Growth on its own cannot lead to poverty reduction

Published on: The Economic Times, 17th February, 2001

By Pradeep S Mehta

Secretary General
CUTS Centre for International Trade, Economics and Environment

Notwithstanding the Gujarat tragedy, which will certainly set back its and the nation’s progress on many fronts, the way our states are approaching the issue of welfare expenditure leaves much to be desired. One doesn’t need to be an economist to understand that along with growth, investment in social sectors is an imperative in our campaign to eradicate poverty. The Economic Times’ Intelligence Group’s report (For the states it’s a question of survival, definitely not welfare, 5 February), shows that in view of the increasing salary and debt servicing bill, states are cutting down on welfare budget. Twenty-six major states have allocated just about 21p.c. of their aggregate budgetary expenses on three welfare heads: education, healthcare and housing in 2000-01, which is 1.75 p.c. lower than the revised estimates of the previous year, what to speak about the inflation and the crucial need to actually increase the outlay.

Rich countries spend nearly 30p.c. of their budget on these welfare heads: USA-31.7p.c., Japan-31.2p.c.Canada-26.8%. As absolute figures the amounts will be staggering compared to what we spend in India. But even developing countries like Thailand spend high (29.9p.c.) and Korea (26.5p.c.).

On the other, the Prime Minister’s economic advisory council has rightly attacked government expenditure (on salaries etc), irrational railway tariffs etc. I am plainly surprised about the lack of any mention of how to buttress welfare expenditure, or even to tackle the huge leakage, at least in the newspaper reports and editorials. It has also been bold to suggest that our average tariff rates should be brought down to 12 p.c. by 2005, but on the other it has been more political by proposing that tariffs should be raised to the bound levels in commodities, imports of which are now being liberalised due to removal of QRs.

“It is not just ironic, it is tragic, that economists come out with policies just like politicians which have perpetuated poverty in the country”, said the noted economist Prof Jagdish Bhagwati in a recent lecture at Chandigarh. “Target poverty rather than mere growth”.

The debate whether growth is sufficient for poverty reduction was reflected in the controversy surrounding the World Bank’s World Development Report, 2000-01, when its principal architect Ravi Kanbur resigned. Indeed there are several other factors which help the poor in a growing economy. On the contrary we can also have jobless growth as has been witnessed in many countries which have grown but have not benefited the poor. For example, studies done in Latin America on the impact of trade liberalisation during the decade of 1980s, wage differentials between skilled and unskilled labour had widened over time. One possible reason for this is the rigid social structures, which do not allow the poor to travel upwards.

On the other hand studies done in East Asia showed diminishing wage dispersion between skilled and unskilled labour during the decade of 1960s and 1970s. One of the reasons for this was steadily increasing investments in social sectors and land reforms. Social safety nets were put in place quite effectively. Besides social integration was also accelerated, resulting in the empowerment of the poor. Indeed policy makers also pursued openness of their economies, which expanded opportunities for the people to increase their incomes.

Whether growth has a positive effect on poverty, two World Bank economists: David Dollar and Aart Kraay in a seminal paper: “Growth is Good for the Poor”, have shown that income of the poor rises one-for-one with overall growth. In a study on the relationship between growth and poverty, which looked at data in 80 countries over the last four decades, they found that in an economic crisis the poor do not suffer disproportionately. The impact is certainly greater if social safety nets are weak. Thus their findings also support the line that growth on its own cannot lead to poverty reduction. They conclude that a policy package has to be in place for growth to impact poverty positively, such as private property rights; fiscal discipline; rule of law; macroeconomic stability and openness to trade.

On fiscal discipline the central government has now enacted the Fiscal Responsibility Act, and we hope that they will follow the letter and spirit to ensure a curb on profligacy, which has been the cause of many of our economic woes. On macroeconomic stability, one of the proxies as an indicator used by the authors is inflation. For quite some time, we have been enjoying a single-digit inflation, but that now seems to be reaching the higher number. Rule of law is fairly good compared to many of the developing countries. However, our rigid social structures resulting from the pernicious caste system are dissolving at a much slower rate than required. Often it is the lower castes, which bear the brunt of being poor, quite disproportionately.

Dollar and Kraay have also examined a number of institutions and policies which may not have a direct impact on growth but have an impact on the well-being of the poor by improving the distribution of income. The most notable among these are: government social expenditure; formal democratic institutions to enhance voice and accountability; and primary education enrollment rates. Public social expenditure showed little effect on either growth or distribution, because often these are not targeted on the poor effectively. Indeed in India, we find that targeting is poor, where often the vocal middle class gets away with moneys allocated for the benefit of the poor. Tragically political parties too shy away from attacking it.
On the whole, if we have to continue reducing poverty in India, we need to pursue growth-oriented policies which will enable the poor to get better opportunities, and target poverty. That fact cannot be disputed. A communication strategy is required for the people to know what the government is doing, thus building up a consensus for reforms.

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