growth rates (Levine and Renelt, 1992; Sala-i-Martin, 1997; Hoover and Perez, 2004). Assessing the role of human capital in empirical growth studies is more problematic since growth theory points to two different roles for human capital in driving growth. First, if human capital represents a direct factor of production that does not suffer from decreasing marginal returns, higher rates of investment in human capitalwill drive faster growth (Rebelo, 1991). Second, as postulated in many endogenous growth theories such as Romer (1990), human capital may be important for creating knowledge or aiding knowledge diffusion from a more technologically sophisticated country, in which case higher levels of human capital would be expected to drive higher growth. On balance, the empirical evidence appears to lend greater support to the endogenous growth theory interpretation. While some studies have found a statistically significant relationship between the rate of output growth and rates of investment in human capital, the association between human capital and growth tends to Growth Econometrics in the Tropics 317 be stronger when human capital is entered in the level form (see, for example, Benhabib and Spiegel, 1994). That said, despite the importance attached to human capital in the theoretical literature, a surprisingly large number of studies have found neither the stock nor rate of investment in human capital to be statistically important. Prompted by this, recent studies have focussed on methods to improve data quality and considered alternative functional forms (Bassanini and Scarpetta, 2002 and Temple, 1999). Aside from the inclusion of basic factors of production, many cross-country empirical growth studies include as one of the explanatory variables the initial (lagged) level of some measure of labor productivity. The coefficient on this variable is often found to be negative, supporting the β-convergence hypothesis that, ceteris paribus, poorer countries tend to grow faster than rich countries (see, for example, Dowrick and Nguyen, 1989). One interpretation for this result, consistent with the findings of a range of historical country and industry level studies, as well as theoretical models of technological diffusion, is that technological backwardness provides an opportunity for growth through a process of catch-up, as technology gradually diffuses from countries on the global frontier to those within.4 An alternative interpretation, based on the dynamics of the Solow-Swan model, is that lagged labor productivity reflects the distance between actual output and the steady-state level of output (Mankiw et al., 1992). In this case the finding of a negative coefficient on this term is interpreted as supporting evidence of convergence occurring through a process of capital deepening. However, this latter interpretation is problematic where the empirical analysis uses actual capital stock data to measure changes in the capital stock, rather than the proxy of the ratio of investment expenditure to GDP (Rogers, 2003). 2.2. Government and policy related factors A range of policy variables is likely to influence technical and allocative efficiency, thereby impacting on growth outcomes directly, or by altering the incentives and opportunities for factor accumulation, impacting on growth indirectly. Amongst the most common types of direct policy variables assessed in empirical studies are policies relating to openness to international trade,macroeconomic stability, the size and nature of government expenditures and factors which come under the broad banner of “institutional quality”. Beginning with openness to international trade, it has been hypothesized that this policy variable affects long run economic performance through a multitude of channels. Openness may reduce inefficiencies by spurring market competition and lessen opportunities for rent seeking, encourage specialization that in turn may facilitate greater economies of scale, and allow for greater trade in capital equipment that embodies new technology, thereby facilitating 4For example in the theoretical model by Barro and Sala-i-Martin (1997) growth in a lead country is driven by innovations derived from deliberate research and development effort, while a technologically backward country catches up by imitating. By assuming that imitation costs are rising as the follower country closes the technology gap, the model predicts that over time all countries move to the global technology frontier but countries that begin further away move to the frontier at the fastest rate. 318 The Singapore Economic Review knowledge diffusion from abroad.5 A large body of empirical evidence, using different measures of both trade regimes and measures of revealed openness to trade have found this variable to be strongly correlated with growth (Dollar, 1992; Sachs and Warner, 1997; Edwards, 1998; Dollar and Kraay, 2004). However, many of these studies have been the subject of a wide ranging criticism relating to measurement error and especially endogeneity bias (Rodriguez and Rodrik, 2000). Relating to measures of trade openness, a number of studies have found the black market premium on foreign exchange, often interpreted as an indicator of trade, exchange rate and price distortions which arise from policy settings, is robustly negatively correlated with growth (see, for example, Barro and Lee, 1994). The orthodox view of economic management and growth, espoused by Fisher (1993) amongst others, contends th Read More