Rana Hasan

Trade Reforms, Labor Regulations, and Labor-Demand Elasticities: Empirical Evidence from India

Using industry-level data disaggregated by states, this paper finds a positive impact of trade liberalization on (the absolute values of) labor demand elasticities in the Indian manufacturing sector. The magnitudes of these elasticities turn out to be negatively related to protection levels that vary across industries and over time. Furthermore, we find that these elasticities are not only larger in size for Indian states with more flexible labor regulations, they are also impacted there to a larger degree by trade reforms. Finally, we find that the reforms have led to a reduction in the share of labor in total output and value added, possibly due to the reduction in the bargaining power of workers.

The impact of imported and domestic technologies on the productivity of firms: panel data evidence from Indian manufacturing firms

Abstract This paper estimates production functions using panel data on Indian manufacturing firms. The results indicate a statistically significant impact of imported technologies on productivity, especially on account of imports of disembodied technology. New domestic capital goods also impact productivity positively and, in fact, tend to do so in a wider range of industries. However, the productivity enhancing effects of domestic capital goods appear to owe more to the disembodied technologies imported by producers of domestic capital goods than the R&D they conduct.

Big Reforms but Small Payoffs: Explaining the Weak Record of Growth in Indian Manufacturing

India has undertaken extensive reforms in its manufacturing sector over the last two decades. However, an acceleration of growth in manufacturing, and a corresponding increase in employment, has eluded India. Why have the reforms not produced the intended results? Using Annual Survey of Industries data at the three digit level for major Indian states, for 1980-2004, we analyze the effects of the reforms that liberalized Indias industrial licensing regime on the performance of registered manufacturing. We find that the performance of the manufacturing sector is heterogeneous across states, as well as across industries. In particular, labor intensive industries and industries dependent on infrastructure have not benefited much from reforms. Industrial performance appears to be contingent on the state specific policy and economic environment. States with relatively inflexible labor regulations have experienced slower growth of labor-intensive industries and slower employment growth overall. Additionally, states with relatively competitive product market regulations and with better infrastructure have experienced larger benefits from reforms.

Financial Sector Development, Economic Growth, and Poverty Reduction: A Literature Review

This paper reviews the theoretical and empirical literature on the role of financial sector development, with a view to deepening understanding of the rationale of development assistance to the financial sector of developing countries. The review leads to the following broad conclusions: (i) there are convincing arguments that financial sector development plays a vital role in facilitating economic growth and poverty reduction, and these arguments are supported by overwhelming empirical evidence from both cross-country and countryspecific studies; (ii) there are however disagreements over how financial sector development should be sequenced in developing countries, particularly the relative importance of domestic banks and capital markets and, in developing the banking sector, the relative importance of large and small banks; (iii) while broadening the access to finance by microenterprises, small and medium-sized enterprises (SMEs), and vulnerable groups is recognized as critically important for poverty reduction, it is also widely believed that microfinance and SME credit programs need to be well designed and targeted to be effective. In particular, these programs need to be accompanied by other support services such as provision of training and capacity building, assistance in accessing markets and technologies, and addressing other market failures; and (iv) financial sector development and innovation will bring risks, and it is therefore essential to maintain sound macroeconomic management, put in place effective regulatory and supervisory mechanisms, and carry out structural reforms in developing the financial sector. The paper argues that these conclusions provide a strong justification for development assistance to target financial sector development as a priority area, and that, like any public sector intervention, such assistance should be designed to address market and nonmarket failures. The paper also highlights several areas where more research is urgently needed, in particular, how to sequence financial sector development, how to balance the need for financial innovation and that for economic and financial stability, and how to make microfinance and SME credit programs work better to reduce poverty.

What Constrains Indian Manufacturing

India has undertaken extensive reforms in its manufacturing sector in the last two decades. However, an acceleration of growth in manufacturing, and a concomitant increase in employment, has eluded India. What might be holding the sector back? Using Annual Survey of Industries data at the three-digit level and difference in estimates this paper finds that the post-reform performance of the manufacturing sector is heterogeneous across industries. In particular, industries dependent on infrastructure or external finance, and labour-intensive industries have not been able to reap the maximum benefits of reforms. The results point to the importance of infrastructure development and financial sector development for the manufacturing sector’s growth to accelerate further. They also emphasize the need to clearly identify and address the factors inhibiting the growth of labour-intensive industries.

Does Investing in Technology Affect Exports? Evidence from Indian Firms

The authors use firm-level data from Indian manufacturing industries to explore the determinants of exports, focusing on the role played by technology. The empirical analysis, which distinguishes between a firms decision to export and the volume of its exports conditional on its having decided to export, reveals that investments in technology via R&D and technology transfer agreements can facilitate the entry of Indian firms into export markets. However, their influence on the volume of exports is fairly limited. Factors with a more broad-based influence on both export participation and volumes include labor intensity and, especially, firm size.

The Distribution of Firm Size in India: What Can Survey Data Tell Us?

We use establishment-level data from Indian manufacturing to describe the distribution of firm size in terms of employment, and discuss implications for public policy. A unique feature of our analysis is the use of nationally representative establishment-level data from both the registered (formal) and unregistered (informal) components of the Indian manufacturing sector. We also examine how the distribution of firm size varies across states coded by recent literature as having either flexible or inflexible labor regulations. We find little difference in the size distribution of firms between states believed to have flexible labor regulations versus those with inflexible labor regulations. However, restricting attention to labor-intensive industries, we find a greater prevalence of larger-sized firms in states with flexible labor regulations. This suggests that labor regulations may indeed be affecting firm size adversely. More generally, our paper serves to illustrate the point that establishment-level survey data represent a very rich source for work on public policy issues.

The Role of the Middle Class in Economic Development: What Do Cross-Country Data Show?

This paper investigates the channels through which the middle class may matter for consumption growth and development. Determinants of the size and the growth of the middle class are also examined. Using several different middle class measures and a panel of 72 developing countries spanning the period 1985-2006, we find that a larger middle class influences growth primarily through higher levels of human capital investment. We also find that large governments, higher levels of urbanization, greater democracy, ethnic concentration, and sea access are all associated with a larger middle class.

Labor Regulations and the Firm Size Distribution in Indian Manufacturing

We use data from Indian manufacturing to describe the distribution of firm size in terms of employment and discuss implications for public policy, especially labor regulations. A unique feature of our analysis is the use of nationally representative establishment-level data from both the registered (formal) and unregistered (informal) segments of the Indian manufacturing sector. While we find there to be little difference in the size distribution of firms across states believed to have flexible labor regulations versus those with inflexible labor regulations, restricting attention to labor-intensive industries changes the picture dramatically. Here, we find greater prevalence of larger sized firms in states with flexible labor regulations. Moreover, this differential prevalence is higher among firms that commenced production after 1982, when a key aspect of Indian labor regulations was tightened. Overall, our findings are consistent with the argument that labor regulations have affected firm size adversely.

Trade Liberalization and Poverty Reduction: New Evidence from Indian States

As is widely acknowledged, the incidence of poverty in India has declined steadily over the last several decades. What is debated, however, is the pace at which poverty has declined and its relationship with Indias economic reforms. In particular, a key concern among policymakers and researchers alike is that trade liberalization undertaken in the early 1990s may have slowed the progress made in reducing poverty. In this paper, we update our previous econometric analysis on the links between trade liberalization and poverty reduction in India. By incorporating measures of poverty based on the 2004-05 consumer expenditure survey carried out by Indias National Sample Survey Organisation, we are able to sidestep the controversy-ridden poverty measures based on the 1999-2000 survey. Our new results are in line with the earlier ones in Hasan, Mitra and Ural (2007): States, and regions within states, that were more exposed to trade liberalization on account of their employment structures did not experience slower reduction in poverty; on the contrary, to the extent that we find a statistically significant relationship between trade liberalization and poverty reduction, the evidence points to faster poverty reduction in states and regions experiencing greater increases in exposure to trade. Moreover, this relationship is typically stronger in states with more flexible labor regulations, better quality transportation infrastructure, and more developed financial systems.