When globalisation is good: Insight from India

One of the world's top economists, K. Otsuka, works as the Director of the Program with Professor Yujiro Hayami, T. Sonobe and K.Kajisa, among others, on board the innovative institution.

There I met Professor Kaliappa Kalirajan. Originally from Tamil Nadu state of India, he is settled in Australia but now serving as a professor at FASID. The first sight, I thought he might be a "descriptive and non-mathematical economist" like many of us, but the subsequent experience of sharing his room, unveiled just the opposite trend.

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Beneath the surface, his enthusiasm on econometric works drew my attention and I had the opportunity to go through some of them (shelving, for the moment, the question of how much I understood!). I found one research article (with Kanhaiya Singh of NCAER, Delhi) as relevant in the context of Bangladesh. The paper is titled: "Globalization Strategies and Poverty Reduction across Indian States."

Defining domain
The authors sensibly start with a definition of globalization at the very outset, seemingly, to clean the smoke off the screen. In popular parleys, globalization goes to mean everything -- free movement of pin to plane. I jokingly say to my students that it is a free movement of everything across countries, excepting of course, immobile land and mobile governments. EU is, perhaps, an example where my joke turns out to be real.

Neither real is the news that globalization is a recent phenomena, as often alleged. If we take international connectedness between nations -- increased flow of trade, investment and communication -- then globalization has been happening over the last 50 years. In fact, as I read in a very recent article by Paul Streteen in the FASID library, the world seems to be less globalized now than it was 30 to 40 years ago. The ratio of immigrants per 1,000 Americans was higher and visa and passport was almost a non-requirement during that period. There was freer movement of commodities across countries.

However, the paper alluded to earlier posits economic globalization that implies increasing openness, growing economic inter-dependence and deepening economic integration between countries. Again, to be to the point, they paid particular attention to the impact of industrial reforms and foreign direct investment reforms (international capital mobility) on poverty reduction at the state level. Therefore, globalization is proxied by the share of industrial product to real Gross State Domestic Product (GSDP) and the ratio of approved foreign direct investment to GSDP.

Hovering hypotheses
Theoretically, several hypotheses hover round the relationship between globalization and poverty reduction and human development. Globalization allows improvement in production technology and generation of employment. Hecksher-Ohlin and Stolper Samuelson theorem are points to the premise set. On an empirical plane, the experiences of East and Southeast Asia with regard to human development and global integration economically tend to support the dominant view. But the negative correlation in the case of some countries is also not behind the curtain. The authors argue that although globalization could gear up aggregate productivity and growth through competitive pressure and "induced innovation," its impact on an equal income distribution is not automatic.

Economists like Francisco Rodriguez and Dani Rodrick and also Joseph Stiglitz established empirically how globalization greases income inequality which, at times, may aggravate poverty in some countries and in some regions. Perhaps, propelled by the position taken by these economists, the authors' question is: Have India's globalization strategies significantly contributed to poverty reduction across states?

Indian insights
India's globalization strategies have their roots in the economic reforms ushered in 1991. Some of the strategies include: complete liberalization of private investment encouraging Foreign Direct Investment (FDI), freeing industries from direct government controls and eliminating licensing in most areas, opening the banking and financial sector for private competition, reducing tariff and non-tariff barriers etc. En passant, the package of policies is similar to that in Bangladesh during the same period of time.

Growth and poverty
That the growth performance of India due to economic liberalization is adequately documented in available literature. The states have diverse pattern of growth during the period of analysis and their contribution to national GDP also varied. There is in evidence little convergence, implying less integration of states with national economy. States like Gujarat, Assam, Himachal Pradesh, Bihar, Maharastra, Punjab, and Rajashtan remained out of the national average while Haryana, West Bengal, Karnataka, Kerala, and Andhra Pradesh traveled in tune with the national average. There has been an appreciable reduction in poverty paripassu economic growth over the years. While growth across states varied, there were also variations in the pace of poverty reduction. The question is why the pace of poverty varies across the states and whether globalization has anything to say on the variations.

Multi-variate regression
The causal connection was sought in terms of taking the annual rate of poverty reduction in percentage points between two national poverty surveys of 1993-94 and 1999-2000. Among the explanatory variables, came up initial poverty level, literacy rate, FDI, Migration, share of industry to real GSDP (industrialization), share of agriculture to GSDP (impact of agriculture on poverty) and other variables each measured in well defined manner.

FDI necessary but not sufficient
The authors observe that FDI flows, which are one of the important components of the globalization strategies in India, are not strongly favourable for poverty reduction. Why? Because it is not FDI per se that reduces poverty but the type of investment (export oriented or import substituting), FDI links with the host economy and conditions in the host country that go to affect poverty. Most of the FDI in India flew into service sector, dominantly in the communication sector. Capital intensive FDI employed skilled workers at the cost of poor and unskilled workers.

Industry and agriculture
Industrialization increases the pace of poverty reduction. If FDI could flow to industry and agriculture, possibly the pace of poverty reduction could be more prominent. States with higher initial level of poverty witnessed a better pace than states with lower poverty. Importantly, in poorer regions, agriculture was more important in reducing poverty, disconcertingly though, India is yet to see an agriculture-friendly globalization strategy. Between agriculture and industry, the impact of industrial growth was stronger than the impact of agricultural growth, implying positive contribution of globalization on poverty. The authors are of the view that despite relative strength of the industrial sector, a robust agricultural sector is needed to reduce poverty. But the fix is that development of the agricultural sector depends not only on domestic policies but also on increased access to developed markets. Ironically, developed countries tend to turn a deaf ear to this and thus, allegedly, indirectly contribute to the state of perilous poverty in developing countries.

Literacy-led growth
Literacy rate significantly affects poverty, and investment, both domestic and foreign, is closely linked to the level of literacy. For example, Ford has chosen a joint venture project in Tamil Nadu state and not in Mumbai, known to be bastion of brisk business. It is because the former has a more literate, more educated work force, and perhaps more importantly, has a better labour rations record than Maharashtra. Economic history of Japan and East and Southeast Asia confirm the causality between education, growth, and poverty reduction.

Policy points
For globalization to be good for poverty reduction and removing regional differences, affirmative steps are needed to develop infrastructure in less developed regions. Second, there is an urgent need to undertake reforms in agricultural sector and small-scale sector to attract FDI in employment and income generation agricultural processing activities such as food processing and agro-exports. Third, national and international coordination in agricultural policy making should get priority.

Hayami-hypothesis
The authors conclude their observations by drawing upon Yujiro Hayami's thesis of the importance of county-specific institutions in determining growth process, the importance of proper institutions to facilitate sustained investment flows including FDI in labour-intensive productive pursuits. The fact that China leads and India lags in an era of globalization, could be due to differential responsiveness of the institutions involved in making globalization a success. The success of East Asia, and also Japan in development boils down to the basics of facilitating institutional arrangements. Pending that, globalization may not be good for poverty reduction.

Abdul Bayes is a Professor of Economics at Jahangirnagar University.