Wednesday, August 12, 2015

Perhaps India can take a few pages out of Pakistan’s poverty reduction playbook

I recently came across a blog titled ‘What’s Really Going on with income trends in India and Pakistan’.  The blog was written by a Pakistani economist working in the Washington office of the World Bank. I have known the author and have great respect for him as an economist and as a person.  However, it pains me to see that in this blog at least, excessive generalisations and selective analysis is presented to promote a political agenda.

Nobody can deny the fact that for over a decade, India’s economy has been doing very well.  In comparison, Pakistan is having severe difficulties; partly due to internal reasons and partly imposed by the geo-political situation in the region. In my opinion, Pakistan could be well served by taking a few pages out of India’s economic management playbook.

Yet, when the author tried to compare the trends of per-capita incomes in both the countries, he seemed baffled to discover that as per the Exchange Rate Parity (ERP), Pakistan is not doing as bad in comparison to India as it should have been doing in his opinion.

Figure 1. Headline GDP per capita of India and Pakistan, 1990-2015 (current US dollars). Photo: World Development Indicators

As per the author,

“What is wrong with this picture? Why is there no difference in average growth between the two countries between 1990 and 2008, when India is supposed to have been on a reforms and high-investment path and Pakistan on a failed-state path.”

Rather than trying to find reasons for this lack of “evidence” to support his hypothesis, he blames it all on the data, and goes hunting for alternative data sources which would support his pre-suppositions, which he finds in terms of per-capita income measured in Purchasing Power Parity (PPP).

Figure 2. GDP per capita of India and Pakistan, 1990-2015 (constant 2011 international dollars). Photo: World Development Indicators

He then tries to convince us that per-capita income measured in PPP is a much better index of economic welfare than that measured in ERP.

“Don’t be misled by ‘headline’ data. Current dollar figures used in the media and in everyday discourse need to be scrutinised and adjusted to get the true picture.”

The author is a very good economist and it is inconceivable that he doesn’t know that superiority of PPP over ERP is not universally true, especially if one or both countries have some ‘administered prices’. In case of administered prices and/or large scale subsidies, per-capita income measured in PPP may even be a poorer indicator of welfare than its ERP counterpart.

We all know that there are a lot of subsidies in India, from food to agricultural inputs, from fuel to credits. These subsidies help in keeping domestic prices low, and hence better PPP.  India spends more than 10 per cent of the Union Government’s budget on subsidies.

On the other hand, Pakistan has eliminated all subsidies except a minor subsidy on wheat.  However, since the commodity price shock of 2007, electricity is also being subsidised.  Still Pakistan spends only three to four per cent of its federal budget on subsidies.

As per the 2015/16 budget, India has allocated equivalent of $ 37 billion for subsidies. In comparison, Pakistan has allocated only $ 1.3 billion. With much higher subsidies, it is no surprise that India does significantly better than Pakistan in PPP terms (than in comparison using ERP). In other words, India’s higher growth in per-capita income measured in PPP terms has been “bought” using taxpayer money.

However, what bothered me most about the content of the blog was how the income story was only half-told.  Going by the title of the blog, the readers expected an attempt by the author to show what really is going on with the income figures in these two countries.  To elaborate, I would like to present two additional charts, similar to the charts presented by the author. Both of the charts use World Bank data.

Income disparities (if we exclude the “freak year”1995 for Pakistan) have been falling in Pakistan, while rising in India. I know the author would say,

“What’s the big deal, if there is nothing to share, the disparities in Pakistan will fall anyway.”

But then let’s look at the second chart.

In the early 90s, Pakistan had a much higher incidence of poverty than India. Despite the slower economic growth and a plethora of other problems, by 2010, incidence of poverty in Pakistan was about one-half of that in India.

What will happen in the future is hard to predict, but to date, it appears that the ‘failed’ state has managed to do much better in using its meagre economic growth to lower poverty than the ‘shining example of economic reforms’ has done with its rapid growth. Maybe India could be better served by taking a few pages out of Pakistan’s poverty reduction playbook.

The strong pro-growth (and an anti-poverty reduction) slant is perhaps reflective of the ideological change at the World Bank (where the author is employed), which has now taken some of its attention away from poverty reduction to focus on shared prosperity.

from The Express Tribune Blog

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