Corruption has declined since the 1991 reforms

Updated: Nov 30 2012, 11:53am hrs
Myth 1: There has been no reduction in poverty as a result of post-1991 reforms

This myth challenges not only the link between reforms and growth but the link between growth and poverty, by asserting that poverty did not decline after the acceleration of growth subsequent to the post-1991 reforms. According to the Planning Commission data, at the traditional poverty line, the India-wide absolute number of poor was 323 million in 1983, 320 million in 1993-94 and 302 million in 2004-05. Presumably, therefore, the number of poor has at best declined marginally.

Once popularised by the World Bank, going by the absolute number of poor is nevertheless a flawed method of measuring the evolution of poverty in the face of a rising population. This approach to measuring poverty will in fact downplay the decline in poverty because it does not distinguish between the changes in the absolute and in the relative or proportionate number of poor. This biases the poverty measure towards exaggerating poverty. One might therefore conclude cynically that the biased measure was popular at the World Bank and diffused to the client nations, so as to increase the alarm over poverty, and bolster the critiques of a reforms-oriented developmental strategy.

Shifting, however, to the proportionate measure of poverty, we get a more meaningful insight into what happened to it. According to Planning Commission estimates, the proportion of the population below the poverty line in India was 44.5% in 1983. Between 1983 and 2004-05, the population rose by 374 million to 1.1 billion. A reasonable assumption would be that, in the absence of an effective poverty alleviation strategy, the poor would have been 44.5% of the additional 374 million individuals. This assumption translates into the addition of 166.5 million to the existing population of the poor. Therefore, if the absolute number of poor were to remain unchanged at 323 million between 1983 and 2004-05, it would imply the exit of 166.5 million individuals from poverty. In reality, the number of poor in 2004-05 turned out to be 302 million, implying that India had successfully pulled as many as 187.5 million people out of poverty.

This substantial decline is properly captured by what economists call the poverty ratio, which fell to 27.5% in 2004-05 from 44.5% in 1983. This makes a mockery of the contention that the unchanged absolute number of poor people is equivalent to no change in poverty. This erroneous inference implies that we expected the entire net addition of 374 million to the population to be non-poor!

Myth 2: Reforms have led to increased inequality

For a measure [of inequality] to be relevant to the public-policy discussion, it must have political and social salience. For example, if incomes increase in Mumbai but not in the Ratnagiri district of Maharashtra, evidently inequality of income has increased between Mumbai and Ratnagiri. But if those living in Ratnagiri are not comparing themselves to what is happening in Mumbai, why is this inequality measure of any relevance So, measures of urban-rural inequality may have little relevance as well. On the other hand, when within Mumbai inequality becomes more acute, the poor there are more likely to notice as they compare themselves with the rich in their own neighbourhoods.

Against this background, what has been the Indian experience As it happens, the evidence we discuss below shows that contrary to widespread impressions, inequality measures do not point to an unambiguously rising trend in inequality and even on a net basis, the rise in it has been at best modest.

Thus, Krishna and Sethupathy (2012) have recently measured inequality in India, using the household expenditure survey data from the NSS rounds conducted in 1987-88, 1993-94, 1999-2000 and 2004-05. Interestingly, these authors show that inequality between states and between urban and rural areas is dwarfed by the inequality among households within each of these aggregates. For example, within-states inequality accounts for more than 90% of the total inequality over the country (see Figure 2).

Between-states inequality accounts for less than 10% of the total inequality across the country. Likewise, within-rural and within-urban inequality accounts for 90% or more of the total inequality across the nation. Importantly, the overall inequality exhibits only modest variation over the period, rising slightly between 1988 and 1994 and again between 1994 and 2000, but dropping by 2005 to a level slightly above that in 1988 (see Figure 2). Inequality trends within states mirror the national experience: it rose between 1994 and 2000 and then fell between 2000 and 2005 in most states. Indeed, between 2000 and 2005, only four statesMizoram,Maharashtra, Orissa, and Haryanaexperienced significant increases in inequality. The picture is almost exactly the same for rural and urban areas within states; the vast majority experienced rising inequality between 1994 and 2000 but falling inequality between 2000 and 2005.

Myth 3: The post-1991 reforms have led to more corruption

A common refrain of the left-wing critics is that the post-1991 neo-liberal reforms have led to an exponential increase in corruption. For example, in an article entitled Economic Reforms: Fountainhead of Corruption in the New Age Weekly, the central organ of the Communist Party of India, RS Yadav writes: The early stage of liberalisation process in the 1980s was accompanied by (the) Bofors scandal, which for the first time in independent India, put the prime minister and the prime ministers office in the centre of the scandal. After the full-fledged adoption of neo-liberal reforms in 1991, the country came across a wave of scams and scandals, every scandal bigger in magnitude, and more bold, and involved people at the helm of governance, administration and industry.

Among such critics, the young are blissfully ignorant of history while the old probably suffer from amnesia. The near-absence of corruption was among the hallmarks of the Indian political virtue in the 1950s. Corruption broke out, not with the liberal reforms of the 1980s, but under the licence-permit raj that peaked in the 1970s during the socialist-era policies of Prime Minister Indira Gandhi. With the government controlling the manufacture, distribution and price of numerous major commodities, bribes became virtually the only means of accessing the latter within a reasonable time frame. Thus, for example, if you wanted a phone, car or scooter, you had to choose between a many-years-long queue and a bribe. As an entrepreneur, if you wanted an investment or import licence or to stop your competitor from getting one, bribing a senior official in the relevant ministry would do it.

It was the reforms, initially carried out on an ad hoc basis but made more systemic in 1991, which freed the ordinary citizens and entrepreneurs from their daily travails and humiliations at the hands of the petty government officials. This may not be obvious to the young, who probably do not even know what the licence permit raj was, but those of us who lived through this history know that reforms bid goodbye to many forms of corruption.

The critical question then is: why have we witnessed so many mega corruption cases recently The success of reforms has opened up new opportunities in several areas to make profits. But because the reforms have still not been extended to these new areas, new avenues for corruption of the older variety have now multiplied. Thus, reforms (which include opening up our access to the world markets) and the growth resulting from them have pushed up the prices of scarce resources such as minerals and land. These price increases have multiplied the scope for government officials (and colluding businessmen) to make vast sums of illegal money through the pre-reforms-type arbitrary and opaque allocations of the rights to extract minerals and the acquisition and resale of land. The 2G scandal offers a dramatic example of how the success of past reforms (in opening up new opportunities to make profits) and the failure to extend them (to cover these new opportunities) have combined to produce a mega scandal. With the telephone arriving in India in the early 1880s, it had taken the country 110 years to reach five million phones in 1990-91. But the spectacular success of telecom reforms brought the number to 300 million at the end of 2007-08 with the rate of expansion reaching 6.25 million per month. This turned the spectrum on which cell calls travel into a resource worth tens of billions of dollars. That allegedly allowed the then telecom minister, A Raja, to make handsome sums for himself and his friends when allocating the spectrum to his wealthy friends for a small fee in January 2008. Had reforms been extended to government procurement and sales policies, Raja would not have had the freedom to allocate the spectrum at a pre-specified low price to his friends with bribes allegedly provided in return.

This is an extract from the book Indias Tryst with Destiny: Debunking Myths that Undermine Progress and Addressing New Challenges by Jagdish Bhagwati and Arvind Panagariya