Left Front government appreciated in World Bank Report

WORLD DEVELOPMENT REPORT 2006

Published by WORLD BANK

Page 103-104

Chapter 5

Inequality and investment

“Both Banerjee and Duflo (2003) and Voitchovsky (2004) conclude that there is no reason to give one of these sets of results priority over the other. Indeed, both could be right. For example, in the short run, policies that allow large cuts in real wages might encourage investment, but in the long run, the consequent increase in poverty might make it harder for the population to maintain its human capital. Or both could be wrong. Most important among the many reasons for both the cross-sectional and the time series evidence to be misleading are the following: the possibility of a nonlinear relationship between inequality and growth, problems with comparability of cross-country data, and the difficult question of identifying the direction of causality when both variables are likely to influence one another.

This lack of clear-cut results is perhaps disappointing, but it is worth emphasizing that our focus here has been on redressing specific inequalities in productive opportunities rather than some overall measure of inequality. Despite the great attention devoted to the question of a systematic relationship between overall inequality and growth at the country level, the body of evidence remains unconvincing. But there clearly are situations in which there is a strong presumption that reducing a specific inequality would promote better investment.

One such example comes from Operation Barga, a tenancy reform in the Indian state of West Bengal in the late 1970s and 1980s. It has been known, at least since the work of the great Victorian economist Alfred Marshall, that sharecropping provides poor incentives and discourages effort. In such an environment, a government intervention that forces the landlords to give their sharecroppers a higher share of the output than the market would give them should increase effort and productivity.

This is exactly what happened in West Bengal, India, when a Left Front government came to power in 1977. The tenant’s share of output was set at a minimum of 75 percent as long as the tenant provided all inputs. In addition, the tenant was guaranteed a large measure of security of tenure, which may have encouraged him or her to undertake more long-term investments on the land. Survey evidence shows a substantial increase in both the security of tenure and the share of output going to the sharecropper.

The fact that the implementation of this reform was bureaucratically driven, and proceeded at different speeds in different areas, suggests the possibility of using variation in the implementation of the reform to evaluate its impact. The evidence suggests that there was a 62 percent increase in the productivity of the land.”