Economic growth best antidote for poverty

Financial Express, 18 July 2006

Much as the UPA would like to believe that its social security

programmes would eradicate poverty, there seems to be no better

poverty alleviation programme than growth. The decline in poverty in

India reported by NSS data for 2004-05 has not happened because of any

well-targeted anti-poverty programmes, or because the NDA stepped up

expenditure on anti-poverty programmes. It happened because of higher

growth. And, interestingly, it has happened not only in India, but

also in most of South Asia.

A recent study shows interesting evidence. Quietly, without most of us

noticing, some of the poorest countries in the world -- South Asian

countries -- have obtained strong growth and a sharp reduction in

poverty in the last five to ten years. Bangladesh, Bhutan, India,

Maldives and Pakistan have all grown at more than 5 percent per year

on average over the last 5 years. A recent paper titled "Economic

Growth in South Asia: Promising, Un-equalising,...Sustainable?" by

Shantayan Devarajan and Ijaz Nabi of the Worth Bank examines the

impact of the growth on poverty (url:

In Bangladesh, India and Nepal, all three among the poorest countries

in the world, a decade of economic growth led to a reduction in the

proportion of population below the poverty line by 9, 10 and 11

percentage points respectively. In Bangladesh it fell from 59 percent

in the begining of the 1990s to 50 precent. In Nepal it fell from 42

percent to 31 percent. In Sri Lanka where the growth rate in the last

5 years was 4.7 percent, poverty fell by 6 percentage points. Pakistan

witnessed economic stagnation in the 1990s, and consequently saw an

increase in poverty in the decade. Looking back at the 1980s, when

Pakistan grew well, we find that there was a 12 percentage points

reduction in poverty over the 1980s. There is recent survey evidence

to show that high growth in the post-2001 period in Pakistan has led

to a reduction in poverty.

Further, their estimates suggest that if South Asian coutries were

able to sustain high rates of growth, they could achieve a significant

reduction in poverty. While it is true that such estimates are based

on past patterns in the economy, on several assumptions between income

and consumption growth and poverty elasticity of the economy to income

growth, and are at best indicative, they do show that apparently small

differences in growth rates matter substantially to poverty reduction.

Projections for poverty incidence in 2013 with a 7 percent growth rate

and a 10 growth rate show the impact of growth-oriented policies for

poverty reduction. Bangladesh today has a 50 percent poverty rate. If

the Bangladesh economy were to grow at a sustained 10 percent for the

next 7 years, the incidence of poverty could be brought down to 13

percent! And, growth was to be sustained even at 7 percent, the

poverty rate would get down to 20 percent.

Pakistan today has a poverty rate of 35 percent. A sustained 10

percent growth for 7 years, which would double Pakistan's GDP by 2013,

would bring poverty down to 8 percent! Sri Lanka's poverty

rate could similarly be reduced from 23% at present to 4% with 10

percent growth, or 10% with 7 percent growth.

The most interesting reasoning, of course, pertains to India. Going by

existing growth rates, there are two alternative projections for the

Indian poverty rate in 2013. Devarajan and Nabi find that if India

continues to grow at 7 percent, poverty will be down to 15 percent in

2013. In addition, the Eleventh Plan approach paper finds that over

the last 5 years, poverty in India has been dropping at an annual rate

of 0.79 percentage points. Projecting into 2013 using this, we get an

estimate of 16 percent for 2013. It is reassuring that these two

estimates are similar to each other.

Devarajan and Nabi additionally estimate that if Indian growth were to

accelerate to 10%, poverty in India is likely to get down to 13

percent by 2013. In other words, such an acceleration in growth would

get an additional 30 million people out of poverty by 2013. Those who

focus on poverty need to focus on this number. No redistribution

scheme can have the impact economic growth can have. High economic

growth is the best poverty alleviation programme.


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