Inter-generational Decline of Indian Villages: A Hypothesis of Migration

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India is predominantly a rural country with two third population and 70% workforce residing in rural areas. Rural economy constitutes 46 per cent of national income. Despite the rise of urbanisation more than half of India‟s population is projected to be rural by 2050. Thus growth and development of rural economy and population are a key to overall growth and inclusive development of the country.

…about two third of rural income is now generated in non agricultural activities…more than half of the value added in manufacturing sector in India is contributed by rural areas. However, the impressive growth of non agricultural sector in rural India has not brought significant employment gains or reduction in disparity in worker productivity.

Changing Structure of Rural Economy of India: Implications for Employment and Growth, Report by Niti Aayog, Government of India

Development and growth in rural India has concerned all state and national governments, and it continues to do so. Rural economy in India is supported by agriculture, it allied occupations, small industries and ‘remittances’ from migrant labor.

In the agriculture setup with large rich landowners and poor tenant farmers along with small, fragmented land holdings, there is a wide disparity in the earnings of the large land-owning rich families and the rest. Similarly, the owners of small industries earn a lot more than the workers they employ. The families that depend on earners in far-off cities are also tend to hardly get by. This has huge impacts on the opportunities available for the next generations.

The decline in the agrarian economy and slowdown in industries have led to low wages, irregular employment, unemployment and labor migration (See here). The labor migration has been documented well in the Economic Survey of India 2016-17. The pattern of labor migration suggests movement of people from already poorer, rural states or districts to richer, more developed states or districts. This movement of people may not be limited just to those seeking better employment opportunities. It also extends to educational opportunities and lifestyle improvement.

The rich, even if uneducated parents, in poor villages decide to send their kids to good schools in faraway places. The younger generation that moves away for studies do not always return and contribute to the local economy. If their family has deep ties in the village, they might stay back. Otherwise, they move away. This generation then decides to get a job in the slightly better town or a city, get married to a working partner and send their kids to even better schools and provide a supportive stable place to grow – maybe provide more assistance than their parents did with better resumes, tutors etc. This ensures that the next generation will inherit their place in the emerging socioeconomic elite.

The land-owning rich do not just employ agricultural labor but also employ servants and other workers, in however oppressive social conditions. The local masons, carpenters, car mechanics etc. have a better chance of having their services deployed with these rich staying back in the village. They also have clout with local politicians to influence expenditure on nearby schools or hospitals even if they themselves travel to cities for these services.

Meanwhile, the poor, even if educated, parents in villages have to keep their kids in local schools which have crumbling infrastructure and absentee teachers. The child may also have to work in the evening or worse, work while being enrolled in the school. This younger generation of poor families do not have access to the resources to move up the ladder, no substantial inheritance to push them into the ’emerging meritocracy’.

As public schools in villages deteriorate and local infrastructure crumbles, due to budget cuts and corruption, there is a ‘sorting’ of families in these areas not just economically but also spatially and in terms of inter-generational widening of inequality of opportunity. The erratic nature of agricultural productivity and disparity in share of earnings mean that any hardships are borne disproportionately by the poor. This means that services of carpenters or masons or beavers are not needed for small incremental works in poor households. The leaving rich further ensure that these occupations are hit even worse. This leaves the region poorer.

As the same time as rural areas become poorer, the richer enclaves in cities become costlier to live. As more people flock to the cities, real estate prices rise to limit movement of the poor into these cities – even if just for manual labor, let alone for staying with families and affording child’s education. Just as villages hollow out, urban gentrification has its own vicious cycle of walled enclaves of opportunities and shanty slums of despair.

Over time, the rich in rural areas move into towns and cities while poor have to stay back and bear the hardships, depend on government support while their communities crumble – an intergenerational decline of villages that threatens to exacerbate the already steep inequality of India. This also leaves behind an inter-generational residential and spatial sorting that creates inequality of opportunity – making a mockery of the rhetoric of meritocracy.

The myopic policy perspective of successive governments and successive budget cuts in social spending have withered away the already puny infrastructure of social mobility, skill development and safety nets available in Indian villages. With unprofitable agriculture, technological changes threatening automation and an unstable employment market, the challenges for revival of rural economy seems unlikely if the neglect continues. Industry will not automatically flock to these places without human capital to ably support them. And human capital will not develop automatically, left to the ‘invisible hand’ of the market. The state, one that has constantly promised and failed its rural constituency, has to intervene and design policies that not just restores the vitality of rural India but also rejuvenates it such that it stands in step with the nation.

The Financial Crisis: Eurodollars in Shadow Banking

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Eurodollars are dollars held outside the US regulatory jurisdiction. It has no connection with the ‘Euro’ currency. The post-World War II Bretton Woods system had capital controls to minimize currency instability and to manage the global shortage of dollars which served as a constraint on the private banks. As US became a large consumer market and imported goods, dollars outside the US grew significantly. With the implicit permission of UK authorities, the London banks sidestepped the fetters by accepting dollar deposits from the wealthy and lending in dollars. This was a source of dollar liquidity outside the ambit of Fed’s regulatory powers. As Tooze puts it:

“eurodollar accounts in London offered the basic framework for a largely unregulated global financial market. As a result, what we know today as American financial hegemony had a complex geography. It was no more reducible to Wall Street than the manufacture of iPhones can be reduced to Silicon Valley. Dollar hegemony was made through a network. It was by way of London that the dollar was made global.”

CRASHED: HOW A DECADE OF FINANCIAL CRISES CHANGED THE WORLD, ADAM TOOZE (2018)

As the old Bretton Woods collapsed and capital controls were lifted, these Eurodollar accounts were awash with dollars. In Tooze’s description: “Driven by the search for profit, powered by bank leverage, offshore dollars were from the start a disruptive force. They had scant regard for the official value of the dollar under Bretton Woods and it was the pressure this exercised that helped to make the gold peg increasingly untenable. When the final collapse of Bretton Woods coincided in 1973 with the surge in OPEC dollar revenue, the rush of offshore money through London’s eurodollar accounts became a flood.”

European banks held 20% of US subprime MBSs while two-third of the ABCPs issued by SIVs had European sponsors. These contracts were dollar denominated, both on the assets and liabilities side of the balance sheet which exploded. Eurodollar was their source of wholesale funding. The Chinese, Russian and Middle-eastern wealth funds looking for relatively safe and high-yielding assets invested heavily in the SIVs which offered complex short term dollar-denominated financial instruments like ABCP. Thus, eurodollar became an integral component in the market-based shadow banking system where it stood outside Fed’s regulatory ambit and in which the European authorities bet on the Fed bailing them out if the eurodollar funding froze.

In 2007, European banks had a dollar asset-liability mismatch of about $1 trillion, which the ECB couldn’t have dealt with, with its puny $200 billions, in the event of a collapse. The central nature of eurodollar in the system is further reinforced by ECB’s “audacious assumption” that, as Tooze notes, “collaboration would be forthcoming and in an emergency the Fed would provide Europe, and London in particular, with the dollars it needed. Given the scale of the offshore dollar business there could be no other answer.”

References:

  1. Tooze, A. (2018). Crashed: How a decade of financial crises changed the world. Penguin.
  2. Kapadia, A. (2019). Capitalism: Theories, Histories and Varieties, HS 449 (Class Slides). IIT Bombay, delivered Jan – Apr 2019