This blog revisits the sudden resignation of Urjit Patel on 10 December as the governor of the Reserve Bank of India (RBI). Patel cited ‘personal reasons’ for his resignation, but it is widely acknowledged that he was unable to manage or withstand a rift with the government. Does this threaten the RBI’s autonomy and thus portend an uncertain future of a venerable institution? Or is the significance of central bank autonomy overrated, as some critics contend? Perhaps, as some have argued, Patel’s resignation is a reflection of his aptitude and characteristics as an individual rather than an existential struggle over the future of RBI.
I had the pleasure and privilege of representing the Griffith Asia Institute at an international forum on poverty reduction. It was held in Beijing on November 1 and 2, 2018. The aim was to showcase China’s stunning economic success.
In a recent statement, the Bangladesh Prime Minister noted that, once the nation’s biggest infrastructure project, known as the multi-purpose Padma Bridge, is fully operational, GDP growth would increase by 2% annually. This would mean that the current rate of growth of 7.9% would reach 10%. Where did she get these numbers from? Is she exaggerating the growth impact of the Padma Bridge?
There is little doubt that the Padma Bridge would transform the lives of millions. For the first time, the southwest of Bangladesh would have a continuous road/rail link to the more developed east. The World Bank, which initially wanted to fund the project but pulled out in 2012 because of corruption concerns with the construction and management of the project, had this to say in 2011:
‘The Padma Bridge is expected to… transform the lives of nearly 30 million Bangladeshis living in the South West. By reducing distances to major urban centres like Dhaka by almost 100km, the Bridge will reduce poverty in the region and accelerate growth and development in the country as a whole.’
Formal evaluations that were undertaken by Bangladeshi economists suggest that the net economic benefits would be substantially positive, but the equivalent annualized addition to national GDP would be about 0.33 per cent. On the hand, regional GDP in the southwest would increase between 1.7% and 2.3%.
It is possible that the Prime Minister’s speechwriters glossed over this distinction between regional and national GDP. After all, 2% extra growth – rather than the more modest fractional numbers – acts rather well as a soundbite.
A recent decision by the tech giant Amazon to ensure that workers are at least paid a minimum wage of US$ 15/hour – which is almost twice the US Federal minimum wage of US$ 7.25 an hour – has renewed attention on the role that minimum wages can play in influencing labour market outcomes. Critics might argue that this portends potentially adverse consequences because Econ 101 says that minimum wages cause unemployment or at least restrict employment opportunities.
Is that really the case or does Amazon know something that avid followers of Econ 101 do not? Amazon’s position is supported by an evaluation by the European Commission (EC) of 14 OECD countries which makes the following optimistic assessment:
The evidence suggests that a well-managed minimum wage policy through statutory minimum rates or collectively bargained wage floors can be effective at improving the wages of low paid workers without negative effects on employment rates.
What about emerging economies? Consider Table 1 which provides comparative on a sample of emerging economies.
|Country||Minimum wage/Average wage||Employment rate|
Source: Derived from Stijn Broecke, Alessia Forti & Marieke Vandeweyer (2017) ‘The effect of minimum wages on employment in emerging economies: a survey and meta-analysis’, Oxford Development Studies, 45:3, 366-391
A cursory examination of Table 1 suggests that it is possible to have high minimum wages that co-exist with above-average employment rates (that is, above the sample average of 58%), the cases of Colombia, Indonesia and Thailand being most notable in this regard. A more rigorous meta-analysis for the aforementioned sample of emerging economies arrives at the following conclusion.
… minimum wages have had little detectable impact on employment. While more vulnerable groups appear to be more adversely affected by minimum wage rises, the effects tend to be small on average. These findings are very much in line with the growing consensus around the impact of minimum wages on employment in more advanced economies…
The study also points out that many empirical investigations in this field suffer from a ‘negative reporting bias’, that is, there is a tendency to report negative results (minimum wages reduce employment). At least 70% of the estimates that were reviewed were actually statistically insignificant. The mean value of the ‘elasticity’ derived from 746 estimates is 0.047, that is, a 10% increase in the minimum wage might reduce aggregate employment by, at best, 4.7%.
It is worth noting that the results of this meta-analysis are in line with the findings of World Development Report 2013 which pointed out that ‘…most estimates of the impacts of (labour regulations) on employment levels tend to be insignificant or modest’ (WDR, 2013: 261). Even if there is a modest and negative impact of minimum wages on employment, this can be offset by the possibility that minimum wages can alleviate the incidence of low pay and thus reduce working poverty.
Of course, minimum wage policy needs to be combined with complementary measures, such as education and skills policies, active labour market programmes and social protection measures in general, to tackle the problem of low wage employment. Nevertheless, the EC evaluation, combined with the aforementioned meta-analysis of the minimum wage-employment nexus are highly relevant to the case of low and middle-income economies that are typically characterised by a significant incidence of low pay and working poverty. A reduction in working poverty, while desirable in itself, can also boost aggregate demand by enlarging the size of the domestic market and become a new source of job creation.
One could still argue that minimum wages, in general, are problematic for developing countries that rely heavily on foreign direct investment (FDI). High minimum wages might deter FDI which usually is motivated – so goes the argument – by the incentive to locate in low-wage labour markets. The problem with this line of reasoning is that it is incompatible with the predominant finding in the academic literature that FDI creates a ‘wage premium’, that is, affiliates of multinational companies pay significantly higher wages than their domestic counterparts while boosting both employment and productivity. Thus, it is unlikely that foreign firms would be deterred by minimum wage legislation.
In 2013, Facebook launched an initiative to enhance internet access in developing countries. In 2015, at a UN Summit, Mark Zuckerberg, the CEO of Facebook, argued passionately that connecting poor people in the developing world to the internet is crucial for the success of the global goal to eliminate extreme poverty. Today, this initiative is known as ‘Free Basics by Facebook’. The goal is to bring ‘internet access and the benefits of connectivity to the portion of the world that doesn‘t have them…. Free Basics by Facebook provides people with access to useful services on their mobile phones in markets where internet access may be less affordable. The websites are available for free without data charges, and include content on things like news, employment, health, education and local information. By introducing people to the benefits of the internet through these websites, we hope to bring more people online and help improve their lives’.
Not surprisingly, Facebook is also available free for mobile phone users of this scheme. Facebook makes strong claims about the impact of such a benevolent mission. Thus:
‘Through our connectivity efforts we’ve brought more than 100 million people online who otherwise would not be and introduced them to the incredible value of the internet. They’re doing better in school, building new businesses, and learning how to stay healthy’.
Some anecdotal examples are given to support this claim, but a more rigorous evaluation is needed. As critics have been quick to point out, this feel-good and benevolent mission can turn out to be self-serving as the ‘free basics’ scheme is a conduit for increasing the size of Facebook’s market in the developing world. Furthermore, subscribers to the ‘free basics service’ could easily end up conflating the internet with Facebook. It is also naïve to reduce a complex phenomenon – poverty and its multidimensional nature – into an issue of enhancing access to the internet.
Perhaps Facebook’s biggest moral dilemma is to contend with increasing evidence that it has unwittingly ended up as an instrument for either abetting authoritarian regimes (as in the Philippines) or fomenting social violence (as in Myanmar, Sri Lanka, India and Libya). It has also been held responsible for mobilizing groups to commit violence against immigrants (as in Germany). In some cases, governments (notably Sri Lanka and Libya) have been forced to temporarily shut down Facebook.
Mark Zuckerberg’s benevolent mission to join forces with the UN and others to fight extreme poverty across the globe has been dented by recent events. Facebook has responded with countervailing measures, but self-regulation by a global corporate behemoth is not adequate enough to respond to a growing and disturbing phenomenon of perpetrators in different parts of the world who have used Facebook as a way of ‘connecting hate’.