Archive for May 24th, 2013

Was India’s 2003-08 growth phase a fundamental driven boom or debt-led cyclical boom?

May 24, 2013

As India’s growth story has bitten the dust, experts have started looking at other reasons. Some question India’s growth story  and others call it a temporary slowdown. A bigger question is whether 2003-08 growth story was indeed true or too good to be true. I have always questioned the story no matter what experts say. My idea is simply that it coincided with a  global boom where most countries grew at a faster rate. So if India’s story is indeed true it has to look for some different period and prove its potential post-crisis. Experts point to all kinds of macros which are in India’s favor but fail to look at India’s falling institutions which will always challenge the sustainability of growth. Anyways it will be an interesting thing to watch out in future on who wins?

This paper by R. Nagaraj of IGIDR in EPW shows why India’s growth was much like other countries -debt-driven fulled by capital inflows:

From 2003, the Indian economy enjoyed a boom in growth for five years. The economy grew at a rate close to 9% per year, until it was punctured by the financial crisis of 2008. What explains that boom? Did the sustained liberal reforms finally pay off? Or was it a debt-led, cyclical boom, coinciding with an exceptional phase in the world economy? This paper contends that it was the latter case, driven by private corporate investments, financed by rising domestic savings, and topped by unprecedented inflows of foreign capital- leaving behind heightened corporate leverage, and frothy asset markets. As the global economy faces a semi-slump and precarious macroeconomic balance, how to reverse the current slowdown is at the crux of the discourse on India’s policy paralysis. With the corporate sector mired in over-leverage, perhaps the most credible policy options now available are to step up public infrastructure to boost investment demand, and expand bank credit on easy terms to the informal sector and agriculture – which were throttled during the boom years – so as to ease supply constraints.

Very interesting paper against the grain. It debunks quite a few myths on 2003-08 growth phase along the way..

Urbanization in the United States, 1800-2000

May 24, 2013

A brilliant paper on the subject which also tells you so much about how US developed apart from its main focus on urbanisation. It is by Leah Platt BoustanDevin BuntenOwen Hearey (all three at UCLA).

This handbook chapter seeks to document the economic forces that led the US to become an urban nation over its two hundred year history. We show that the urban wage premium in the US was remarkably stable over the past two centuries, ranging between 15 and 40 percent, while the rent premium was more variable. The urban wage premium rose through the mid-nineteenth century as new manufacturing technologies enhanced urban productivity; then fell from 1880 to 1940 (especially through 1915) as investments in public health infrastructure improved the urban quality of life; and finally rose sharply after 1980, coinciding with the skill- (and apparently also urban-) biased technological change of the computer revolution. The second half of the chapter focuses instead on the location of workers and firms within metropolitan areas. Over the twentieth century, both households and employment have relocated from the central city to the suburban ring. The two forces emphasized in the monocentric city model, rising incomes and falling commuting costs, can explain much of this pattern, while urban crime and racial diversity also played a role.

It has this very nice description of why cities grow:

Cities will grow if either workers are attracted to the area by a new consumer amenity or firms are attracted to the area by a new producer amenity. First, consider a new producer amenity such as a new port for international shipping in city i. Firms move to city i to take advantage of this local productivity boost. Firms in city i are now willing to pay higher wages because each worker generates more output, thereby inducing workers from elsewhere to move to city i. As firms and workers move to the area, competition over the fixed land resource drives up rents, offsetting the increase in wages and equalizing worker utility across locations. Despite the productivity advantage in city i, the need to pay higher rents and higher wages together ensure zero profits for firms. Therefore, we can infer that cities whose growth is due to the arrival of a new productive amenity will offer higher wages and charge higher rents.

Next, consider a new consumption amenity like the development of a new theater district. This consumption amenity will attract workers to the area and thereby drive up rents. Firms facing higher rents will lower their demand for land, thereby reducing both workers’ marginal products and their wages. The combination of higher rents and lower wages counterbalance the higher consumer amenity level, equalizing worker utility across cities. Therefore, we can conclude that cities whose growth is due to a new consumption amenity will offer lower wages and charge higher rents. Note that, in both cases, the model predicts that urban growth is accompanied by higher rents; what distinguishes between producer- or consumer-led growth is aaathe correlation between urban growth and wages.

Hmmm..Is this true in most cities?

What does the urbanisation in US show?

The first era, extending through the mid-nineteenth century, was characterized by fairly flat wage growth within urban and rural areas but significant (if fitful) growth in the urban wage premium. Between 1820 and 1880, wages in each sector grew by only a third while the urban wage premium nearly doubled from 21 to 41 percent. Coinciding with a dramatic increase in the urban population (as shown in Figure 1), these trends suggest that cities were becoming more productive centers of economic activity as they increasingly came to serve as hubs of transit, trade and manufacturing activity.

The second episode, from the late nineteenth century to the mid-twentieth century, featured steadily rising wages coupled with a declining urban wage premium. From 1880 to 1940, wages in each sector more than tripled while the wage premium fell modestly from 41 percent to 36 percent. Because workers continued to move to the cities during this period, the slumping wage premium suggests an increase in urban consumption amenities like public health.

The third episode, spanning the mid-to-late twentieth century, was characterized by rapidly rising wages and rents together with continued declines in the urban wage and rent premia. Over the period 1940 to 1980, wages more than doubled in each sector while the wage premium fell substantially, from 36 percent to 23 percent. At the same time, rents increased by about half while the urban rent premium declined substantially, from 81 percent to 46 percent. Moreover, throughout this period, the urbanization rate continued to increase. According to the Roback model, these patterns suggest that cities were experiencing a decline in productive amenities relative to non-metropolitan areas – perhaps due to the construction of interstate highways and the rise of trucking, which minimized the need to be near fixed transportation nodes in central cities (e.g. train depots or ports). These trends also suggest that the growth in the urbanization rate in the mid-twentieth century was likely driven by an increase in urban housing supply. That is, the substantial amount of homebuilding in the suburban ring in the decades after World War II reduced urban rents, thereby leading to an increase in urban residence despite the loss of relative urban productivity.

The fourth episode, from the late twentieth century to the present, is characterized by a sustained increase in both urban wage and rental premia for the first time in a century. From 1980 to 2010, the urban wage premium grew from 23 to 35 percent. Likewise, the rent premium jumped from 46 to 71 percent. At the same time, the urbanization rate grew modestly. In light of the Roback model’s predictions, these trends imply that urban areas enjoyed a boost in productivity– coinciding with the diffusion of the personal computer and later the Internet.


India is on the path of urbanisation as well. Most of it is unplanned and random but will nevertheless happen. This study could be used as a way to figure India’s story as well..

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