DEVELOPMENTAL ECONOMICS

UNIT 1
1. Partha Dasgupta: Characteristics of development
 GDP as a measuring rod
 The GDP of a country is the value of all the final goods produced by its residents in a given year. GDP and
national income are two sides of the same coin.
 GDP is used as a measuring rod to compare the successes and failures of countries concerning the
development of their economy.

 GDP over the period

 For most of humanity’s past, people have been abysmally poor.
 The economic statistician Angus Maddison estimated that at the beginning of our common era, the PCI of the
world was about $515 a year in today’s prices.
 He also estimated that the distribution of income was remarkably equal back then.
 It appears that regional disparities became significant only from the beginning of the 19 th century when
income per head in Western Europe had become three times that in Africa.
 World income in the 19th century was $755 a year in today’s prices which means that income increased by
only 50% over 1800 years.
 It means that the growth phenomenon accelerated only in the recent period.

 Clusters
 If one was to line up countries according to GDP there would be the following clusters:
a. Poor - sub-Saharan Africa, the Indian subcontinent, etc. - total population of 2.3 billion and PCI of
$2100 a year
b. Rich - Europe, North America, Australia, and Japan - population under 1 billion and PCI of $30,000
c. Middle - spread between the extremes - China, Brazil, Venezuela, and Argentina

 The world thus appears to be polarized.

 Poor countries lie mainly in tropic zones which is a breeding ground for many diseases and also harbours a
vast natural resource.
 The poor could not take advantage of resource endowments due to colonization by Europeans.
 People in poor countries draw their production from Nature – ‘biomass economies’.
 The share of agriculture is 25% in the poor world and less than 5% in the rich. 10% of the population lives in
rural areas in rich countries while more than 70% is poor.

 DIFFERENCE BETWEEN THE TWO CLUSTERS

1. Accumulation of physical capital allows people in rich countries to work with better equipment thus
contributing to high standards of living.
2. People in rich countries are far better educated and can make use of ideas to produce better goods. The
production of new ideas and cheaper methods of production is the prime factor leading to economic
progress.
3. Gender inequalities are higher in poor than in rich countries.
4. Life expectancy at birth in rich countries is 78 years whereas 58 years in poor countries.
5. Clean water and good hygiene have reduced morbidity in rich countries while poor countries suffer from
undernourishment and vulnerability to infections. These factors affect cognitive abilities.
6. Education and health together are called human capital.
7. Since the mid-1960s population in poor countries has grown at 2.4% while in rich countries it has been 0.8%.
Rising population need high rate of capital accumulation.
 RICH POOR
Population 1.0 billion 2.3 billion
GDP per capita $30,000 $2100
HDI high Low
Agriculture’s share in GDP 5 25
Population growth rate 0.8 2.4
Rural population 10% of total 70% of total
Life expectancy 78 yrs 58 yrs

 The polarization that separates the rich from the poor world today is a manifestation of two movements
namely virtuous and vicious cycles of poverty.
 VIRTUOUS CYCLE OF POVERTY - increase in mfg capital = increased GDP = increased income for education =
increased production of ideas.
 The flip is VICIOUS CYCLE OF POVERTY also called poverty traps.

 What led to growth in these countries?

 Both human and social capital is required for growth in any economy.
 Suppose over a certain period, real GDP in a country grew due to increased labor participation and
accumulation of human skills and technology.
 When we add all the contributions made by the labor but it turns out to be less than real GDP growth, we
can say that the overall productivity of the assets or the capital has also increased.
 It means more output is produced even when the f-o-p (labor) level remains the same.
 Thus, there has been a general rise in efficiency. This is known as an increase in total factor productivity or
human capital.
 It comes from:
1. More acquisition of knowledge
2. More use of knowledge and technology
3. Improvement in the working of institutions

 For countries where such a rise does not happen, the reasons may be many. One of the reasons may be the
development of institutions which can be termed as social capital.
 Economic historians like Robert Fogel have argued that the rich world is rich because, over the centuries, it
has devised institutions that have enabled people to improve their material conditions of life.
 Efficient policies lead to growth but to design a policy too we need capable institutions.
 The Oxford English Dictionary defines an institution as ‘an established law, custom, usage, or another
element on the political and social life of people’.
 It includes the market structures and an overarching entity called government.
 Corruption remains to be an inevitable part of any institution.
 Corruption and ineffectiveness of institutions leave their imprint on total factor productivity.
 Such intangible but quantifiable factors are called social infrastructure or social capital.

2. DEBRAJ RAY: ECONOMIC DEVELOPMENT

 PROBLEMS WITH MEASUREMENT
 For a very long time, development was measured with the yardstick of GDP. However, in recent decades, this
practice has received a lot of criticism.
 Development is not just about income. It is also about the removal of poverty, improvement in nutritional
levels, increase in life expectancy, and access to sanitation, clean drinking water, and health services.
 These factors form the ‘multidimensional aspect of development’.
 Therefore, we can accept that per capita income does not capture all aspects of development.
 The disparities in income distribution across various countries are enormous, and no amount of fine-tuning
in measurement methods can get rid of the stark inequalities that we live with.
 According to World Development Report, the world produced $24 trillion of output in 1993. About 20% of
this came from low- and middle-income developing countries and these countries housed 85% of the world’s
population at that time.
 Underreporting of income is common in developing countries because of inefficient tax collection systems.
 A far more serious issue comes from the fact that prices for many goods in all countries are not appropriately
reflected in exchange rates. The prices of nontraded goods, such as infrastructure and many services, do not
affect exchange rates.
 GNP measurement, even when it accounts for the exchange-rate problem, uses market prices to compare
apples and oranges; that is, to convert highly disparate goods into a common currency. There may be several
objections to this argument. Not all markets are perfectly competitive; neither are all prices fully flexible.
 It is arguable that although taking a wider and multidimensional view of development is conceptually
correct, per capita GDP still acts as a fairly good proxy for most aspects of development.

 We try to understand two sets of relations here:

1. How do economic attainments like GDP or PCI influence development?
2. How does the distribution of income affect development across various countries?

 HISTORICAL EXPERIENCE
 Over the period 1960–85, the richest 5% of the world’s nations averaged a per capita income that was about
twenty-nine times the corresponding figure for the poorest 5%
 Of greatest interest is the meteoric rise of the East Asian economies: Japan, Korea, Taiwan, Singapore, Hong
Kong, Thailand, Malaysia, Indonesia, and, more recently, China.
 Over the period 1965–90, the PCI of these economies (excluding China) increased at an annual rate of 5.5%.
 In contrast, much of Latin America and sub-Saharan Africa languished during the 1980s.
 The diverse experiences of countries demand an explanation, but no single explanation can account for the
variety of historical experiences.
 However, there are certainly many reasons to think that historically low levels of income may be
advantageous to rapid growth.
1. New technologies are available from the more developed countries at a lower cost
2. It is possible to study the success stories and avoid policies that led to failures in the past.
3. Scarce capital in these countries should display a higher rate of profit, because of the law of diminishing
returns.

 MOBILITY MATRIX
 The observation that several countries have changed relative positions suggests that there are no ultimate
traps to development. At the same time, a history of wealth or poverty does seem to partly foretell future
developments.
 Although there appears to be no evidence that very poor countries are doomed to eternal poverty, there is
some indication that low incomes are very sticky.
 Notice that middle-income countries have far greater mobility than either the poorest or the richest
countries.
 For instance, countries in category 1 (between half the world average and the world average) in 1962 moved
away to “right” and “left”: less than half of them remained where they were in 1962. In stark contrast to this,
over three-quarters of the poorest countries (category 1/4) in 1962 remained where they were, and none of
them went above the world average by 1984. Likewise, fully 95% of the richest countries in 1962 stayed right
where they were in 1984. 8 This is interesting because it suggests that although everything is possible (in
principle), a history of underdevelopment or extreme poverty puts countries at a tremendous disadvantage.

 INCOME DISTRIBUTION IN DEVELOPING COUNTRIES

 It is common see enormous wealth coexisting with great poverty, like on the streets of Bombay, Rio de
Janeiro, Manila, Mexico City, and the other great urban conglomerates of the developing world.


 The figure records the income share of the poorest 40% of the population as well as the income share of the
richest 20% of the population.
 The poorest 40% of the population earn around 15%—perhaps less—of overall income, whereas the richest
20% earn around half of total income.
 There appears to be a tendency for the share of the richest 20% to fall, rather steeply in fact, as we cross the
$8,000 per capita income threshold (1993 PPP).
 However, there is also a distinct tendency for this share to rise early on in the income scale.
 The two trends together suggest, very tentatively indeed, that inequality might rise and then fall as we move
from lower to higher incomes.
 This is the essence of a famous hypothesis owing to Kuznets [1955] that is known as the inverted U (referring
to the shape traced by rising and then falling inequality).
 At very low levels of income, average levels of living are very low, and so it is very difficult to squeeze the
income share of the poorest 40% below a certain minimum. For such countries the income share of the rich,
although high, is nowhere close to the extraordinarily high ratios observed in middle-income countries. This
indicates the possibility that as economic growth proceeds, it initially benefits the richest groups in society
more than proportionately.
 Countries that pursue policies of broad-based access to infrastructure and resources, such as health services
and education, will in all likelihood find that economic growth is distributed relatively equally among the
various groups in society. Countries that neglect these features will show a greater tendency toward
inequality.
 FACES OF UNDERDEVELOPMENT
1. Human development:
 A relatively prosperous country as per GNP may fare poorly on some of the commonsense
indicators of development, such as literacy, access to drinking water, low rates of infant mortality,
life expectancy, and so on.
 Consider the countries of Guatemala and Sri Lanka.

 We can say that the highly unequal distribution of income in Guatemala is responsible, at least in part,
for these differences in some natural yardsticks of development.
 Government policies, such as those concerning education and health, and the public demand for such
policies also play significant roles.

 Index of human development:

 The United Nations Development Programme (UNDP) has published the Human Development Report
since 1990 to coalesce some of the indicators that we have been discussing into a single index, which
is known as the Human Development Index (HDI).
 It is a forerunner is Morris’ “physical quality of life index” (Morris [1979]).
 The HDI has three components as well.
1. The first is life expectancy at birth (this will indirectly reflect infant and child mortality).
2. The second is a measure of educational attainment of the society. It takes a weighted
average of adult literacy (with weight 2/3) and a combination of enrollment rates in primary,
secondary and tertiary education (with weight 1/3).
3. The last component is per capita income, which is adjusted somewhat after a threshold
(around $5,000 in PPP dollars, 1992) is crossed.
 The advantage of a composite index is its simplicity and, of course, its political power.
 The HDI creates, for each country, a final number that takes a value somewhere between 0 and 1.
 The number is to be (tentatively) interpreted as the “fraction of ultimate development” that has been
achieved by the country in question.
 Although such comparisons of ratios simply do not make sense, the rankings generated by the HDI are
of some interest because they illustrate how a relatively high-income country can fare so badly in
meeting basic socioeconomic goals that its HDI index falls behind that of a relatively poor country.

 Per capita income and human development

 The per capita income and the equality of its distribution, does not serve as a unilateral guarantee of
success in “human development”.
 To show this we can collect data on per capita income as well as on some other facet of development
that we might be interested in, and then connect the two by means of a scatter diagram.
 We chose three indicators of development that are of interest: life expectancy at birth, the infant
mortality rate, and the adult literacy rate. Then we plot the relationship between these variables and
per capita income. Each of these diagrams has a cross that is drawn at the average values of the data
in that sample.
 The idea of the diagram is to check the correlation between the two variables concerned.
 STRUCTURAL FEATURES FOR DEVELOPMENT
1. Demographic
i) Very poor countries are characterized by both high birth rates and high death rates.
ii) As development proceeds, death rates plummet downward. Often, birth rates remain high,
before they finally follow the death rates on their downward course.
iii) In the process, a gap opens up (albeit temporarily) between the birth and death rates. This leads
to high population growth in developing countries.
iv) High population growth has two effects.
i. It means that overall income must grow faster to keep per capita growth at reasonable
levels.
ii. A second effect is that the overall population is quite young. There are many untoward
consequences of an abnormally young population, and these include poverty, child labor,
and low education.

2. Occupational
i) Agriculture accounts for a significant fraction of production in developing countries.
ii) For the poorest forty-five countries for which the World Bank publishes data, called the low-
income countries, the average proportion of output from agriculture is close to 30%, for middle-
income countries, it is around 20% and for economically developed countries it is around 1–7%.
iii) For the low-income category, 72% of labor force belonged to rural areas and for middle-income
countries the share is 60%. The contrast with developed countries is again apparent, where close
to 80% of the labor force is urbanized.

3. Rapid rural-urban migration

i) They are an outcome of both the “push” from agriculture, because of extreme poverty and
growing landlessness, and the perceived “pull” of the urban sector reinforced by a variety of
factors, such as high wages and worker protections offered in the organized urban sectors.
ii) Urban growth was simply double (3.9%) as compared to the overall population growth for the
low income countries (2%) , which suggest a huge amount of migration to these urban areas.
iii) An unusually large fraction of the population in developing countries is in the tertiary or
“services” sector.
iv) At a higher level of income, there is a high demand for services: banking, tourism, restaurants,
and travel. Therefore, developed countries allocate a large fraction of their non-agricultural labor
force to the services sector.
v) This unorganized or informal sector is the home of last resort—the shelter for the millions of
migrants who have made their way to the cities from the rural sector.

4. International trade
i) By and large, all countries, rich and poor, are significantly involved in international trade.
ii) Developing countries are often exporters of primary products. Raw materials, cash crops,
Textiles, light manufactured items and sometimes food are major export items.
iii) In contrast, the bulk of exports from developed countries is in the category of manufactured
goods, ranging from capital goods to consumer durables.
iv) The reason behind such a division of goods for trade is comparative advantage, which states that
countries specialize in the export of commodities in which they have a relative cost advantage in
production.
v) An increase in the terms of trade augers well for the trading prospects of that country, whereas a
decline suggests the opposite.
vi) Primary exports may underlie such a phenomenon as they are subject to large fluctuations in
world prices, and this creates instability in export earnings.
vii) This suggests that poor countries are more likely than richer ones to face a decline in their terms
of trade.
3. AUGUS DEATON: THE GREAT ESCAPE

This book tells the story of the Great Escape, the benefits to mankind that it brought, and how it was responsible for
today’s unequal world. It also explains what we need to do—or not to do—to help those who are still trapped in
deprivation.

 HEALTH
 Health is not just a matter of being alive, and living a long time, but of living in good health.
 A girl born in the United States today can expect to live for more than 80 years. This is a remarkable change
from the situation of her great-grandmother, born in 1910, say, who had a life expectancy at birth of 54 years.
 Even in China and India (which in 2005 contained between them more than a third of the world’s people and
almost half of the world’s poorest people), newborns today can expect to live for 64 years (India) and 73 years
(China.)
 Bad though these numbers are, they are much better than those a few decades ago: even in the worst places,
where nothing else seems to go right, the chances of dying have been falling.

 LIFE EXPECTANCY AND INCOME

 Preston’s picture, updated to 2010, is redrawn in Figure 1; it shows life expectancy and income around the
world.
 Each country is shown as a circle, and the areas of the circles are proportional to population size.


 Health and wealth are two of the most important components of well-being, and the graph shows that they
generally (although not inevitably) go together.
 The huge circles in the middle of the plot are China and India, while the considerably smaller but still large
circle at the top right is the United States.
 The curve that runs from bottom left to top right illustrates the general relation between life expectancy and
national income, rising rapidly among the low-income countries and then fattening out among the rich, long-
lived countries.
 Luxembourg and the tiny Chinese peninsula of Macau, now the world’s largest gambling casino are excluded,
along with Qatar and the United Arab Emirates, because they had the world’s highest levels of GDP per head
in 2010.
 An important feature of the graph is the “hinge point” near China where the curve begins to fatten. The hinge
point marks the epidemiological transition.
 For countries to the left of the transition, infectious diseases are important causes of death, and many of the
deaths are among children so in the poorest countries, about half of all deaths are of children under the age of
 After the transition, as we move to the richer countries, child deaths become quite uncommon, and most
deaths are of old people, who die not from infectious disease but from chronic diseases, the most important of
which are heart disease (or more broadly, cardiovascular disease, including stroke) and cancer.
 It is sometimes claimed that there is no relation between income and life expectancy among the better-off
countries of the world.

 Figure 2, which uses the same data as Figure 1, gives a very different impression.
 To a first approximation, the slope of the line is the same on the right as on the left of the picture, although the
relationship at the top is a little flatter—largely driven by the poor performance of the United States—and
among the very richest countries, the lack of a relationship is still apparent.
 Among the countries that do much worse than might be expected given their levels of income, some have been
affected by wars.
 Others are suffering from the HIV/AIDS epidemic, which in several countries has taken back all or most of the
gains in life expectancy achieved since World War II.
 For those countries, the disease has shifted them down and away from the curve.
 But the same factor—extreme inequality of income—is also partly responsible for South Africa’s position, which
has been below the curve for many years, long before the advent of HIV/AIDS.
 Russia is another of the large poor performers. It is a country where life expectancy decreased rapidly after the
fall of communism.

 Figure 3 plots the data and two curves, one repeating the 2010 curve and one for 1960. Countries in 1960 are
shown with lighter shading to distinguish them from countries in 2010.
 Almost all of the darker circles are above and to the right of the lighter circles; since 1960, nearly all countries
have become richer and their residents longer lived.
 Robert Fogel has written about what he calls the escape from hunger and premature death. The Great Escape
has continued apace throughout the world since World War II.
 Despite overall progress, there have been catastrophes. One of the worst in human history was China’s “Great
Leap Forward” in 1958–61 when deeply misguided industrialization and food-procurement policies led to the
deaths of around thirty-five million people from starvation and prevented the births of perhaps forty million
more.
  The HIV/AIDS epidemic has been another great disaster. As we have already seen, it has raised mortality and
dramatically decreased life expectancy in many countries in sub-Saharan Africa.
 Turning away from catastrophes, we can see from Figure 3 not only that countries are getting richer and
healthier, but that the curve linking life expectancy and income is itself moving up over time.
 This upward movement was noted by Preston, who concluded that some systematic factor other than income
must be responsible.
 If income were the most important thing—with other factors, like epidemic disease or country health policies,
more or less without any pattern—then countries would move up or down (mostly up) the curve.
 Even with no change in income, life expectancy improved over time, and did so the world over, at low and high-
income levels.
 Preston attributed this upward movement of the curve to improvements in scientific and medical knowledge,
or at least to the greater practical implementation of existing scientific and medical knowledge.

 GLOBAL POVERTY GLOBAL INEQUALITY

 Is everyone benefitting or is it only the already rich who made the Great Escape, leaving the less fortunate
behind?
 One way to answer the question is to see whether initially poor countries have grown faster than initially rich
countries, something that must happen if the gaps between them are to narrow.
 If it is progress in science and practical knowledge that makes economic growth possible, then we might expect
country living standards to move closer to one another, at least if the knowledge and techniques can easily be
transferred from one country to another.


 Each point in the figure is a country and shows its average per capita growth rate on the vertical axis against its
initial GDP per person on the horizontal axis.
 Figure 5, which was first drawn in this way by economist Stanley Fischer, is identical to Figure 4, but each
country is now plotted with a circle whose area is proportional to its population in the starting year.
 The dark circles take 1960 as the starting point and look at growth from 1960 to 2010, while the lighter circles
start from 1970 and show growth from 1970 to 2010.
 The two largest countries in the world, China and India, have grown very rapidly over the past half-century.
 And because there are so many people in both, their growth has brought the average incomes of more than
two billion people from the bottom of the world income distribution— where they began—to somewhere
much closer to the middle—where they are now.
 Figure 5 would show that the living standards of all the people in the world have drawn closer together,
although there has been no narrowing of the average living standards of countries.
 The rapid growth of China and India has not only enabled hundreds of millions of the world’s citizens to make
the Great Escape but made the world a more equal place. If we care about people, rather than countries, the
optimistic picture in Figure 5, not the pessimistic picture in Figure 4, is the correct one.

PRANAB BARDHAN: AWAKENING GIANTS

INTER-RELATIONSHIP BETWEEN DEMOCRACY AND DEVELOPMENT – the positive and negative impact of
democracy on governance
  We refer to China and India while addressing the issues involving two-way inter-relationship between
democracy and development.
 Democracy unleashes both positive and negative forces for development.

SOCIAL STRUCTURES

 India
 A heterogenous society riddled with social and economic inequality and conflict, makes it difficult to
implement a collective action for a change that lasts.
 It raises hindrances to long-term investment and reforms, which is exactly what happens in India.
 In India, local democracy and self-governance are still inadequately developed.
 Regular elections at the district level and below are not followed up by effective accountability and the
delivery of essential services and local public goods continues to be dismal.
 In India, the large proportion of the poor in an assertive electorate has not always succeeded in focussing the
attention of the politicians on the sustained implementation of programs to alleviate mass poverty or to
deliver basic services such as education and health care.

 China
 In a homogenous society, like China, leadership can be more decisive and purposeful in pursuit of economic
reform and long-term strategy.
 However, in the absence of institutionalized checks and balances, the government remains fragile.
 The decentralized governance system in China has limited the power of the central government to check on
local officials due to the absence of effective mechanisms of democratic accountability. This has resulted in
environmental damage, land seizures, etc.

ECONOMIC INDICES

 Thus, there are accountability failures in both countries.

 Both countries have made economic progress in recent years but both have severe structural and institutional
problems that will continue to hobble them for many years to come.
 On the financial end, China has a small budget surplus whereas India’s budget deficit is more than 10% of
GDP currently.
 Public debt in India is as high as 75% while it is just 17% in China.
 The financial structure is, however, weaker in China. Indian capital market is much more vigorous with a
generally healthier and more active stock market and less burden of bad loans. Innovative private banks have
begun to energize the whole financial services sector.
 India’s domestic private corporate enterprise in industry and services has been more robust and autonomous
than China. In China, the government now provides very little access to private sector firms to finance new
markets and private capital grows only under the pervasive shadow of the Communist Party.
 China’s future growth will hit the demographic barrier much sooner than India's. Due to ‘demographic
transition’ the working age proportion of the population will peak in the early 2010s whereas the
corresponding peak for India will be reached by the 2030s.
 Another demographic factor is women’s contribution to economic growth in India and the high male to
female ratio in both China and India.
 China is said to be soon running dry in supply of low-skill labor.
 How and where the hundreds of millions of peasants will be absorbed remains a worrisome question in both
China and India. (India’s accretion to labor force each year is same as China).
 The large pool of household savings in China may decline over time due to urbanization and increasing
income disparity. (average saving rate is higher in rural households). This is also because of falling working age
population.
 Policy shifts in China toward technology promotion and high-tech output consumption, major spending on
R&D, etc. sustained the high TFP growth. Indian policy in this regard has been on a smaller scale and less sure-
footed.
  The environmental damage that acts as a drag on effective economic growth and welfare will be larger in
China than India with the environment movement in India being more active as a watchdog.
 The inequality of opportunity is much greater in India than in China.

Does inequality of opportunity matter?

 India
 Social heterogeneity and economic inequality make the social and political environment in India quite
conflict-ridden and it is difficult to build consensus. This makes reforms unpopular in India.
 Economic reforms inevitably cause job disruptions and displacements that raise the level of anxiety among
workers because of the barriers faced by them in land and capital markets, skill acquisition, and in coping
with risks.
 Thus, trade unions are often opposed to privatization and to relaxation of job security mechanisms which
reduces a society’s potential for productive investment, innovation, and human resource development.
 As more and more subordinate social groups become more politically important, the heterogeneity
increases.
 When the interest groups are fragmented, state policies get buffeted and many steps toward economic
reform are likely to be halting and hesitant.
 But at the same time, such fragmentation gives the state more autonomy because they don’t have to march
to the tunes of one dominant interest group and thus some of the resistance to the reform can be diffused.
 Indian political system sometimes has a clever way of introducing reforms known as ‘reforms by stealth’.
 It means that the accommodations arranged through informal political networks mediate conflicts between
winners and losers.
 Market reforms are also resisted by environmentalists as they become identified with uprooting the
livelihoods of little people and despoliation of the environment.
 There are two kinds of collective action problems in India. One relates to sharing the cost of bringing about
change (‘free-rider problem’) and other related to sharing the benefits (‘bargaining problem’).
 The Indian elite are more fragmented than the elite in most other countries which makes it more difficult for
the group to agree on a goal and coordinate their actions.
 They opt for the ‘bird in hand’ short run subsidies which increases fiscal burden. This is the general problem of
collective action.
 Infrastructure is a crucial bottleneck for Indian economic growth and requires a lot of public investment which
may require the elite giving up government subsidies or benefits of underpriced public goods and services.
However, this has been difficult to achieve in India and takes the form of another collective action problem.

 China
 Mounting inequality has been a cause of concern in China as well. A major component of Chinese inequality is
the rural-urban disparity which is considered to be ‘too large’.
 The more urban and educated people show more distrust of the system. Yet rural respondents seem to report
more gains from the reforms and less distrust of the system as compared to their urban counterparts.
 There is rural unrest indeed but the potential of unrest is more alarming in the urban areas. With a more
internet-connected and vocal middle class and a rise in unemployment, urban unrest may be difficult to
contain.
 With farmers, land requisitions are a greater issue as compared to inequality. It is reported that by 2006 more
than 60 million farmers had lost their land to demands of commercialisation without adequate compensation.

Why China has less inequality than India?

 In a homogenous society, like China, leadership can be more decisive and purposeful in pursuit of economic
reform and long-term strategy.
 When China started the reform process, it was carefully orchestrated with individual cultivation rights, dual-
track pricing, rural industrialization, and decentralization which led to very few losers in the reform process.
  In later years, as the commercialization of firms prevailed, workers were laid off and as the ‘iron rice bowl’ of
social protection for employees was broken, there emerged many losers.
 However, by that time the fast-growing economy was able to absorb and compensate many of the losers.
 In recent years, forcible land recquisition and pollution have created many new losers but the opposition is
scattered for now.
 China has had some kind of safety net largely made possible by an egalitarian distribution of land cultivation
rights in 1978-79. In most parts of India, there is no similar rural safety net in India.
 Resistance to globalization is generally stronger in countries where social safety nets are weaker.
 Indian economic reforms have not produced as many losers yet. Most of the reforms have been in the market
and private sector without many changes in the existing labor laws that provide job security to those already
employed.

Democracy v/s authority

 China’s dramatic success has revived a hoary of a myth that particularly in the initial stages of economic
development, authoritarianism delivers much more than democracy.
 But the relationship between authoritarianism and development is not simple.
 Authoritarianism is neither nor sufficient reason for economic development. It is demonstrated by the
recent successful developments in Costa Rica, Botswana, and now India.

 Advantages of democracy:
1. Democracies are better to avoid catastrophic mistakes and they have greater healing power in difficult
times. India’s democratic pluralism has provided means of containing many social conflicts unlike the
monolithic state in China.
2. Some degree of tolerance for diversity and heterogeneity has always been a safety valve in Indian
society. On the other hand, Chinese high culture and tradition has not given much scope to pluralism and
diversity for many centuries.
3. Democracies experience more intense pressure to share the benefits of development with the people
and to reduce the costs of dislocation thus making development more sustainable.
4. There are more political opportunities to mitigate social inequalities that act as barriers to social and
economic stability.
5. Democratic open societies provide better environment for development of information and related
technologies. Censorship and state control of information, as in China, inhibites people’s imaginativeness
and inventiveness.

 Disadvantages of democracy:
1. Competitive populism may hurt long-term investment like public infrastructure. It makes it difficult to
charge user fees for roads, electricity and carry out policy experimentation of the kind Chinese have
excelled at throughout their reform process.
2. Electoral politics, particularly in a weak society, can also give rise to clientelism in which there is quid pro
quo between voter support and official disbursement of benefits.
3. In a democracy like India, legislative process is often relegated a second order of importance. Important
bills are passed without much discussion and issues are not resolved in legislative deliberations. Rather,
they get trapped in rhetorical intransigence and street theatre, leading to decision deadlocks.
4. When democracy takes the form of popular mobilization, as in India, when the education level remains
low, civic associations become weak and oppositions easily get away with being irresponsible. It gives
political opportunists a lot of leeway to divide the electorate based on regional or religious lines.

Why do poor people who are so assertive when the election comes often seem not to punish ineffective
politicians?
  Common people consider poverty to be complex phenomenon and ascribe only limited responsibility to
the government in this matter.
 The measures of government performance is often noisy and well marketed, particularly in a world of
illiteracy, low levels of civic organization, and lack formal communication on public issues.
 Besides, at any given time in India an election somewhere is not far off.
 During elections, short-term calculation dominates and populist quick fixes rather than sustainable
improvements in structural conditions become the order of the day.
 Delivery of private and short-run benefits takes priority over the delivery of public services and long-term
investments in infrastructural facilities.
 Decentralization of governance for devolution of power was meant to increase accountability of service
bureaucracy which largely remains ineffective.
 A large number of local governments simply do not have adequate funds or appropriately delegated
functions or competent functionaries.

 In most parts of northern India, there seems to be a preoccupation with symbolic victories among the
emerging lower-caste political groups.
 Upper-caste opposition to social organization is also somewhat stronger in northern India as the upper
caste constitutes a larger percentage of the population.
 So new political victories of lower castes in northern India get celebrated in the form of defiant symbols of
social redemption rather than committed attempts at changing the economic structure of deprivation.
 Unlike northern India, in southern India, such changes took place several decades earlier and there has been
much more effective performance in the matter of public expenditures on pro-poor projects such as health,
education, housing, etc.

 Although the electorate does not seem to penalize politicians for their endemic poverty, they are less
forgiving when their economic condition is hit, for ex – a high degree of inflation sensitivity.
 The poor tend to make the gov responsible for inflation and expect to stop it even at the expense of cutting
budgetary programs on infrastructure or social services that would have helped them in the long run.

Style and nature of governance

 China
 In China there is more decisive policy initiative and execution than in India because collective-action
problems in goal formulation and policy enforcement are less severe in China.
 In India, any major decision is preceded by endless discussion, protests, breast-beating street antics, loud
agitation, etc. But for the same reason, executive authority is more legitimate in India.
 In recent years, the political leadership in China has been more technocratic and professional than in
India.
 Regulatory effectiveness in commercial transactions is also better in China than in India.
 Nepotism in state appointments has gone further in China.
 Corruption prevails in both countries but corruption in China is qualitatively different from that in India.
1. In China the line of authority is well-defined, unlike in India where even after paying bribes, there is
no surety that the job will get done.
2. Official rewards and promotions are more directly linked to local economic performance in China
than in India, which is why the officials do not lose sight of performance records.
3. As elections become expensive, politicians in India have to be on the lookout to collect serious
money which is not required in China
4. There are more institutionalized efforts to keep a check on corruption in India, for ex- The Right to
Information Act
 In China decentralization has been successful but it has increased regional inequalities with richer coastal
regions having better ability to fund social services.
 The system is still sufficiently fiscally decentralized with large number of unfunded mandates and social
obligations for the local government while the better-off regions can afford superior services.
 The tensions of fiscal federalism is increasing in India too as better-performing state governments openly
protest for large redistributive transfers to laggard states.

 India
 The diminishing hold of elite control and the welcome expansion of democracy to reach the lower rungs of
the social hierarchy has affected the whole fabric of governance.
 Some of the new social groups coming to power are nonchalant in suggesting that the elite have looted them
for long and now it is their turn to do so.
 In the process they trample on individual rights and procedural aspects of democracy.
 Kaviraj explained it as a Tocquevillian paradox, ‘As democratic society has slowly emerged with the spread
of political equality, it has made the functioning of democratic government more difficult.’
 This is a part of a fundamental tension between the participatory and procedural aspects of democracy.
 The participatory aspect of democracy and the all-consuming emphasis on electoral mobilization make
people look away from politicians’ rampant procedural violations and generates a culture of impunity.
 However, the independent judiciary, the EC functioning with a degree of insulation helps to keep a check.
This institutional insulation is much weaker in China.
 The media and NGO acts as watchdogs in India
 The Party has started to experimentally introduce some form of intraparty democracy at lower levels from
which the Indian government has now deviated. Young and ambitious politicians finding their path upwards
are inclined to go and form their own party. This has also resulted in a lot of political fragmentation in India.