Articles by Ajit K Ghose

The developments in the global economy since the 1990s are not an outcome of a "global saving glut" as postulated by Ben Bernanke in 2005, but the consequence of fl ows from the "global dollar glut". This glut led to the 2007 financial crisis. Quantitative easing is brewing the crisis of tomorrow.

The inflow of foreign private capital to developing countries increased rapidly in the 1990s, but the result was growth of foreign currency reserves and not investment rates. This suggests that capital inflow actually crowded out domestic investment, thereby generating a surplus of domestic saving in recipient countries. This paper seeks to explain why such crowding-out might occur. A simple open-economy model is developed to show that crowding-out can be seen as an unavoidable consequence of substantial capital inflow, and that growth of foreign currency reserves is a corollary of crowding-out. The implication is that by allowing unrestricted inflow of foreign private capital, developing countries do not augment investment. They end up undermining their domestic investors, lending their own savings to developed countries and increasing their dependence on foreign investors for sustaining economic growth. Maintaining controls on capital flows is a good policy stance.

Development used to mean a process of structural transformation associated with gradual disappearance of dualism and surplus labour. Today it simply means growth of per capita income. This change of meaning reflects a paradigm shift in development economics; the Lewis framework has yielded place to a "monoeconomics" framework. The latter assumes away the structural differences between developing and developed economies, thereby eliminating the distinction between development and growth. Development economics then becomes concerned with explaining why some countries have remained so much poorer than others. The premises of this "new" framework, this paper argues, are highly questionable. Lewis' characterisation of developing economies as labour-surplus dual economies and conceptualisation of development as a process of structural change are far sounder. The paper uses Lewis' premises and the considerable benefit of hindsight to build a fresh perspective on issues, requirements and challenges of development.

The idea that growth of the modern sector alone can improve employment conditions in labour-surplus developing economies has been and remains extremely influential. It is implicit in the argument that rapid economic growth is all that is required to improve employment conditions. It is also implicit in the fact that issues of growth of the modern sector are usually presented as issues of economic growth in general while issues of growth of the traditional sector hardly ever figure in debates and discussions. And yet, this paper argues, neither theory nor real world experience supports the idea. For employment conditions to improve, growth must occur simultaneously in both modern and traditional sectors. There are important issues of growth strategy for the traditional sector waiting to be debated.

The growth performance of the Indian economy, though not spectacular, has been decent by the standards of developing countries. But growth has failed to improve employment conditions in the country even though the rate of labour force growth has so far been quite low. It is hardly surprising that problems of unemployment and underemployment worry policy planners of today as much as they did Mahalanobis at the time of formulating the Second Five-Year Plan. The rate of labour force growth is currently accelerating and is expected to remain high for quite some time to come. If the past patterns continue, the country will soon be confronted with an employment crisis. This paper analyses the past experience in an effort to identify the problems that must be urgently addressed. It then proposes a few ideas for future policy.