2004 Articles

Great Expectations

Bhagwati, Jagdish N.; Panagariya, Arvind

India's economy had virtually stagnated over a quarter-century until the early 1980s, with autarkic policies on trade and direct foreign investment. The expansion of the public sector had turned into an epidemic, trespassing into most areas of industrial activity, and not just utilities; and the licensing system had become a maze of irrational restrictions. With growth at 3.5% and population increasing at 2.2% annually, per capita income grew at a snail's pace (the infamous "Hindu rate of growth"). It therefore failed to pull the mass of people out of poverty and into gainful, sustained employment. We should then have expected a "revolution of falling expectations": The poor could have risen in revolt, bundling the ruling Congress Party out of power because there was no hope of improvement. One should note that the ratio of the poor to the overall population in India has declined dramatically over the period 1987-2000, in both rural and urban areas. If one goes by the official estimates, the decline has been to 26.8% from 39.4% in rural areas and to 24.1% from 39.1% in the cities. If we go by the alternative calculations done by Princeton economist Angus Deaton, the rural poverty ratio fell to 26.3% from 39.4% , and the urban to 12.0% from 22.5%. What these estimates show is that the standard explanation, so dear to the Indian novelists writing opeds on the subject -- that the rural areas have been neglected by India's economic reforms and the ensuing development -- is contrary to the facts. (But these writers do specialize in fiction.)