Dr.DEBESH BHOWMIK

Dr.DEBESH BHOWMIK

Wednesday 26 October 2011

Indian Poverty and Inequality – A Paradoxical Result


 Indian Poverty and Inequality – A Paradoxical Result
Prof. Sukhdeo Thorat and Prof. Amaresh Dubey  have released a research paper from the Jawarharlal Nehru University,NewDelhi where they showed that in rural areas,decline in Indian poverty accelerated from 2.2% between 1993-94 and 2004-05 to 4.4% in the period 2004-05 to 2009-10.For the same period,poverty reduction in urban areas rose from 1.9% to 3.9%.During 1993-94 – 2009-10, Indian poverty reduction rate was found as 2.5% .On the other hand,the inequality rose marginally in both rural and urban areas in 2009-10 compared to 1993-94 and 2004-05 respectively.This result is , however, contradictory.At the same time,they claimed that inclusive growth and poverty alleviation strategy were successful enough including the reduction of sc/st  poverty ratio in the respective periods.

Average Annual rate of decline in poverty (%)
1994-2004
Average Annual rate of decline in poverty (%)
2005-2010
Average Annual rate of decline in poverty (%)
1994-2010
Rural
2.2
4.4
2.5
Urban
1.9
3.9
2.3
Total
2.1
4.3
2.5
                                              Inequality of income (Gini Co-efficient)

1993-94
2004-05
2009-10
Rural
0.30
0.30
0.31
Urban
0.36
0.38
0.40
Total
0.35
0.35
0.37
In South Asia and South East Asia , poverty ratios are declining whereas inequality are rising with the increasing growth rate.In some of the middle and high income economies, the same trends were observed. But,if growth –poverty nexus is valid, then inequality should remained the same. So, poverty may stimulates inequality if growth remains the same or declines. If poverty declines with the increase in growth rate then inequality should reduce through redistribution effects. Since, inequality rose, then we may infer that redistribution of income went against the poor and favoured the rich.This paradoxical results have been happening in recent years. Therefore, policy makers have lot of works to do in the process of income distribution for preparing pro-poor growth policy.

Monday 3 October 2011

Exchange rate behavior of Great Britain during 1960-2010


The official exchange rate of U.K. with respect to US dollar during last 40 years behaves more or less like other countries of EU and Asia because it shows volatility. If we use co-efficient of variation as the very simple measure of volatility , then we got the value of 22.16% which is too high. In the Fig-1, the volatility of the exchange rate is given.
                                             Fig-1, Official exchange rate of UK per US dollar

In contrast to the behavior of the official exchange rate of UK per US dollar, the nature of the REER of UK during 1975-2009 is plotted below.
                                           Fig-2, REER of UK


This REER (2005=100) is found as cyclical having co-efficient of variation is 9.6572% ie less volatile than the level series data. It is linearly estimated as,
REER = 80.8878+0.4293 T+U
               (31.994)*(3.539)*
R2=0.275 , F= 12.53 (significant) and   * = significant at 10% level.
On the other hand, the linear estimated equation of the level series of exchange rate is given below.
EX.RATE =0.38009+0.005913t +u
                   (16.69)*(7.759)*
R2=0.551 , F=60.21(sig) , where * = significant at 10% level.      
The REER  is positively skewed (value = 0.13007) but the level series is negatively skewed(value = -0.0843).
The long run trend of the curve is estimated in the linear form is shown in the figure-3, and the nature of the actual exchange rate curve is also shown and it is cyclically upward.
                       Fig-3 , Estimated series of exchange rate 

The exchange rate shows auto-correlation and partial auto-correlation problems.In the Table-1,the correlogram of auto-correlation and partial auto-correlation are given along with the values of auto-correlation and partial auto-correlation along showing Q statistic and probabilities for significance.

Table-1
Correlogram of exchange rate series
Sample: 1960 2010
Included observations: 51
Autocorrelation
Partial Correlation

AC
 PAC
 Q-Stat
 Prob
      . |*******|
      . |*******|
 1
 0.892
 0.892
 43.055
 0.000
      . |****** |
     ***| .     |
 2
 0.730
-0.327
 72.446
 0.000
      . |*****  |
      . |*.     |
 3
 0.593
 0.112
 92.250
 0.000
      . |****   |
      . |*.     |
 4
 0.512
 0.133
 107.35
 0.000
      . |****   |
      . | .     |
 5
 0.470
 0.036
 120.33
 0.000
      . |****   |
      . |*.     |
 6
 0.472
 0.195
 133.69
 0.000
      . |****   |
      . |*.     |
 7
 0.494
 0.068
 148.66
 0.000
      . |****   |
      .*| .     |
 8
 0.484
-0.120
 163.40
 0.000
      . |***    |
      .*| .     |
 9
 0.417
-0.142
 174.58
 0.000
      . |**     |
      .*| .     |
 10
 0.311
-0.104
 180.95
 0.000
      . |**     |
      . | .     |
 11
 0.216
 0.018
 184.11
 0.000
      . |*.     |
      . | .     |
 12
 0.149
-0.036
 185.65
 0.000
      . |*.     |
      .*| .     |
 13
 0.091
-0.138
 186.24
 0.000
      . | .     |
      . | .     |
 14
 0.050
-0.020
 186.42
 0.000
      . | .     |
      . | .     |
 15
 0.036
 0.047
 186.52
 0.000
      . | .     |
      . | .     |
 16
 0.025
-0.039
 186.57
 0.000
      . | .     |
      . | .     |
 17
-0.009
-0.036
 186.58
 0.000
      .*| .     |
      **| .     |
 18
-0.088
-0.196
 187.21
 0.000
      .*| .     |
      . | .     |
 19
-0.168
 0.003
 189.60
 0.000
      **| .     |
      .*| .     |
 20
-0.250
-0.149
 195.06
 0.000
     ***| .     |
      .*| .     |
 21
-0.329
-0.111
 204.79
 0.000
     ***| .     |
      . |*.     |
 22
-0.367
 0.114
 217.34
 0.000
     ***| .     |
      . |*.     |
 23
-0.338
 0.124
 228.38
 0.000
      **| .     |
      . | .     |
 24
-0.276
 0.044
 235.99
 0.000

The exchange rate of UK from 1960 to 2010 does not face unit root because from the unit root test we found the value of Augmented Dicky Fuller (ADF)which is -3.2857 and found  significant at 10% level.
The estimated unit root test is,
X t-1 = 0.1006 – 0.2489 + 0.4794 X t-1+u
              (3.24)*  (-3.2857)*   (3.665)*
  R2= 0.2969, ( moderately  low), F= 6.334(insignificant),   where * = significant at 10% level.
But, the exchange rate series has no common variance and therefore, the Auto Regressive Common homoscedasticity test appeared to be significant where  Observed R2= 24.041(low but significant) ,F=44.456(sig) in which the estimated values are:
Constant              0.001929 (t= 1.41 , insignificant)
Residual               0.6932 (t= 6.66,significant)
Moreover, the series contains  heteroskedasticity  where the value of log likelihood ratio was found as 24.53(significant) from the Ramsey Reset Test.
So, we have to face numerous exchange  rate  policies for stabilization. The falling REER is the condition for net gain in terms of trade and positive current account balance. The stability of exchange rate with inflation targeting policy is crucial and to be adjusted with LIBOR and interest rate of EU for good behavior of exchange rate of the economy. Any interest rate differential is to managed by monetary policy.