Of course, the Doha Round has collapsed repeatedly in the past, only to be resurrected by countries eager for a multilateral agreement. However, that they have collapsed on a point so seemingly trivial suggests this must really be the endgame. The USA, China, and India may simply be positioning for a better outcome when they return to the negotiating table.

But this latest failure also puts into immediate perspective the choice most developing countries face when negotiating with “the West.” Immediately following the collapse of the talks, the EU reneged on a deal with Latin American exporters of bananas that, the EU says, was effectively tied to the Doha round. As this illustrates, most developing countries are better off negotiating as a group.

That said, some countries are more equal than others. India and China fall into that category, and must ask themselves two questions. First, if this failure is simply a negotiating tactic, will the rest of the developing world hold the line? Not likely. Instead, this failure is likely to give a fillip to bilateral trade agreements that have ballooned recently (see chart) with the US in the lead. Such a spaghetti bowl of agreements may be great for trade lawyers, but will do less to serve the people in the developing world.

More important, are farm subsidies or safeguards really the key issue that Indian and Chinese diplomats should be worried about? In a world where food prices are rising and expected to stay high, and where more and more European and American consumers are turning to locally grown organic food, India and China seem to be fighting yesterday’s battle. Are there not other issues on which the two can stake their negotiating position? Some obvious candidates spring to mind to tackle critical, and future, public good challenges: a food security fund; a technology transfer agreement for cheap renewable energy; a climate change adaptation fund; a medical research or procurement fund for tropical diseases?

No doubt India and China have earned the right to be bull-headed about the current round of trade talks. Previous rounds have come and gone and much has been given away by these countries. At the same time the American farm lobby is as important for American politicians, as the Indian farm lobby is for Indian politicians. Netherless this stalemate is unfortunate at best. There are more important issues out there that deserve at least as much attention.

How is one to reconcile these contradictions? And, to answer Natasha’s question - what can the World Food Programme do about it?

This is more than a rhetorical question because the World Food Programme matters to a lot of people. It is the frontline agency feeding the world’s hungry and in 2004 delivered almost 50% of global food aid (7.2 million tons valued at USD 3.2 billion). With prices up to 40% higher, the WFP is reporting that it will be forced to cut back on the number of people it feeds. According to Josette Sheeran, Director of the WFP, this “silent tsunami” threatens up to 100 million people unless the agency receives an additional USD 700 million.

So, what is the WFP to do?

Greater funding of the WFP is not a solution. Though grain prices have fallen recently (wheat is 40% below its February peak), the spectre of sustained high prices suggests the WFP and national governments will have to seriously reconsider their long-term strategy for ensuring food security. But any strategy or solution will have to account for two factors.

First, that volatility is up. The sudden spikes and falls in food prices suggest we are far from an equilibrium. Data from the Chicago Board of Trade (CBOT) indicates that volatility in wheat prices, for instance, has risen (see chart). This suggests that long-term consumers of grains would do well to heed the call of Goldman Sachs’ oil analyst Murthi who suggests only buying long-term crude oil.

Second, the problem has many reasons. On the demand side greater demand and changing consumption patterns in China and India; on the supply side a shift of agricultural land towards biofuels and urban expansion and lack of research since the last green revolution. Agricultural commodities have also become an investment class contributing to higher volatility. There is no one culprit. Rather, the entire value chain of food markets is riddled with government intervention and inefficiency.

These problems will remain for the forseeable future therefore any solution will have to account for the fact that it cannot change the system. International grain prices will always be subject to domestic politics, such as the US farm subsidy bill; faced with high gas prices rich countries will still promote ethanol; urban expansion will continue; and climate change in the north will receive more funding than agricultural research in the south. The WFP cannot address the problem by throwing more money at it - even the entire USD 1.2 billion it was criticised for possessing.

Purchase for Progress

The good news is that, as one of the largest global consumers of food, the WFP is in a position to bypass the system. The Purchase for Progress program of the WFP does just that. It aims to increase farmer productivity in the developing world by creating market linkages, acting as a guaranteed buyer, and providing futures contracts to farmers to encourage long-term investments.

The concept is intriguing. Not because it is new but because it mirrors a similar move in India by retail giants such as Reliance and Walmart. As they execute plans to open hundreds of stores to serve millions of middle-class consumers in India, they are bypassing local agricultural markets, choosing instead to buy directly from the farmer.

Thinking Bigger: Building Markets

In the long-term, then, the WFP has a shot at putting in place long-term purchase contracts that help WFP as well as local farmers. And by buying locally, the WFP can reduce its dependence on national contracts - always a risk when governments can renege on export contracts as they did in this current crises.

But why stop there? Indeed, if the WFP can show that efficient markets are in the farmer’s and consumer’s best interests, it provides a strong incentive for local governments to dismantle the controls that hold back global grain trade (e.g. less than 8% of the global crop of rice is traded internationally). Done right, the Purchase for Progress concept could - and possibly should - be expanded into an Alternative Investment Market for agriculture - a global market for small-holder farmers.

With that in mind here is a more ambitious Purchase for Progress (P4P) 2.0.

• Create an internal marketplace: The whole point of purchasing locally should be to turn food scare areas into food exporting areas. While the FAO and IFAD, amongst other agencies, try to increase productivity, the WFP is in the priveliged position of having the money to put where its mouth is. As local production increases beyond local needs, create an internal marketplace that trades the suplus to other parts of the world. Grow in Africa, send to Burma - and vice versa when disaster strikes Africa.
• Become a clearing house: While I do not know the details, in its current avatar the P4P program partners with several organizations. However, it can go further offering for instance to be a local clearing house for retail giants such as Reliance. As the retail business in India is currently structured, farmers transact with multiple companies bilaterally. While this works for now, the scenario needs an intermediary market in the long term. The WFP can be that market, at least in some places. Not only would it offer its logistics experience, it could benefit by buying any surplus or at least having a better insight into supply and demand.
• Use that investment fund: That USD 1.2 billion fund, for which the organization was criticized, can be put to good use. By all means, keep the reserve. In fact, create a long-term endowment because the world’s hungry are not going away anytime soon. But use part of the money to invest in agricultural SME funds such as Aventura or to provide loan guarantees to businesses that are needed to boost agricultural productivity. Why keep all that money in cash and cash reserves?

The high food prices have illustrated much about our inability to feed a substantial portion of the world’s population. However, this problem is not one of supply. Rather, it shows deep rooted problems in an international system of distribution. When such a system does not serve one’s ends, it is often easier to bypass it rather than fix it.

The WFP is in the ideal position to do just that. It has the purchasing power to be a market shaper with enough resources to push through changes further down the value chain (much like Nike does with its suppliers). It also has a special legal status that can allow it to bypass national laws - such as those banning independent agricultural markets or futures. And finally, it is not so big that anyone would actually notice a disruption in the overall market.

Indeed, that a substantial portion of WFP’s donations are tied is a good thing (Canada required 50% of wheat be bought from Canada, and the US generally provides in-kind donations). Not only is that food subsidized, but so long as the WFP meets those commitments both national governments and international commodity businesses (such as Cargill) will allow the WFP to build its own parallel system. Such a system can, one day, rival any national or international trading platform. It is in the benefit of WFP, but also in the interests of shifting agricultural trade in favor of poor developing countries.

The current issue of the Harvard International Review looks closely at Sweden to offer some hints on how this may be possible. Sweden, along with Switzerland, Norway, and Finland, is amongst the most globally competitive, yet has an extensive welfware system for its citizens. To explain how this works the article compares Sweden with another welfare state - France:

The key difference between the leaking private sectors plaguing other European nations with the welfare model in Sweden is the way in which the government injects value into the economy. Because of the structure of Swedish welfare, the private sector doesn’t suffer. Swedish socialism is designed to protect the people, not just jobs themselves.

The reason for this apparent contradiction lies in the agent of action in Sweden’s social calculus. While French corporations are required by law to provide benefits, the Swedish government shoulders these costs. In addition, unions in Sweden have a different perspective than do their French counterparts. Much like the system as a whole, the goal of unions is not just to protect jobs, but to protect people by winning benefits for those who go off the employment rolls. In France, a worker represents costs to the company during and even after their employment, but in Sweden, the government takes over for the welfare of laid-off workers.

Clearly, by placing the burden of welfare and job protection on the government, the system retains companies’ focus on efficiency, hiring, and firing.

There is an additional consideration that allows this system to work - and explains why Swedes tolerate such high taxes. The country’s homogeniety makes such collective transfer payments acceptable - something that may not work in a more diverse country where group membership is restrictive (India), or where there is a traditional mistrust of the government (USA).

A final contrast between the Nordic country and its southern counterparts is national unity. With a largely homogenous population, Sweden’s view of community is unique. Unlike France, which is a nation historically marked by prejudice and racial conflict, Swedes are more willing to submit to the large tax rates that support the large government payroll and expenditures.

Of course, government is no paragon of efficiency, and Sweden is no exception. Indeed, the government’s overwhelming presence in society, together with the twisted incentives and changing social mores, are identified as threats to the system:

Because employee benefits are so generous, many abuse the system by faking illnesses and escaping work. Absenteeism is the largest unaccounted-for contributor to the discrepancy between government data and actual statistics.

A new issue altogether is increased apathy toward the Swedish government. Decreasing voter turnout reflects a populace that cares less for its government. There are two possible explanations for this drop. First, the Swedish people could be disillusioned with the government and its policies, possibly heralding a fledgling discontentment that has in the past resulted in troubles for other welfare states. Once a country’s citizens are unhappy with governmental policy, they are much less likely to be pleased with paying for it. This could prove to be a disrupting factor in the seemingly well-run model.

An alternative explanation lies in the changes and modernization taking place throughout the country. The Sweden of today features an increasingly diverse population. This results in less emotional and cultural investment in the nation as a whole, as well as less willingness to shoulder the burden of welfare for one’s fellow Swede. The homogeneity that differentiates this Nordic nation from other European welfare states is starting to dissipate, and with it possibly the security of the model’s success.

This is an article worth reading in its entirety for it offers two important lessons.

First, a welfare state is not necessarily contradictory to a free-market one. If the latter is necessary to lift people out of poverty, the former is necessary to keep them out of it. The hope offered by Sweden is that it may be possible, in certain conditions, to marry the two.

Second, just as a free-market system needs government regulation, a welfare state also needs regulation to minimize beauracracy. But who will regulate government? Some self-regulation occurs in times of economic distress, as demonstrated by economic restructuring during the Asian and Latin American financial crises and India’s own balance of payments crisis. But when no external triggers exist the only true regulator is a well-informed citizenry, vigilant and wary of excessive government.

Ironically, then, the countries best placed to establish sustainable but extensive welfare systems might be the countries most skeptical of them.

Discussions on this issue generally take either an ethical or an economic perspective, with very few considering the politics of climate change negotiations. Yet, that perspective is particularly important for India, because the costs of climate change are so high for it.

By some measures India has the most to loose from climate change. This is not surprising given the country’s vast rural population, overwhelmingly dependent on natural weather patterns. Intuitively, India should therefore not only be acting forcefully to help its population adapt, it should be encouraging all developed economies to tackle climate change convincingly. Yet, India has resisted calls for binding emission cuts that would spur other countries to follow and has also avoided taking a lead role in negotiations on the issue.

Such resistance can perhaps be explained by the fact that western policymakers have seldom acknowledged the vulnerability of the developing world. Nor have their policy proposals, including Kyoto, included substantive provisions for helping vulnerable countries adapt. In the absence of assistance on adaptation, India has little incentive to participate in global mitigation efforts. Instead, India’s approach reflects the advice of economist Thomas Schelling that given their limited ability to adapt, “the best way for developing countries to mitigate global warming is through economic growth.”

We are presented, therefore, with a dilemma. In the long run, India would benefit from a collective response to global warming. But in the short term and with no agreement on a post-Kyoto framework, a unilateral strategy of high emissions growth would be more beneficial. Both parties in this situation would benefit from cooperating, but cooperation is hindered both by trust and the asymmetrical cost of cooperation.

The Case for Engagement

Such cooperation could be pursued for two reasons. The first is merely existential – anything that triggers a collective mitigation response from the developed world helps India. But a more compelling argument is political – by not participating in negotiations India risks the creation of a framework that does not reflect its concerns (see Why India Must Act).

There are unmistakable signs that this will happen, particularly with American business lobbying for a “global framework” that prevents balkanization of regulation, reduces operational uncertainty and prevents dilution of their competitive advantages. Last year the American Congress proposed legislation to tax imports from countries that do not restrict carbon emissions. Early this year, the European Commission too announced it was considering import taxes for carbon-heavy imports, triggering the prospects of a trade war with China and India.

There are useful parallels here to study from the incorporation in 1995, of the TRIPS agreement. The TRIPS Agreement came into being when the US, Europe, Japan, and Canada (known then as “the Quad”) decided to create a new international framework encompassing intellectual property. Rather than attempt to modify the GATT, they instead created the World Trade Organization, and forced developing countries to accept the TRIPS agreement, along with two others. Since developing countries did not participate in negotiations, their concerns were not reflected therein – a bias that has not been adequately corrected since despite the Doha Declaration on TRIPS and the currently stalled Doha “development” round. The lesson is simple – it is better to establish a favorable international policy, rather than try to change such a policy after the fact.

The Case for Disengagement

If the case for engagement is strong, the case for waiting for action by others is even stronger, though less obvious. Arguments for not participating in negotiations lie in the dynamics of bargaining power – and how participation in negotiations affects that power.

Agreement in international negotiations occurs not because there is an economic or ethical case for it. Rather, it is based on quid pro quo. Countries that loose from the agreement join a treaty when they are appropriately compensated by those that gain.

So, who looses and who gains from climate change?

The economic models of Nordhaus & Boyer estimate the economic cost of global warming will be highest for India, Africa, and Europe. In comparison, Russia will receive a mild boost to its GDP, while the impact on America and China is expected to be relatively low. This explains why Europe and Africa are enthusiastic for a collective response. It also explains why America did not join Kyoto – because the treaty did not compensate it sufficiently for the economic costs of carbon mitigation.

This suggests it may be smart for India not to participate in ongoing negotiations just yet. As a country that looses from climate change and benefits directly from a collective response to it, India’s case for any compensation is weak. India’s bargaining power derives not from its ability for give-and-take, but rather from the world’s desire to include it in a future treaty. The moment India indicates a desire to participate in those negotiations it weakens its own bargaining power.

A Middle Path: Free Riding on China

How then is India to proceed? One option, perhaps, may be to free ride on China’s negotiations with the US. China is the counter-point to the US within the developing world – it looses little from climate change, yet its involvement is essential to the success of any future treaty. Therefore, China is much better positioned to bargain for compensation (e.g. technology transfer, R&D financing, or adaptation assistance), and should therefore be at the vanguard of negotiating a climate treaty with the US and EU.

There is still much India can do, as it reiterates the principle of “common but differentiated responsibility.” For instance, India needs to lead efforts to reframe the issue of climate change as one of adaptation, not mitigation (which is a Euro-centric view). It also should work closely with major emerging economies to define a collective bargaining position for the developing world in return for participation in a climate change treaty. Not only would such bargaining improve the potential outcome in favor of the developing world, it would also support and reflect India’s political rise and ability to convene.

Conclusion

A climate change treaty that binds India to mitigating action is no longer an option but a virtual certainty. Such a treaty will become fact either through negotiation or through unilateral measures by the developed world. To avoid lockout, India must have a strategy for addressing such negotiations.

Current disagreement between India on the one hand and Europe and the US on the other is unlikely to be resolved till a new treaty addresses the dilemma faced by India. That will essentially involve payments from winners of the agreement, to the loosers. Some of the elements of such a payment system are already in place, such as Kyoto’s Adaptation Fund, but they must be substantially expanded. Domestically, India should continue to cherry-pick and implement initiatives that are domestically economically viable to reduce emissions growth. But at the international level, India’s best strategy for negotiations may simply to promote China as a collective bargainer and signal its own resistance to bargaining – a signal which up to a point will strengthen India’s position.

There has been less attention paid to the concentration of these loans in neighborhoods that are largely black, Hispanic, or both. This pattern, documented in federal loan records, holds true even when comparing white middle-income or upper-income neighborhoods with similar minority ones.

Last year, about 70 percent of the loans made in the Detroit neighborhood (97% black) carried a high interest rate — defined as 3 percentage points more than the yield on a comparable Treasury note — while in Plymouth (97% white) just 17 percent did.

Last year, blacks were 2.3 times more likely, and Hispanics twice as likely, to get high-cost loans as whites after adjusting for loan amounts and the income of the borrowers, according to an analysis of loans reported under the federal Home Mortgage Disclosure Act. (Asians are somewhat less likely than whites to take out high-cost loans.)

One can draw several interesting inferences from this. First, it would appear that banks in America have been unable and unwilling to move down the “pyramid” to cater to people with bad or unknown credit histories. This stands in start contrast to the success microfinance in the developing world.

Second, credit is not a good thing by itself. In this case, it was overzealous and highly competitive lenders that “actively sold subprime loans” (see also). The corollary for microfinance is that if the aim is development (as opposed to building a new business model), one needs more than credit.

One of the main arguments of those propogating economic growth has been that it reduces poverty. China is a frequently cited example. Yet, as Bardhan shows, economic growth may have less to do with poverty reduction in China than previously imagined, and conversely, that poverty declined less rapidly in India during the period of economic growth:

Estimates made at the World Bank suggest that two-thirds of the total decline in the numbers of poor people – below the admittedly crude poverty line of $1 a day per capita – in China between 1981 and 2004 already happened by the mid-1980s, before the big strides in foreign trade and investment in China during the 1990s and later. Much of the extreme poverty was concentrated in rural areas, and its large decline in the first half of the 1980s is perhaps mainly a result of the spurt in agricultural growth following de-collectivization, egalitarian land reform and readjustment of farm procurement prices – mostly internal factors that had little to do with global integration.

In India the latest survey data suggest that the rate of decline in poverty somewhat slowed for 1993-2005, the period of intensive opening of the economy, compared to the 1970s and 1980s, and that some child-health indicators, already dismal, have hardly improved in recent years. For example, the percentage of underweight children in India is much larger than in sub-Saharan Africa and has not changed much in the last decade or so. The growth in the agricultural sector, where much of the poverty is concentrated, has declined somewhat in the last decade, largely on account of the decline of public investment in areas like irrigation, which has little to do with globalization.

This contradicts what is now taken as an article of faith within the economic liberalization community. However, the article does not give much to the anti-globalization camp either, for it points out that the inequality cannot be directly ascribed to liberalization or globalization.

But it is not always clear that globalization is the main force responsible for increased inequality. In fact, expansion of labor-intensive industrialization, as has happened in China as the economy opened up, may have helped large numbers of workers. Also, the usual process of economic development involves a major restructuring of the economy, with people moving from agriculture, a sector with low inequality, to other sectors. It is also the case that inequality increased more rapidly in the interior provinces in China than in the more globally exposed coastal provinces. In any case it is often statistically difficult to disentangle the effects of globalization from those of the ongoing forces of skill-biased technical progress, as with computers; structural and demographic changes; and macroeconomic policies.

This may seem obvious, but is often forgotten. What causes inequality is not globalization. And what will reduce it or save people from poverty is not economic growth. Rather, it is what internal policies are taken to manage either - or both.

A proposal to force firms to hire more workers from the dregs of Hinduism’s caste system (see article) would be different. It would be a disaster…

Extending into the private sector a policy that has been a disaster in the public sector is lunacy.

The Economist is a bit late to the party - this controversy has been around for a year. But this coverage is notable because it comes from a publication better known to cover US and European domestic politics. And if the Economist’s criticism of the policy proposal is unequivocal, it is not without explaining the real problem and the real solution:

Reservations in companies would not just damage business. They would also distract attention from the real source of the problem. Responsibility for lower castes’ lack of advancement does not lie with the private sector. There is no evidence that companies discriminate against them. The real culprit is government, and the rotten educational system it has created.

Originally, reservations were supposed to be needed only for a decade. After that, it was reckoned, they would be unnecessary, because primary education would be universally available. Nearly six decades on, it is not. And the quality of much of India’s higher education is execrable. By one reckoning, only a quarter of engineering graduates, the raw material of a booming computer-services industry, are employable. The government should concentrate on sorting out schools and universities, not piling new burdens on business.

There’s another effective weapon against ancient prejudices: growth. As Indians get richer, their caste biases fade. Middle-class urban Indians are less likely to marry within their caste than the rural poor, and less likely to wrinkle their noses at a dalit. Happily, the ranks of the middle class are swelling in a fast-expanding economy—for which India has its businessmen to thank. Hobbling them with quotas will only make it harder for them to help the country change.

Well said, all around.

Roger Lowerstein writes, at length, about inequality in the US, its drivers and solutions (The Inequality Conundrum, June 10). It is a long article, and one I will not quote here - but every word is worth reading (mirrored at The Economist’s View, if you do not have a Times subscription).

The observations I have made in the past week on inequality - which is growing in India and Asia - and the historical evidence from the US brings forth many points. Answering them is for another post, but I put them forward for reference and reflection:

• The theory that inequality would subside once an economy has reached a certain level of growth has not been borne out. It seems more likely that once a certain level of inequality is reached, it will persist or even be self-perpetuating, given the nature of white-collar driven growth we have. Reducing it will, therefore, require intrusive policy interventions.
• Is it really equality (of incomes) that we should be worried about, or fairness (of opportunity)? I take the latter view, yet recognize that equality of incomes is one component that retards fairness. The poor do not have the same skills or opportunities. “Unfairness” has many problems, all related to social exclusion. Income inequality is one of them and indeed reinforces those very drivers.
• As an aside, the previous point is a particular rebuttal of proponents of privatization. Privatization of education or health will have little impact on improving the outcomes of the socially excluded because they are socially excluded. Usually that exclusion is social and economic - and privatization will do nothing to remove either. The poor will remain poor and they will remain discriminated against.
• There seems to be a tradeoff between growth and equality. Certainly, too much equality leads to sloth. Yet, too much inequality becomes self-perpetuating and may also hinder growth. The choice of what the balance of growth and equality should be is for each society to decide. America seems to prefer more growth, Europe seems to prefer more equality (Switzerland, I can vouch is an extreme case, where ostentatious public displays of wealth are frowned upon).
• Finally, the best way to reduce inequality seems to be to reduce the incomes of the bottom. But we do not want to simply increase their incomes. If we want “fairness”, we want to give them the opportunity to increase incomes and move up the ladder. Redistribution seems to be the way to go. But it will only work when that redistribution leads the poor into more education and better jobs. Scandinavia is an excellent example, where education is extensive and good.
• Finally, it is important to note that in this debate social mores count, though the true economist may not get what that word means. Essentially, economic incentives are not all that matter. For instance, Indian family’s preference for education for their children is a good thing - it makes it easy to get children in school (the problem here is that we don’t have schools).

These points are very important for India as a society. Our economy is growing, but is relatively equal. That means we still have a choice as to what kind of growth we want. Do we want to go along at a comfortable pace and more or less within shouting distance of each other, or travel forth at a screeching pace but with many eating dust?

Ultimately, this decision will be taken by politics, but again I offer two perspectives:

• From the viewpoint of the ostentatious dollar millionaires (and billionaires) there is every sign we will go the American way, naively happy thinking there is equality of opportunity simply because we did well.
• From the perspective of those that did not see “India Shining”, the picture will not be so rosy, and so governments will resort to short-term but ill designed schemes such as the rural guarantee scheme, or quotas that do nothing to combat the root causes of social exclusion.

Neither portends well for India. Perhaps there is a more rosy picture, but that would require a more enlightened and uniform public and certainly more competent politicians. I fear we have neither.

Indeed, underlying many of the cases of increasing Gini coefficients is a growth process in which those at the top of the distribution (top 20% here) have seen their expenditures/incomes grow considerably faster than those at the bottom (bottom 20% here).

This report is follows on my previous post on the IEB on income inequality in India. In that I made some fairly basic points that a) income inequality was increasing in India (as measured by the Gini index), b) this was undesirable because income inequality reinforced social exclusion, (as a case I showed that inequality negatively impacted access to healthcare), and c) insofar as growth had not reduced, and possibly contributed to, inequality, India should revisit the kind of growth it engendered.

This report further strengthens the case for a more equal growth. It also indicates that our current growth path does indeed exacerbate inequality and how policy interventions could help. The following points, in particular, stand out.

First, why is inequality important? This being an economic report, it does not delve into the ethical choice inherent in that question, but it suggests two more practical reasons - because it damps the “poverty reducing impact of a given amount of growth”, and because it may hinder growth prospects (there is also a very readable introduction on measuring inequality, and how appropriate the gini index is to that measurement).

Second, is the inequality a result of growth? The report suggests it is not growth per se, but the kind of growth we are witnessing that is resulting in inequality, with three proximate causes: growth differentials between rural and urban divides, between sectors (agriculture vs. services and industry), and between the educated and those not. In fact, “widening differentials in earnings of the college-educated vis-à-vis less educated individuals appears to be the single most important observable factor accounting for increasing inequality.” Somewhat simplifying, the BBC quotes the report as saying:

The bank said the main reason for widening wealth gaps in recent years was the discrepancy in investment between urban and rural areas which favoured better-educated, better-off urban populations.

This is particularly important. In my previous post I had made a similar observation regarding healthcare - that inequality affected access to health, a key to equality of opportunity . This report suggests a similar dynamic leaves the uneducated poor in a vicious cycle of social exclusion. Since economic growth prospects favor the educated and the poor lack quality education, it is unlikely they will be able to benefit from those prospects and move up - leading to further inequality.

What role for policy? The ADB suggests increasing reforms that generate income and growth for the poor, as the way forward. The emphasis, clearly, needs to be on ensuring equality of opportunity, through for instance better access to finance, removal of social exclusion, and redistribution of wealth through public funding of rural education and basic health.

The discussion to my previous post was vigorous particularly on the last point. Some suggested that private healthcare (in this case education) is better. But that argues only for private operation of these services, not their funding (two separate debates). The second major criticism, that is countered here, is whether it is public spending - or spending in general - that is important, and the public sector should in fact stay out of funding healthcare. That argument is rather counter-intuitive - since the poor are, by definition, poor and pay a premium for most services, the only way for them to spend more on education (or health) is if someone else does it for them (say the government). I will grant, however, that given the scale of the challenge, it is more appropriate to talk of public and private spending. This is particularly true in agriculture, where distortionary public policies keep private investment out of the supply chain (a point reiterated by the ADB).

I have not seen the entire report, but even the summary makes fascinating reading. It should remind us that GDP growth is not the final measure of success. Since we compare India so often to China, here’s a statistic - China’s GDP increased the most amongst the economies studied, but so did its income inequality. Perhaps we can learn something from that too.

This post originally appeared on the IEB.

“By providing small farmers with improved financial services, such as credit, savings, remittances and insurance, this project will play a significant role in helping India’s rural poor benefit from growth opportunities,” the bank’s country director for India, Isabel Guerrero, said.

What growth opportunities? Ms. Guerrero must be deluding himself. That farmers are killing themselves should be enough to explain that lack of credit is not the problem - it is the inability to repay credit! Pouring more money into banks that cannot collect loans, from clients that cannot pay will not solve that problem. Improving water supplies, reducing US agricultural subsidies, and removing market distortions and government intervention in the agricultural supply chain might. Maybe Reliance can fix this mess.

(Mirrored on IEB)