New Economist

How rural villages have gained from China's great migration

Inter-county migration in China - mostly rural migrants moving to urban areas - increased four-fold during the 1990s, from just over 20 million in 1990 to 79 million by 2000. With what effect?

Co-authors Alan de Brauw from the International Food Policy Research Institute and Michigan State University's John Giles examine the impacts this great tide of migration has had on China's rural villages. Their paper, Migrant Labor Markets and the Welfare of Rural Households in the Developing World: Evidence from China (PDF), finds that rural out-migration has boosted per capita consumption and reduced inequality:

We find that increased migration from rural villages leads to signicant increases in consumption per capita, and that this effect is stronger for poorer households within villages. Household income per capita and non-durable consumption per capita both increase with out-migration, and increase more for poorer households.

Villages with the fastest growth in out-migration have seen the largest reductions in village poverty headcount and the strongest growth in average consumption levels. Out-migration has also reduced inequality - "expanded migration is associated with decreasing inequality within villages", as poorer households "supply more labor to productive activities and experience more rapid income growth".

There are mixed effects on rural investment - new earnings from urban jobs have largely been spent on better homes and durable goods:

A second important finding relates to the impact of migration on investment in rural areas. Increases in migration from rural China are associated with increased accumulation of housing wealth and consumer durables, but we do not find evidence of a significant relationship between migration and investment in productive assets.

While none of these findings are particularly unexepected, they help unpack China's economic story. And they show that it is not just international migration that brings benefits.

Britain's super rich: racing away?

The latest Institute for Fiscal Studies briefing note, Racing away? Income inequality and the evolution of high incomes, focuses on the 'super-rich'. Authors Mike Brewer, Luke Sibieta and Liam Wren-Lewis define this group of 'high income individuals' as the richest 1 in every 1,000 taxpayers (i.e. the top 0.1%) The super-rich earn £350,000 or more in taxable income a year. Nine in every ten are men, and most are lawyers, City bankers and the like. The accompanying IFS press release states:

The outlook for inequality in Britain may depend more on the outlook for the stock market than on Government tax and benefit policies, a study by IFS researchers suggests today. Even though the current Government has increased taxes on people with high incomes, this has not prevented them from them racing further away from the average level of living standards across the country. In recent years, it is only in the wake of extended falls in the stock market that the incomes of the richest have fallen.

The FT's Chris Giles comments on the role played by market forces in his piece, Very rich get richer under Labour:

Highlighting a sea-change from the early post-war years when wealth often derived from land or other inherited assets, Mr Sibieta said the 21st century super-rich received 80 per cent of their incomes from an occupation - whether salaried or self-employment - rather than investments. "We are talking about the working rich rather than the idle rich," said Mr Sibieta.

But the past decade has seen rich people's income sputter as well as soar. With so many working in finance, there is a strong link between their fortunes and those of the stock market. Real incomes of top-earners grew 6.6 per cent a year on average between 1996-97 and 2001-02.

Yet in the following two years, when the stock market reached its low point, they fell on average by 2.7 per cent, before picking up again alongside equities in 2004-05. That tight correlation leads the IFS to predict that, with the rapid growth of financial markets since 2004-05, the incomes of the richest will have risen quickly in the past two years.

The data show the impact of Labour's generous funding of the public services this decade. The one group outside finance, the law or property to be well represented in the top 1 per cent of incomes works in the health sector. These were "presumably doctors and senior health service managers who have enjoyed relatively big pay increases under Labour", added Mr Sibieta.

The 'super-rich' earn 31 times average incomes: around £780,000 pre-tax income a year, of which they pay on average almost £275,000 in income tax: a tax rate of 35.3%. This is double the rate paid by the average UK taxpayer, who earns around £25,000 and pays £4,400 in tax: a rate of 17.6%.

Supercapitalism or super-hype?

Tony Judt's piece in the latest New York Review of Book, The Wrecking Ball of Innovation, presents quite a telling assessment of Robert Reich's new tome, Supercapitalism: The Transformation of Business, Democracy. While Judt agrees with much of Reich's account of what's gone wrong, he despairs at the lack of an alternative. An excerpt:

This is all well said. But what is to be done? Here Reich is less forthcoming. The facts he amasses appear to point to an incipient collapse of the core values and institutions of the republic. Congressional bills are written to private advantage; influential contributors determine the policies of presidential candidates; individual citizens and voters have been steadily edged out of the public sphere. In Reich's many examples it is the modern international corporation, its overpaid executives, and its "value-obsessed" shareholders who seem to incarnate the breakdown of civic values. These firms' narrowly construed attention to growth, profit, and the short term, the reader might conclude, has obscured and displaced the broader collective goals and common interests that once bound us together.

But this is not at all the conclusion Robert Reich would have us reach. In his version of our present dilemmas no one is to blame. "As citizens, we may feel that inequality on this scale cannot possibly be good for a democracy.... But the super-rich are not at fault." "Have top executives become greedier?" No. "Have corporate boards grown less responsible?" No. "Are investors more docile?" "There's no evidence to support any of these theories." Corporations aren't behaving very socially responsibly, as Reich documents. But that isn't their job. We shouldn't expect investors or consumers or companies to serve the common good. They are just seeking the best deal. Economics isn't about ethics. As the British Prime Minister Harold Mac-millan once observed, "If people want morality, let them get it from their archbishops."

Inequality - a threat to India's boom

While it is right to celebrate India's economic resurgence, not all its citizens have benefited from this growth; many are landless, and poverty remains endemic.FT journalist Jo Johnson warns that Inequality threatens India’s economic boom

It is a fair bet that when the ruling elite of a poor developing country ignores a non-violent protest by 25,000 desperate citizens, it will soon face a violent one. When a 25,000-strong army of landless workers, indigenous tribespeople and “untouchables” from the bottom of Indian society marched 320km to Delhi to highlight the growing divide between haves and have-nots, they were met with crushing indifference. Admittedly, their timing was bad: Mumbai’s Sensex index on Monday punched through the 20,000 mark for the first time, triggering orgiastic self-congratulation by the English language media and eclipsing all other national news.

“The first 10,000 took over 20 years. The next came in just 20 months. Superpower 2020?” rhapsodised the front-page headline of the Economic Times, the cheerleader for a phenomenon it calls the ”global Indian takeover”. In their excitement, several other newspapers double-counted the value of all Mukesh Ambani’s stakes in various listed Reliance entities and erroneously concluded that he had overtaken Bill Gates and Carlos Slim to become the wealthiest person in the world, with investments valued at $63bn. Although that joyous moment may not be far off – the elder Ambani is worth nearer $50bn – it has not come yet.

As first-world India cheered the stockmarket, there was scarcely mention of the visitors from third-world India who had camped overnight in the old city. Feet swollen, mouths parched and hair matted, the protesters were physically detained in a gated enclosure throughout the day, denied the satisfaction of completing the symbolic last leg of their march down Parliament Street. The city’s police force had instructions to keep the capital spruce for visiting dignitaries, among them Angela Merkel, the German chancellor, Henry Paulson, US Treasury secretary, and dozens of chief executives in town for a lavish conference organised by Fortune.

 

Has world poverty really fallen?

The short answer is: maybe, maybe not. Here's a slightly longer answer:

We evaluate the claim that world consumption poverty has fallen since 1990 in light of alternative assumptions about the extent of initial poverty and the rate of subsequent poverty reduction in China, India, and the rest of the developing world. We use two poverty indicators: the aggregate headcount and the headcount ratio, and consider two widely-used international poverty lines ($1/day and $2/day).

We conclude that, because of uncertainties in relation to the extent and trend of poverty in China, India, and the rest of the developing world, global poverty may or may not have increased. The extent of the estimated increase or decrease in world poverty is critically dependent on the assumptions made. Our conclusions highlight the importance of improving the quality of global poverty statistics.

That comes from an article of the same title by Barnard College's Sanjay Reddy and Columbia University's Camelia Miniou in the latest issue of the Review of Income and Wealth (Vol. 53, No. 3). For now at least, it is available to download free.

Explaining the persistence of India's caste system

Yesterday's post about India's reservation system failed to mention a startling fact. The caste system in India has been dated to approximately 1000 BC, and it still affects the lives of a billion people in South Asia. Why so persistent? A recent paper by Northwestern University's Kripa Freitas offers an explanation. In The Indian Caste System as a Means of Contract Enforcement (PDF) she argues that it's about trade and the need for enforceable contracts:

The persistence of this system of social stratification for 3000 years of changing economic and social environments is puzzling. This paper formalizes a model of the caste system to better understand the institution and the reasons for its persistence. It argues that the caste system provided a tool for contract enforcement and facilitated trade in services, giving an economic reason for its persistence.

A caste is modeled as an information-sharing institution, which enforces collective action. Trade is modeled as a version of the one-sided prisoner’s dilemma game, where the consumer has an opportunity to default. Consumers who default on a member of a caste are punished by denying them services produced in the caste. Various features of the caste system like occupational specialization by caste, a purity scale, and a hierarchy of castes are shown to be equilibrium outcomes that improve the efficiency of contract enforcement. The implications of the model are tested empirically using unique census data from Cochin (1875), Tirunelveli (1823) and Mysore (1941).

Earlier posts on this topic:
* India: reservations and rent-seeking, 4 October 2007
* India: caste out, 1 June 2007
* India's job reservation policy: extend, or rethink? 19 December 2005

India: reservations and rent-seeking

The latest Economist has a feature article on business and caste in India. With reservations explores why India's government is threatening to make companies hire more low-caste workers. Here is an excerpt:

India's Congress-led government has told companies to hire more dalits and members of tribal communities. Together these groups represent around a quarter of India's population and half of its poor. Manmohan Singh, the prime minister, has given warning that “strong measures” will be taken if companies do not comply. Many interpret that to mean the government will impose caste-based hiring quotas.

Quotas already apply in education and government, where since 1950 22.5% of university places and government jobs have been “reserved” for dalits and tribal people. In addition, since 1993, 27% of government jobs have been reserved for members of the Other Backward Classes (OBCs)—castes only slightly higher up the Hindu hierarchy.

This is not enough for supporters of reservations. Since the introduction of liberal reforms in the early 1990s, public-sector hiring has slowed and businesses have boomed. Extending reservations to companies, they argue, would therefore safeguard an existing policy of promoting the Hindu wretched. It would almost certainly require changes to the constitution. But low-caste politicians are delighted by the prospect, so it could happen.

The chief minister of Uttar Pradesh, a dalit leader called Mayawati, has said 30% of company jobs should be reserved for dalits, members of the OBCs and high-caste and Muslim poor. Chandra Bhan Prasad, a dalit journalist, applauds this and argues that it would be in the interest of companies. “It is in the culture of dalits that they are least likely to change their employment because they are so loyal to their masters,” he says. It would also help them become a “new caste [sic] of consumers”.

But is there a problem?

The U.S. Earned Income Tax Credit: a primer

Bruce D. Meyer from Chicago University's Harris School of Public Policy Studies recently prepared a primer on the Earned Income Tax Credit for a conference organized by the Economic Council of Sweden. The paper, The U.S. Earned Income Tax Credit, its Effects, and Possible Reforms (PDF), is a useful primer on the subject. Here's what it covers:

In this paper, I first summarize how the U.S. Earned Income Tax Credit (EITC) operates and describe the characteristics of recipients. I then discuss empirical work on the effects of the EITC on poverty and income distribution, and its effects on labor supply. Next, I discuss a few policy concerns about the EITC: possible negative effects on hours of work and marriage, and problems of compliance with the tax system. I then briefly discuss some possible reforms to the structure of the current EITC.

And this is how Professor Meyer concludes:

In summary, the evidence indicates that the income distribution features of the EITC are quite good. It targets resources at those below the poverty line, particularly families with children. The empirical evidence on labor supply and marriage indicates that the incentives of the EITC are remarkably favorable given the resources transferred. However, there are still substantial opportunities for reform along several dimensions.

The reforms mooted include modifications to the tax schedule to reduce marriage penalties, simplifying eligibility criteria for the credit, and providing a more generous credit for single childless individuals or non-custodial fathers.

The limits of microcredit

Plenty of people are enraptured by the possibilities of microcredit, but not Aneel Karnani. In a recent Michigan working paper, Employment, not Microcredit, is the Solution, he writes:

Most studies suggest that microcredit is beneficial but only to a limited extent. The problem lies not with microcredit but rather with microenterprises. With low skills, little capital and no scale economies, these businesses have low productivity and lead to meager earnings that cannot lift their owners out of poverty.

Creating opportunities for steady employment at reasonable wages is the best way to take people out of poverty. The government is responsible for providing public services that are critical for increasing the productivity and the employability of the poor.

The economics of pre-school

The Wall Street Journal's Real Time Economics weblog has an interesting post by Deborah Solomon on the economics of pre-school

James Heckman, University of Chicago economist and 2000 Nobel prize winner, has become a key advocate for pre-school, with his work routinely cited by everyone from Sen. Hillary Clinton to state legislators. But his interest in early education happened in a roundabout way.

In the early 1990s, while doing work evaluating government job programs, he noticed that the reason minorities weren’t going to college at a greater rate was not because they couldn’t afford it but because of “ability gaps.” Minorities were more likely to be lacking in both cognitive and non-cognitive abilities, making it more difficult for them to excel – or even stay — in school.

He grew interested in finding out when those gaps first occur and was surprised to discover that they take place in a child’s formative years.

“I happened to notice that ability gaps opened up very strongly at ages 3, 4 and 5,” Mr. Heckman says, adding those gaps “were so predictive of a range of behavior.”

That discovery helped fuel his belief that intervention efforts need to happen while kids are still very young, before they even get into Kindergarten. “If we wait too late the costs of remediation are high and they’re higher than anything we’ve paid so far,” he said. Mr. Heckman is part of a growing cadre of economists — Federal Reserve Chairman Ben Bernanke among them — who see pre-school as a cure for inequality. (Read more in a page-one WSJ article here.)

In 2004, he and a colleague produced a paper with some landmark findings, including that pre-school could reduce crime, keep people off welfare and boost taxes down the road. His paper has been cited by legions of pre-school supporters, who tout the economic benefits as a strong reason to fund pre-school.

But while Mr. Heckman is a proponent of early education, he believes it should be targeted solely at disadvantaged kids and not all kids, as some advocates propose.

“You go where the marginal returns are the highest and they’re highest with disadvantaged children,” he says. He fears that all the economic data – including his own — has produced a “rush to judgment” that has convinced some camps to pre-school for everyone will produce the greatest return.

“It worries me a lot,” he says. “Science doesn’t support universality … we have to approach it more cautiously.”