Sunday, April 29, 2007

A $ a day!

Courtesy : The economist

This month the World Bank announced that 986m people lived on the equivalent of less than one dollar a day in 2004—the first time it has counted fewer than 1 billion people in such a parlous state. The bank's definition of extreme poverty is stark, simple and even alliterative. In the latest issue of the Journal of Economic Perspectives, Abhijit Banerjee and Esther Duflo, of the Massachusetts Institute of Technology, describe it as a rhetorical masterstroke. But is it also entirely arbitrary? And how do the poor subsist on such a meagre amount?

When the bank decided to count the world's poor for its 1990 World Development Report, it did not take it upon itself to define them anew. Instead, a group of economists led by Martin Ravallion gathered together 33 national poverty lines that were already knocking about. India's line, for example, defined the poor as those who ate less than 2,250 calories a day. By its reckoning, this requirement would be met by the typical rural Indian spending 15 rupees a month at 1960-61 prices.

Mr Ravallion and his team converted rupees, pesos and rupiah into a common unit of purchasing power. Someone spending 15 rupees in rural India in 1960 had about the same command over goods and services as an American spending $23.14 a month in 1985. But India's benchmark was unusually abstemious. Half a dozen other poverty lines (for Indonesia, Bangladesh, Nepal, Kenya, Tanzania and Morocco) all fell within a few cents of a more generous allowance of $31 a month.

With that observation, the dollar-a-day concept was born, to appear in countless declarations, laments and pleas ever since. Halving the share of people who live on less than a dollar a day is, for example, the first of the Millennium Development Goals to which 189 countries subscribed in September 2000. (The concept's rhetorical appeal was diminished only a little when Mr Ravallion updated the threshold to $1.08 at 1993 prices, which is worth about $1.53 in today's money.)

Cigarettes and alcohol
But what does this line mean to the people who fall below it? Mr Banerjee and Ms Duflo describe the "economic lives" of the poor, drawing on 13 household surveys from Côte d'Ivoire to Mexico. The two surveys from India—undertaken in Udaipur's farms and Hyderabad's slums—they carried out themselves.

Vikram Seth, an economist before he was a poet, has described the "dreary pillage of privacy" these surveys entail. In 2001, for example, bank researchers in Timor-Leste diligently recorded whether a household bathed under a shower or in the river; used a flush toilet or a bucket; built their home from brick or rattan, and so forth. They also asked them to recall what they had eaten, drunk, chewed or smoked over the previous week: cassava or shrimp? Mung beans or papaya? Clove cigarettes or betel nuts? Beer or palm wine?

A dollar a day would seem to leave little room for choice or discretion. Hunger is surely the most binding of constraints. And yet these pillages of privacy show that the poor do make choices. They also suggest they are not always the best ones.

The poor do not complain much, the two authors note. (Only 9% of people in their Udaipur survey say their life makes them generally unhappy.) But they have a lot to complain about. Beset by hunger and illness, many are scrawny (65% of adult men in Udaipur are underweight), over half are anaemic, and about a seventh suffer from impaired eyesight. Many had to go without food on at least one day in the previous year.

And yet they do not eat as much as they could. According to Mr Banerjee and Ms Duflo, the typical poor household in Udaipur could spend up to 30% more on food than it does, if only it stopped devoting money to alcohol, tobacco and festivals. That last item, which includes weddings, funerals and religious events, typically accounts for about a tenth of the household's budget. This spending might be motivated by escapism—the poor have a lot to escape—or perhaps by social emulation. Even those in absolute poverty care about their relative standing.

The authors ponder not just how the poor spend their money but also how they make it. They describe the hard-pressed women of the Indian city of Guntur, who line the road each morning, mixing dosas over a kerosene stove for the price of a rupee. By 10 o'clock the women have turned their hands variously to making pickles, embroidering saris or collecting rubbish.
The poor, whether smallholders or petty entrepreneurs, lack scale and specialisation, Mr Banerjee and Ms Duflo point out. The farmers of Udaipur cultivate the land they own, no more, no less, but only a fifth rely on their plots as their chief source of income. In West Bengal, a poor household will typically have three breadwinners doing seven occupations between them.
It is almost an "item of faith" among development economists that the poor act rationally, however straitened their circumstances. If their undertakings are too small, or their efforts too thinly spread, to be efficient, it is not because they have miscalculated, but because the markets for land, credit or insurance have failed them. As one economist argued in 1993, "More than 40 years of research...should at last have laid to rest the thought that such folk may not know where their real interests lie."

But just such a thought is stirring again in the minds of Mr Banerjee and Ms Duflo. Why, for example, do more Ghanaian farmers not cultivate pineapples, which would fetch returns of 250-300% by some estimates? Why do so few farmers in western Kenya dress their fields with fertiliser, even after the benefits have been demonstrated to them?

"One senses a reluctance of poor people to commit themselves psychologically to a project of making more money," the authors write. When you live on a dollar a day it may be painful to confront your circumstances too squarely, or even to aspire to better things. The "great redeeming feature of poverty," George Orwell wrote after his excursions in the social gutters of Paris and London, is "the fact that it annihilates the future".

Friday, April 20, 2007

Strong rupee

- Chellamuthu Kuppusamy

There was a remark made in the previous post on Chidamaram's book.//Why is the government increasing the interest rate to curb liquidity and at the same time inject money by heavily buying dollar to maintain exchange rate? Are the FM and RBI of the view that Indian economy is not resilient enough to absorb strong rupee? //

This statement has beome obsolete within days. Rupee has peaked to its 9 year high. It is alledged that RBI has pulled back from obsorbing excess dollat floating in the market. Government has apparently decide to keep aside economy aside & cool down inflation. does exchange rate find its relation to inflation?

We have seen multiple interest rate hikes in the recent past to curb liquidity & thus arresting inflation. A good move indeed. But, there is other side effects too. Due to relatively attrative interest rates, foreign money - read dollar - flows towards India. This raises the demand for rupee and brings down the demand for dollar making exchange rate climbe (say from 44 to 42). RBI normally buys such incoming dollar and makes an attempt to maintain greenback demand constant, meaning weaker rupee. Having a stroung rupee is not good for our exports and eonomy as a whole. That is precisely the comment made in the book review.

When RBI buys dollar and injects more rupee into the system, it adds to liquidity and subsequently giving raise to inflation. The oroginal goal is defeated? May be, true. It is duty of the government to maintain moderate inflation as well as exchange rate. But, managing ecconomy is not that simple. They always try to strike a balance.

Having said that, RBI not going ahead in its normal act of sucking dollar is not a surprise. State elections in the north is onsidered to be a reason. One cant help thining that inflation is more of a politivcal factor than eonomic one at this junccture. Otherwise there is no need to let rupee gain strength. I dont have any reason to believe that FM and RBI are confident that Indian economy is resilient enough to absorb strong rupee?

Wednesday, April 11, 2007

A view from outside - P.Chidambaram

- Chellamuthu Kuppusamy

I am writing this from the city of Columbus in central Ohio, the United States. A coworker of mine shares an attention-grabbing information. It is about Indian finance minister P.Chidambaram.

He could not recollect exactly. It might be 2002 or 03. Mr.Chidambaram was out of power, even out of congress party. He was invited to a function in Columbus, organized by an Indian community. Political personalities attending such gatherings, while out of office, is not uncommon. But what is fascinating about this Harvard educated lawyer cum economist is his simplicity.

Former finance minister (at that time) flew all the way from India in economy class. Three and a half hours drive from Detroit was adequate for his commute to Columbus. He had not demanded another domestic flight, even after long journey in the sky. Story did not end there. He stayed with an NRI at his residence & surprisingly did not insist for hotel accommodation.

After the talk in the meeting, folks had offered him to take around the city. He refused and held that he had to write for Indian Express. Indeed, he went ahead and penned down thousand plus word column, despite getting intermittent calls from international bodies like world bank etc. That shows the level of discipline this market savvy politician is made up with. He wrote a column every week in Indian Express between August 2002 and March 2004, except two weeks.

All those articles are collected and tied to be named as ‘A view from outside’, a 372 page book, not to mention being priced at Rs.500. I am making a simple attempt to gaze through that work via a common man’s eyes.

He starts his first article on a positive note. “India is often described as a poor country. I disagree. It is a country where a large proportion of its people is poor.” He talks high that India can grow much much faster than rest of the world. But, growth is a function of investment. He augurs the need to eradicate all stumble blocks hindering productive investment. More emphasis can be seen towards public spending on infrastructure. We join our current FM in pressing the need to accelerate public investment and removing roadblocks for private investment.

At many instances he proves to be a smart politician, principally when it comes to criticizing then ruling BJP and it’s Hindutva policies.

Many of Chidambaram’s remarks on BJP’s term at the center applies now as well. Finance minister might like to forget these statements. He terms Vajpayee
“He presides over the most fractious coalition government ever to rule India. Not a day passes without one party or the other vehemently criticizing the government”

Should we forget the current government at the center flexing itself for every peril from left allies and regional powers like DMK? If one has mind that can be mould just by reading some articulate writing, it would be easy to get a feeling that it was only BJP that had differences in the government. Differences and compromises are not the rule of the game and accepted norm in a coalition government. Even current DMK government in Tamil Nadu faces unprecedented (is there a better word) pressure from its allies, including Chidambaram’s party itself for the first time.

One should have no doubts on his vision and economic acumen. Growth of nation and the living standard of her citizen is characterized by the per-capita consumption. BJP’s inability to push hard power sector reforms, initiate & even achieve preset targets in power generation capacity addition is indicated at various instances. We ought agree with FM on this matter. We are pretty pleased with government’s ambitious target of electrifying every home by 2012, which is no longer a paper target.

He touches upon agriculture, albeit them being short. Even he acknowledges.
“there were only three pieces on agriculture, but I was able to identify the real issues plaguing that sector: low investment, inadequate credit and poor farm-gate prices. These problems persist, but a beginning has been made to correct the situation.”

Book advocates for simple and transparent rules to be incorporated into our administrative system. Author even makes an attempt to touch the roots of corruption in our system and reasons why it stays undiminished. License raj obligated business leaders to be nice with ruler to receive favor, which is percolates down the pyramid to every taluk office and office boy, not to talk of clerks and officers.

Chidambaram also questions ourselves on the important issue of Kashmir. Our governments, for Chidambaram it is more of BJP than congress, have been very comfortable to point fingers towards Pakistan for every unrest in India. It is no different from Bush's 'war against terror' and Sadam Hussain being found guilty for every crisis US faces.

Our failure to embrace Kashmir and its people into national mainstream is cited. Dissident Panjabi’s are now in every walk of life. We have accommodated them on the national dais. Even DMK wanted separate nation and gave up that idea. It is a classical example on how a state (and political dynasties) can prosper through participation and involvement. India’s failure to handhold north eastern states is a symbol of disgrace.

‘A view from outside’ is predominantly economic outlook of this free market preacher. He has quoted lot numbers through the length and breadth of this work. I shall get into those details. Chidambaram’s advocate brain makes sure that he puts forward his views, criticism and comments with relevant statistics. That is some effort for a politician in Indian. No wonder why prime minister Dr.Manmohan Singh praises his finance minister and asks opposition to use their otherwise gratis time effectively.

He goes on talking on many issues ranging from child labor, honesty in politics, low tax – high compliance, fiscal deficit, usage of forex reserves, women empowerment, WTO, Kaveri water problem, tourism industry, budgets, disinvestment, FDI, tourism industry, LTTE and the list goes on. He proves with no doubt that he was Rajiv Gandhi’s pet. Rajiv had a dream and wanted to change the lives of millions. Agreed! But, Chidambaram’s efforts on Bofors are very explicit. Even he proclaims to have taken Vajpayee, a wordsmith himself, by surprise with his statement on this historic arms deal racket.

It is my honest belief that this articulate politician with his ‘scholar’ hat has done a fantastic work using his free time. I would say, “Its a must read”, if you don’t ask back, “Are his criticism hold good for his current governance & government?”

I want to add another question too. Why is the government increasing the interest rate to curb liquidity and at the same time inject money by heavily buying dollar to maintain exchange rate? Are the FM and RBI of the view that Indian economy is not resilient enough to absorb strong rupee?