Category: Growth

Revisiting Hirschman鈥檚 Tunnel Effect and Its Relevance for China

Wannaphong durongkaveroj4 Comments

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As within-country inequality is on the rise worldwide, considering how people actually perceive inequality in their societies and how they respond to it is a question worth asking. In 1973 Albert Otto Hirschman proposed an explanation of changing tolerance for inequality associated with different 鈥榮tages鈥� of the development process. In this post I鈥檒l revisit Hirschman鈥檚 theory and link it to emerging studies of how inequality is perceived in China. The Chinese people generally seem to be satisfied with rising inequality, yet it is unclear how long this tolerance will last.Read More »

Consuming development: Capitalism, economic growth and everyday life

Arve Hansen2 Comments

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With the consumption patterns in rich countries being more unsustainable than ever and the consumption of the 鈥榚merging middle classes鈥� increasing rapidly, it is about time 鈥榗onsumption and development鈥� becomes a field of study. Such a field would necessarily be interdisciplinary and combine analyses of everyday life and the structures of capitalist development. A useful starting point could be found at the intersection of theories of practice and systems of provision.Read More »

Emerging Market Downgrades: Panic at the Disco?

ilanstraussLeave a comment

When it rains, it pours. For emerging markets, the downpour has come in the form of credit rating downgrades by the big three global ratings companies. Fitch, Moody鈥檚, and S&P took a record聽聽negative rating actions on emerging market sovereign and government-related entities in 2016. Emerging economies are right to be concerned. With a 鈥榞ood鈥� credit rating (AAA), a sovereign state can borrow at very low rates of interest from investors. A poor rating could force states to pay significantly higher borrowing costs. Rating downgrades could have negative ripple effects throughout the affected economies, raising the cost of borrowing for banks and firms, and, in turn, consumers.

Infrastructure projects, business ideas, and consumer credit extensions, become unprofitable due to the higher cost of credit to banks, businesses, consumers, and governments. If a country is downgraded to 鈥榡unk status鈥� (more formally known as 鈥榥on-investment-grade鈥� or 鈥榮peculative-grade鈥�), it risks the mass exodus of investors from its bond markets. As the cost of borrowing for governments increases, this can lead to a dangerous downward spiral as borrowing and spending dries up business and consumer activity declines.

Getting back on course
So what is the best set of policies for emerging markets to recover their credit ratings? On one side are economists who argue for 鈥榓usterity鈥�. In their view, recovering from a ratings downgrade requires sharp reductions in state spending, even if this results in poor conditions in the short term. The benefits are twofold: It can reduce inflation and prices, thereby helping restore a country鈥檚 price competitiveness in international markets; and it can enhance the credibility of a government when it comes to containing profligate spending.

Former British Prime Minister David Cameron called this philosophy 鈥樷��. The problem is that there is not much evidence to聽聽this idea. The EU enforced austerity among its member states in response to the 2007 financial crisis, until it helped propel a 鈥樷�� recession in 2011/12. Following this largely unsuccessful adventure with austerity, the EU turned towards more pro-growth policies, which supported expansions in infrastructure and fixed-capital investment, with notable success.Read More »

The BRICS and a Changing World

Sanjay G ReddyLeave a comment

This July and August, I led an international group of experts in preparing an Economic Report on the role of the BRICS countries (Brazil, China, India, Russia and South Africa) in the world economy and international development. 聽The was commissioned as an input to the that took place in early September 2017 in Xiamen, China.

It surveys the BRICS countries鈥� sizable contribution to global growth, trade and investment, evaluates the prospects for this to continue in the future, and explores the possible role that these countries can play in bolstering the global economy, in reshaping international economic arrangements and in contributing to the and to international development generally. An important conclusion in the report is that continued BRICS growth as well as policy initiatives can substantially benefit other developing countries (the report uses the IMF category of Emerging Market and Developing Countries, or EMDCs) 鈥� and developed countries too. 聽I will 聽be pleased if the report will be circulated widely, and welcome all reactions.Read More »

What do we know about the wealthy in India? A case study prior to liberalization

Rishabh KumarLeave a comment

The first modern book in economics was called the 鈥淲ealth of Nations鈥� because its writer, Adam Smith understood (and transmuted the idea) that the key to prosperity and growth was the generation and distribution of wealth – not just the flow of income. Recent interest in economics has started to return to this question especially in the context of today鈥檚 rich countries. The academic attention on the metamorphosis and concentration of wealth has so far excluded poor countries. In fact the study of the wealth of poor nations should be a core question in development economics (over income growth) because wealth tends to cumulate all past prosperity or disparity.

I found it notable that despite the detailed historical analysis in Piketty鈥檚 book , there was no mention of Indian wealth (Piketty did study top Indian incomes). To an extent this is understandable because data on India is so limited and unreliable that documenting it would require a book in itself. Till date, the Indian central bank (RBI) does not follow the tradition of publishing regular household and private sector balance sheets at market value, to assess accumulation and asset prices. And yet due to its sheer size and importance, India presents a unique challenge to the notion of prosperity – it is simultaneously home to some of the and global citizens. In the past, the question of India鈥檚 colonial subservience was related to the , rather than income – the British enriched themselves at the cost of their prized colony. What happened once India became independent?

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My new paper 鈥溾�� tries to answer this question for a particular historical phase in Indian history. Read More »