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: http://tinyurl.com/kl6dd).
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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