Economic Survey Volume 1 Chapter 5 (Latest)

ECONOMIC SURVEY   

VOLUME I

CHAPTER -5

 

IS THERE A “LATE CONVERGENCE STALL” IN ECONOMIC DEVELOPMENT? CAN INDIA ESCAPE IT?

THEME

The chapter discusses the convergence process experienced by the poorer countries .It brings into focus the fear of “late convergence stall” along with its associated reasons. It also lists ways through which India can avoid it and maintain a dynamic and sustainable growth trajectory.

INTRODUCTION

  • In last few decades, the global “bads” –war, violence, deprivation and poverty- are at unprecedentedly low levels while the global “goods” – standards of living, access to essential services, and material wellbeing have improved drastically.
  • Major driver of these developments- economic convergence– the process of poorer countries “catching-up” with richer countries and closing gaps in standards of living.
  • Since the mid-1980s, the process of catch-up has broadened, as the number of poor countries growing faster than advanced economies has substantially increased. Also, the rate of catch-up has also accelerated- so it has been “convergence with a vengeance”.

  • India’s track:

Year

Status

Per capita income(% of US)

Per capita income (in 2011 PPP terms )

1960

Low income

6

$1033

2008

Lower middle income

12

$6538

Mid to late 2020s

Upper middle income

Cross 15

Expected if per capita income  grows annually at 6.5%

  • “Divergence big time”- term used for countries not catching up at all, growing more slowly than richer countries.

Survey observes four categories of economies:

Observations:

  • In two periods after 1997, there is no middle income trap in any period and
  • The convergence process actually accelerating after 2008. Growth rate pace – poorest>lower middle income > upper middle income> richest.

Fear of “late convergence stall”

There are fears that slowdown could be due to “late convergence stall” – countries that joined the process of convergence after the Global Financial Crisis of 2008 possibly due to four headwinds that were absent in the case of early convergers like Japan and Korea.

Rate of growth before the decade and after the decade of GFC:

 

Categories

Before (in %)

After (in %)

Rate of decline

World

4.3

2.9

1.4

Advanced

3.6

1.4

2.2

Lower Middle Income

4.9

4.2

0.7

Upper Middle Income

4.5

3.3

1.2

Underlying these slowdowns are following major developments that could not only damage growth over the long run but eventually even slow down the process of convergence- THE FOUR HEADWINDS (HORSEMEN)

  1. HYPERGLOBALISATION REPUDIATION
  • Early convergers benefitted from the process of rapid globalization reflected in the dramatic increases in the world trade-GDP ratio. But developing countries now face a very different global trading environment from their predecessors.
  • Backlash in advanced countries due to globalization reflected in the world trade-GDP ratios since 2011. Politics in advanced countries is moving defacto in the direction of seeking and forcing lower trade-GDP ratios as convergence process makes distribution of output more disbursed.
  • Impact of hyperglobalization: recourse to the gravity model of trade.
  • For few countries such as India, there need not be such an external constraint on growth going forward, but for lower and middle income countries as a whole there may well be.

NOTE: During the period of hyperglobalization world trade-GDP rose by about 14 percentage points, from about 17 percent of world GDP to about 31 percent.

2. THWARTED STRUCTURAL TRANSFORMATION: Good growth and sustainable growth

  • Two kinds of structural transformations for successful development:

Shift of resources from low productivity to high productivity

Larger share of resources devoted to sectors that have potential for rapid productivity growth

  • However, in many cases, there is “thwarted structural transformation”- shift from informal/low productivity sectors to ones that are marginally less informal/more productive.
  • The manufacturing sector is a critically important sector for ensuring transformation. That is why, premature deindustrialization is a cause of concern.
  • Overall productivity growth is decomposed into “good” and “less good” growth.
  • Two features: leftward shift in the share of good growth capturing more general version of the premature deindustrialization point and positive relation between growth and good growth has weakened over time.
  • Various outliers: India and China as China’s good growth persists while India’s share of the same declined

3. HUMAN CAPITAL REGRESSION

  • In Early convergence, alignment of human capital endowment with the sector associated with structural transformation, spread dynamism to the rest of the economy – A case of growth and structural transformation based on comparative advantage (the so called Lewisian transformation- from farm to factory).
  • However current situation going to be tough for late convergers as-
    • They failed to provide even basic education necessary for some structural transformation.
    • Human capital frontier for the new structural transformation has shifted making the transformation even costlier as advents in technology would require skilled human capital which would have greater adaptability and ability to learn continually.
  • Thus, growth will be based less on comparative advantage and more on some absolute human capital attainment.

 

  • Wider educational attainment gaps between lower income countries and advanced economies Persistence or widening of this gap might prove transformation for late convergers even more difficult.
  • India’s human capital challenge:
    • Learning poverty count – between 40 and 50%
    • Learning poverty gap – 25% for reading and 23% (approx.) for Math

4. CLIMATE CHANGE-INDUCED AGRICULTURAL STRESS

  • For the late convergers, agricultural productivity is critical not just for feeding people but for ensuring human capital accumulation in those who move from agriculture to modern sectors.
  • Divergence on agricultural productivity: growth rates for richer countries have been consistently greater than for developing countries, while for the poorest, these growth rates have declined post-GFC.
  • Thus, agriculture could yet come back to haunt the structural transformation fortunes of the late convergers.
  • Indian agricultural productivity growth has been stagnant averaging roughly 3% over the last 30 years because Indian agriculture is vulnerable to temperature increase and is dependent on precipitation. If this situation continues then farmer revenues could decline by 20-25% in non irrigated areas.

LESSONS FOR INDIA

India’s growth has occurred with limited transfer of labor resources from low productivity to high productivity and dynamic sectors and relatively modest agricultural growth. Risk for India is that its resources will move from low productivity, informal sectors to other sectors that are marginally less formal and only marginally more productive.

Way forward:

  • Rapidly improving human capital – healthy individuals, including all women with the basic education to continually learn and adapt.
  • Rapidly improving agricultural productivity– against the headwinds of climate change and water scarcity.
  • Hyperglobalization repudiation must also recede to create a favorable external climate to sustain rapid growth.
  • There is no late converger stall for India as yet but it would be wise to act to head it off.