Veblen Preferences and Falling Calorie Consumption in India: Theory and Evidence By Amlan Das Gupta University of British Columbia Abstract Despite rapid economic growth India experienced an unexpected decline in average calorie consumption during the time span 1983-2005. This paper is an attempt to demonstrate that preference for conspicuous consumption driven by status competition within one's peer group is a significant explanatory factor for this decline. It begins by adding status seeking preferences to a dual-economy general equilibrium model, demonstrating the theoretical possibility of this idea. Next, the effect of peer group income on calorie consumption is estimated using World Bank data collected from rural India. Using these estimates it is roughly calculated that Veblen competition can account for more than a third of the missing calories. A unique source of variation in peer group income, based on caste-wise domination across villages, is used for identification. Keywords: Calorie reduction, India, Veblen goods, Caste. JEL codes D11, I 15, O12, O53 Acknowledgments: For his essential guidance and help in this project I would like to thank my supervisor Dr. Mukesh Eswaran and also my supervisory committee members Dr. Pattrick Francois and Dr. Kevin Milligan. I am also grateful for useful comments and suggestions from Dr. Siwan Anderson, Dr. Kaivan Munshi, and the participants of the empirical workshop at the University of British Columbia, especially Dr. Thomas Lemieux and Dr. Nisha Malhotra. I have also benefitted greatly from discussions with my fellow graduate students. 1 1. Introduction There is ample anecdotal evidence to suggest that status, derived from display of wealth, is an important aspect of Indian social life1. This paper will try to convince you that in India status competition is also an important influence on one real economic outcome, namely nutrition. A surprising recent finding is that average calorie consumption in India was declining during the years 1985 to 2005, a period most noted for very high growth rates in the Indian economy (Deaton and Dreze 2009). This paper is an attempt to explain this phenomenon on the basis of strong preference for status goods coupled with rising incomes. The paper begins with a theoretical framework where such preferences are added to a standard dual-economy general equilibrium model. This framework demonstrates that in order to observe reducing calorie consumption with economic growth, status competition has to coexist with low income elasticity of food. In the subsequent empirical section, consumption choices of a sample of rural Indian households from the states of Uttar Pradesh and Bihar is examined. The evidence suggests that peer group income has a negative impact on calorie consumption. Moreover this effect is much higher than the positive effect of own income. These findings suggest that status competition may explain how calorie consumption may actually fall even though incomes are going up all round. India today suffers from the dubious reputation for being home to almost a third of the world‟s malnourished children (See Fig 1 attached at the end). So the issue of nutrition generates deep 1 For some of the articles in the popular media regarding conspicuous consumption in India see the following: “India's wealthy flaunt riches as fashion industry booms”, China Daily May 2011; “For India‟s Newly Rich Farmers, Limos Won‟t Do”, New York Times March 2010 and “India‟s Secret Weapon: Its Young Population”, CNBC October 2012. 2 concern. According to the latest report of the National Family Health Survey2 (2005-06) 48% of all children under 5 years of age are stunted3, 20% are wasted and 43% are under weight. Children suffering from such severe under-nutrition are more susceptible to disease and are much less likely to develop into physically and mentally healthy adults. The adult population also shows signs of this severe malnutrition with extreme thinness or obesity prevalent amongst 43% of Indian men and 48% of Indian women between the ages 15-49. The state of nutrition in India is critical in the sense that it has ceased to be a humanitarian problem restricted to the poor and threatens the economic/productive capacity of the whole country. According to a World Bank report published in 2005 (Gragnolati et al. 2005) micronutrient deficiencies alone are costing India US$2.5 billion annually. Poverty is often cited as the root cause of malnutrition in India4. This is what commonsense would suggest and indeed most studies find a positive income elasticity of food expenditure as well as calorie consumption 5 . So, the spell of high economic growth from the mid-1980s onwards, was expected to make significant inroads into solving malnutrition. Yet, Deaton and Dreze (2009) demonstrate that in between the years 1983 and 2004 average calorie consumption 2 The NFHS survey is a nationally representative survey conducted under the stewardship of the Ministry of Health and Family Welfare government of India. 3 Nutritional status is typically described in terms of anthropometric indices, such as underweight, stunting and wasting. The terms underweight, stunting and wasting are measures of protein-energy undernutrition and are used to describe children who have a weight-for-age, height (or recumbent length)-for-age and weight-for-height measurement that is less than two standard deviations below the median value of the NCHS/WHO reference group. This is referred to as moderate malnutrition. The terms severe underweight, severe stunting and severe wasting are used when the measurements are less than three standard deviations below the reference median, and mild underweight, stunting and wasting refer to measurements less than one standard deviation below the reference population. Underweight is generally considered a composite measure of long and short-term nutritional status, while stunting reflects long-term nutritional status, and wasting is an indicator of acute short-term undernutrition. 4 Yet the malnutrition statistics we see are far worse than the proportion of people living below the poverty line (27.5% in 2004-05 according to Kotwal et al (2010)). 5 Although there is some debate about the size of this elasticity, most agree that it is greater than zero and higher for low income households (see Subramanian and Deaton (1996) and Behrman and Deolalikar (1987)). 3 in the whole country has fallen6. However during the same period, GDP per capita grew at 4 to 6 percent per annum, real percapita consumption expenditure was rising at 2-4 percent and the relative price of food remained quite stable. So, this fall in calorie consumption cannot be attributed to a negative income elasticity of calories. Also, the authors estimate the calorie Engel curves for different time periods. An interesting feature of these curves is that they are positively sloped but have been shifting downwards over time. So calorie consumption is falling, over time, for each point on the income distribution. Clearly there must exist other factors, independent of income, which are driving this phenomenon7. One such factor could be the preference for status. The idea, first introduced by Veblen in his book “Theory of the Leisure Class” (1899), recognises that certain goods are consumed for their value as indicators of higher status or wealth (Veblen goods). A closely related concept is that people care not only about their own income but their relative income vis- a-vis others (Duesenberry 1949). People generally try to catch up with their neighbours8 and distinctly feel worse when they fall behind (Easterlin 1974, 1999, Clark and Oswald 1996, Luttmer 2005). In an environment where rapid economic growth is pushing up incomes there is a possibility that agents constantly feel pressured to keep pace with the consumption of their neighbours. If this pressure is strong enough we might see a reduction in essential non-Veblen consumption like food. The objective here will be to investigate this possibility. 6 Malnutrition has fallen though, but slowly. According to the National Family Health Survey, the proportion of underweight children remained virtually unchanged between 1998-99 and 2005-06 (from 47% to 46 % for the age group of 0-3 years). 7 This phenomenon of falling calorie/food consumption in a period of economic growth is not a peculiarity of India. There is some evidence that something similar occurred in England during the industrial revolution period of 1770- 1850 (Clark et al. (1995)) and also in China during a phase of rapid growth from 1982-1997 (Du et al. (2002) and Meng et al. (2009)). 8 Hence also referred to as “Keeping up with the Jones” 4 The first contribution of this paper is to use preference specifications motivated by Veblen-style status competition in a dual economy model of economic development. There exist other papers which show that status seeking preferences have the potential to generate ex-post utility reducing decisions from agents through a consumption externality (Kelly 2005, Cooper et al 2001, Hopkins and Korienko 2004 and Eaton and Eswaran 2009). But most of these results are from standard neoclassical general equilibrium models, quality ladder models (as Grossman and Helpman 1991), strategic interaction settings (game theoretic) or simply partial equilibrium models. On the other hand the dual-economy models, pioneered by Lewis (1954) and developed by Jorgensen (1961), focus on the transition of a less developed economy from being largely agricultural to an industrial one9. Later Eswaran and Kotwal (1993) bring attention to the role of consumer preferences in this transition. In the present paper the Eswaran and Kotwal framework is adapted to incorporate status motivated preferences such as “Keeping up with the Jones” (KUJ). An immediate implication of assuming "Keeping up with the Jones" (KUJ) is that food consumption falls with a rise in peer group income ceteris paribus, in the partial equilibrium.