How not to tackle Poverty

For decades, people have worried that the fruits of economic growth will not reach the poor, and that special efforts must be made by the state to ensure that this happens. Compounding these worries has been the famous hypothesis of Simon Kuznets, the economic historian, that inequalities widen in the initial stages of economic development and then shrink in the later stages. Pessimists have interpreted this to mean greater misery for the poor in the initial decades.

For all such worriers, here is some good news. A seven-year international research project, probably the biggest ever, overseen by Professors Deepak Lal and Hla Myint, seems to have dented, if not destroyed the Kuznets thesis. It suggests a strong general relationship at all phases of development between growth and poverty reduction, notwithstanding many exceptions. More important, there is no systematic tendency for poverty to worsen in the initial phase of development, as followers of Kuznets once feared.

A study for the project by G. Fields in 1991 looks at trends in developing for which reasonable data is available. It concludes that (a) In most, though not all, cases, poverty decreases as growth increases, and inequalities tend to shrink rather than widen, (b) The faster the rate of growth, the more dramatically does poverty tend to fall and inequalities shrink, the very opposite of what “immiserising” growth theorists believe. (c) Egalitarianism does not seem to promote growth, a finding that challenges the widely-held notion that Korea and Taiwan succeeded because of egalitarian land reforms to begin with. The Fields study finds no relationship between the degree of inequality in the initial phase and the subsequent rate of growth.

POWERFUL TOOL: The Lal-Myint research finds no evidence for growth-induced misery along Kuznetsian lines. It concludes that efficient economic growth (which in developing countries is labour-intensive) is such a powerful tool for alleviating mass poverty that governments need not worry about the distributional effects of such growth.

Some caveats are in order. The research relates to data after 1950, a period of great overall prosperity, and earlier, more dismal periods may not have yielded such a categorical conclusion. Besides, developing countries have, in recent decades, invested a great deal in education, health and rural infrastructure. Some have launched direct attacks on poverty, like land reforms, rural employment schemes and subsidised food. This was not the case in earlier periods of history. Nevertheless, it is comforting to know that in the socio-political conditions since 1950, economic growth has proved to be a consistent international alleviator of poverty, and fears about “immiserising growth” have proved to be vastly exaggerated.

This does not imply that governments should forget about poverty altogether. First, as already noted, the state needs to be active in education, health and infrastructure. Secondly, there is a significant problem of destitution-handicapped and aged people incapable of earning a living-which cannot be tackled by growth.

Third and most important, sudden poverty and starvation can, be caused by economic shocks like a drought. It is vital to distinguish between three types of poverty-mass poverty, sudden poverty induced by shocks like drought or civil war, and destitution. Mass, poverty can be removed gradually through economic growth. But, this is not true of sudden distress. caused by drought or civil war, India’s emergency rural employment programmes in drought1 years have rendered yeoman service in alleviating sudden poverty and avoiding mass starvation Amartya Sen and Jean Dreze have shown that in Maharashtra in the early 1970s, the availability of grain per head was much less than in the African Sahel, sometimes half the Sahel’s availability. Yet employment schemes gave purchasing power to the needy and prevented mass starvation in Maharashtra, while people died like flies in the Sahel for want of purchasing power.

NO SOLUTION: However, such employment programmes cannot remove mass poverty Maharashtra has a much-admired employment guarantee scheme yet its poverty ratio is as high as 40 per cent, greater than the national average. After two decades of operation, it no longer looks-like a solution to mass poverty though it provides a socially valuable form of insurance against destitution, and plays a stellar role in reducing deprivation in droughts.

How do the Lal-Myint findings square with our own experience in India? In this country, poverty showed no decisive trend- up or down– between independence and the mid-1970s, a period marked by the “Hindu rate of growth” of 3.5 per cent annually. This suggests that, in Indian conditions. modest growth does not. automatically translate into poverty reduction, and a certain threshold needs to be crossed first.

Between 1973-74 and 1987-88, the poverty ratio dropped by 1 5 percentage points, according to the Lakdawala Expert group. This was a time when economic growth accelerated to around 5 per cent annually. It was also. a time when direct attacks on poverty (Jawahar Rozgar Yojana, IRDP) were stepped up. Do we attribute poverty reduction in this phase to faster growth or anti-poverty programmes? The Lal-Myint research suggests that rapid-growth is a better explanation.

A similar conclusion is reached by Tendulkar, Sundaram and Jain in their research for ILO-ARTEP. They find that in drought years, anti-poverty schemes are vital for alleviating poverty, but in normal years growth matters much more. It appears that in normal years, investing in durable rural infrastructure (and thus aiding rural growth) may be a more efficient way of reducing poverty than expanding Jawahar Rozgar Yojana or IRDP.

The existing multitude of rural subsidies have not and cannot end mass poverty. There are great political and administrative problems in limiting such subsidies to the poor. Barely 20 per cent of subsidised essentials in the public distribution system reach the poor. In Jawahar Rozgar Yojana, at least 40 per cent of the programme goes on materials and some more on administration and kickbacks, so Rajiv Gandhi may not have been far short of the truth in saying that 80 per cent leaked out. Highly subsidised canal water and rural power benefit mainly the richer farmers, not the poor. Kirit Parikh and others have shown that switching funds from subsidies for food or farm inputs to investment in fresh irrigation will achieve a much greater reduction in poverty by increasing employment opportunities through accelerated growth. The Lal- Myint research adds the weight of international experience to the pleas of Kirit Parikh for such a shift in emphasis.

What do you think?