Sunday, November 15, 2009

At last, good news about poverty

If only we would pause and look beyond the horizon of day to day events, we would see a trend of great significance. More people on the earth have risen out of poverty in the past 25 years than at any other time in human history, and this has happened primarily because of sustained high economic growth in India and China. Unlike China which has embraced growth enthusiastically, India has a vast industry of ‘poverty-wallas’, who incessantly raise doubts if our growth is pro-poor.

These ‘growth skeptics’ tend to make our reformers defensive, which slows reforms and the nation loses the potential for even higher growth. Earlier they argued that post-reform growth was ‘jobless’ until recent data has proved them wrong. Nowadays, they usually say, ‘growth but…’ While the type of growth does matter, the truth is that growth in itself is virtuous, and we should celebrate that India is experiencing this miracle.

Now, two experts on poverty have come up with new research which shows that India’s high economic growth since 1991 is, indeed, pro-poor and has decisively reduced poverty. Gaurav Datt and Martin Ravallion, both respected economists, employed a new series of consumption-based poverty measures from 1950 to 2006 and 47 rounds of National Sample Surveys, to show that slightly more than one person in two lived below the poverty line in India during the 1950s and ‘60s. By 1990 this had fallen to one person in three. By 2005, it fell again, and only one in five persons now lives below the poverty line.

The authors conclude that ‘the post-reform process of urban economic growth has brought significant gains to the rural poor as well as the urban poor’. (See ‘Has India’s Economic Growth Become More Pro-Poor in the Wake of Economic Reforms?’, Policy Research Working Paper 5103). The poor in urban and rural areas are now linked through trade, migration, and transfers, which explains why rising standards in India’s towns are helping to reduce poverty in the villages. Even though agricultural growth has been relatively weak since 1991, overall high growth has affected positively the lives of the rural masses.

This is an outcome that the reformers had dreamt of. They believed that the reforms would create a more efficient and productive economy, which would raise the overall growth rate and it would transform both urban and rural society. This had happened during the great transformations which occurred in the West during the 19th century and in East Asia in the second half of the 20th century. It is now happening in India.

An earlier study by the two economists had examined the period prior to 1991 when our economy grew more slowly. India’s per capita GDP grew at an annual rate of barely 1% in the 1960s and 1970s; it picked up to 3% in the 1980s; and accelerated to 4-5% after 1991. In the pre-1991 period, modest urban growth brought little or no benefit to the rural poor. (Rural poverty decreased only through rural growth, such as the green revolution.) High growth after 1991 seems to be different—it has pro-poor backward linkages to the rural economy. Hence, the effort to create a more productive economy through the reforms is benefiting the poor, and we have the permission now to dream of becoming a middle class country. The dampener, alas, is that inequality after 1991 is also increasing.

This happy news, however, must be seen in the context of lost opportunities. If only India had reformed agriculture and had functioning schools and health centers, the poor would have gained even more from high growth. In another study comparing India, China and Brazil, Martin Ravallion shows that China (with higher growth) and Brazil (with lower growth) have done a much better job at poverty reduction. India’s failure in education and health is not a function of money alone, as the Prime Minister suggested this week when he vowed to raise spending on education to 6%. When one in four teachers is absent and one in four is not teaching, we need accountability in delivering services to the poor. Thus, administrative reforms are just as important to the lives of the poor than even economic reforms.