Tuesday, November 21, 2006

More on the Indian economy

Shunya has made a few interesting points about my previous post on the Indian economy. My response was getting a bit long, so I have elevated it to an independent post by itself.

The Gini coefficient tends to magnify small differences between Lorenz curves. I speak from experience with ROC curves, which are close cousins of Lorenz curves. I would be wary of reading a great deal into small Gini index differences.

In any case, income inequality is a bit more tolerable if the lowest income levels are well above subsistence levels. To visualize this, imagine two histograms of income, A and B. Distribution A is relatively compact, but its left tail extends almost to zero. Distribution B is more spread out (more inequality) but its left tail is at a much higher value than that of A. (In other words, B is shifted substantially to the right and is wider). I think most people would agree that distribution B would be better for a country than distribution A.

To make this point concrete, consider poverty levels in the US and India. In the US, the threshold is set at an annual income of about $20,000 for a family of four and the percentage of the population below the threshold is about 12.6%. In India, a very low level of income is used for the poverty threshold (the better to get a good number for the fraction of the population below it). Using numbers from this report for reference, a threshold of Rs. 500 per person per month in 2005 seems to be an appropriate definition of the official Indian poverty line. About 23.6 % of Indians are below this poverty line. This amounts to an annual income of Rs. 24000 for a family of four. Conversion to US dollars (at an exchange rate of Rs. 45 to the dollar) and multiplication by a PPP factor of about 5 brings the poverty level to about $2700. To summarize:

Poverty line
Fraction below
India $2,700 23.60%
US $20,000 12.60%
A heck of a lot of people are a heck of a lot poorer in India.

The last point about India's democratic freedoms is very important, but tangential to the issue I am addressing. Economic performance may be measured and evaluated on its own. Adding political freedom to the criteria for deciding which country is more admirable is a personal preference, one that coincides completely with my own. Nevertheless, it is a personal preference and, speaking in economic terms, changes the utility function altogether.

Shunya's defense of the urban middle-class Indian's celebratory mood is a defense of the mindset I described in my previous post. Having come 10 m from the starting line in a 100 m race is certainly an achievement. You only have to agree not to look at how others are doing. Bring the champagne along. I would be more than happy to raise a toast.


Anonymous Shunya said...

Your point about histograms A and B is well made. However, a comparison between India and China would be more appropriate (instead of the US) and more in keeping with the tenor of your initial post. China’s histogram would also be to the right of India’s (less absolute poverty in China) and will be spread wider (more disparity in China). If the two histograms are close enough, which I think is true of India and China, higher disparity may well introduce new social pathologies that counteract the pathologies from higher absolute poverty. What the crossover point is certainly debatable but the advantage may not rest that clearly with China. The jury may well be out on this one.

To make my other point clearer, China has achieved its rate of growth in the absence of political freedoms, arguably making it easier to centrally plan and realize economic growth. That India has achieved its economic growth with political freedoms seems to me a bigger achievement than China’s. So I may well bring along two champagne bottles, after which we can step out on the Indian street and freely rail against the Indian government for botching up public health care and education.

11/22/2006 12:36 AM  
Anonymous Shunya said...

Let me also register my dislike of the 100 m race analogy you’ve now mentioned twice in your posts. There is no single race here with a clear finish line and universally accepted rules for evaluation. Countries have their own goals and priorities (for instance: more liberty or more equality? Lower taxes or subsidized public health care?). Nor are the “runners” visible to each other as in a 100 m race. This reductionist approach oversimplifies the factors that make up economic development. That is why experts use specific metrics like per capita income, literacy rates, infant mortality, etc. for comparing countries.

Just for the record, I have no interest in defending the Indian mindset you described in your initial post. I am more interested in pointing out that it's not reasonable to expect people to see how others are doing if the progress of others (i.e., countries) is either invisible or nebulous to them (and on which even experts disagree). People do in fact compare themselves with others, but in more immediate and self-evident ways: Am I doing better than my peers? Am I doing better than my parents? Can I afford the goods I see advertised on TV? Can my money buy superior health care? To those who can suddenly say yes, it is a cause for celebration, irrespective of the answers of someone in Hunan province.

11/22/2006 4:13 PM  
Blogger VP said...

Dislike registered.
The goal of the analogy was to make the following point:

Self-congratulation based on time-series performance is inadequate and cross-sectional performance is a critical adjunct for some perspective.

I was just trying to say that in more picturesque fashion :-)

Nevertheless, your statements about no clear finishing line or evaluation rules needlessly obscure what are relatively clear issues.

When we think of countries, there are two related concepts: economic performance and human welfare performanc. Each of these is assessed by using a variety of indicators.

For example, since the goals of modern macroeconomic policy making are high output, low unemployment and low inflation, this set (output, employment and inflation) is popular with the business press.
If we also look at equality of income distribution, we obtain a pretty good picture of an economy's performance. Of course, there are other useful metrics as well, say currency stability, susceptibility to economic shocks, trends in performance, etc.

To measure human welfare performance, we can look at development indicators such as health and education metrics, quality of life measures, gender inequality etc. These data are published on an annual basis by the World Bank and the UNDP.

We can probably come up with some composite indicator that captures this picture in one number, but the general preference is to look at multiple indicators.

The point is that while there are multiple indicators (some of which may present measurement difficulties), they are finite in number and their significance is generally accepted and fairly clearly understood.

* Evaluation criteria exist.
* Acceptance of evaluation criteria is broad (among most development economists and observers, not all of them neutral)
* the runners are clearly visible to each other (annual publication of data)

I also want to clarify that I don't expect the ordinary Indian to realize all of this. My target is the typical educated person whose ideas are formed through self-image enhancing media hype.

11/23/2006 12:20 AM  
Anonymous Shunya said...

Some final thoughts from my end:

Yes, specific metrics exist, are numerous and diverse, and are regularly updated. Interpretation is the problem, as is the notion of a composite indicator. Experts routinely air their prejudices and often don't see eye-to-eye, except when their prejudices coincide or out of practical convenience. Should the 'quality of life' metric under human welfare performance include civil liberties or not? Who can agree on the weight we assign to literacy vs security vs communications infrastructure vs a free press vs unemployment benefits vs per capita GDP? Try comparing India and Singapore via a single composite indicator.

Amartya Sen has made a persuasive case for employing metrics that measure "real freedoms people can enjoy." The "runners" Sen sees around him are probably very different from the "runners" of Milton Friedman. What hope is there for your typical educated Indian?

11/23/2006 10:10 AM  

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