Global Poverty Reduction: Problems and Prospects

The accepted hypothesis is that there is a positive relationship between the growth of real per capita income and the growth of average real income of the bottom quintile of the population making poverty reduction a simple matter of economic growth. But, in reality, it is much more complex, analyses Dr Jitendralal Borkakoti.

At the end of the 20th century, the Western World woke up to the problem of abject poverty in low-income countries that are characterised by economic stagnation, poor provision of infrastructure, inadequate stocks of physical and human capital, low Human Development Indices, political corruption and poor governance. Consequently, the UN Millennium Summit declared that the proportion of human beings living in extreme poverty would be halved by 2015. A person is said to be living in abject or extreme poverty if he/she lives with an income less than $1.08 dollar a day (calculated in 1995 US dollars by using 1993 PPP). The latest estimate of the global poverty line is $1.25 a day in 2005 prices and this is based on PPPs based on 2005 cost of living data. [These are relatively more reliable data. The World Bank reveals that 1.4 billion people in the developing world were living on less than $1.25 a day in 2005 (down from 1.9 billion in 1981). But there has been uneven progress towards reduction of abject poverty].

This laudable global aspiration is to be fulfilled by the rapidly progressing process of globalisation that leads to a higher rate of economic growth defined usually as the rate of growth of real per capita income. It is because globalisation in the sense of freer international trade leads to appropriate international specialisation based on comparative advantage and, hence, to higher levels of national and global welfare, while globalisation in the sense of freer capital flow (foreign direct investment) leads to transmission of new technology and, hence, to relatively faster growth. Lastly, globalisation increases levels of national efficiency because of internal market reforms and privatisation since the ethos of free market is a concomitant policy to the process of globalisation.

The accepted hypothesis is that there is a positive relationship between the growth of real per capita income and the growth of average real income of the bottom quintile of the population. This hypothesis emanates from the so-called Dollar-Kraay proposition that there is a one-to-one relationship between the rate of growth of real per capita income and the rate of growth of average real income of the poorest 20% of the population. Using a large sample of panel data (80 countries over a period of 40 years), David Dollar and Arat Kraay, two prominent American economists, have estimated the relationship between the growth of per capita real income and the growth of average income of the bottom 20% of the population. They have found that the growth of average income of the bottom 20% of the population is the same as the growth of real per capita income. In short, economic growth leads to poverty reduction, globalization leads to economic growth, and hence, globalization leads to poverty reduction.

The above analysis appears to make poverty reduction a simple matter of economic growth. But, in reality, it is much more complex and difficult in low-income countries where there are no social benefit systems. First of all, the average real income of the bottom 20% or 40% hides the wide disparity that may exist among the poorest. Imagine an economic scenario where the bottom 20% of a country’s population contains 10 million individuals each with an income of less than $1 a day. Furthermore, assume that 9 million of them receive an income of 30 cents each per day and the other 1 million receive 90 cents each per day, such that the average income of the bottom quintile is 36 cents per day. Consider a second scenario where 9 million individuals receive an income of 90 cents each per day and 1 million receive 30 cents per day such that the average income of the bottom quintile now is 84 cents per day. The incidence of poverty is deeper in the first scenario than that in the second. The first scenario, roughly and qualitatively, mimics the situation in India while the second scenario mimics that in China. [The poverty gap in the first scenario is $6.4 million while it is only $1.6 million in the second scenario]. If the poor individuals are clustered around the poverty line, it is relatively easier to lift the poor out of the poverty line. This also reveals how crucial the choice of the poverty line is.

In the context of global poverty reduction, there are two important issues that must be considered. The first is pro-poor economic growth, and the second is the distinction between economic growth and economic development.

Pro-poor growth takes place when individuals below the poverty line or in the bottom quintile (or the bottom 40%) of the population obtain absolute or relative gains in their average real income from economic growth. Such an outcome depends crucially on the pattern of economic growth, that is, it depends on which sector of the economy spearheads economic growth. For example, if economic growth is spurred by high-tech industries, IT services, or banking services, then employment and income of the highly educated individuals from the urban areas will increase, growth will have negligible impact on poverty reduction in the rural areas of any low-income country. In such a situation, the middle-class people in urban areas will benefit, and the urban poor may benefit only through the so-called trickle-down effect. On the other hand, the rural poor will benefit both directly and indirectly if economic growth is led by ‘green revolution’ in the agriculture sector. In fact, if in a country, as in India, 70% of the population directly and indirectly are dependent on agriculture, it is then apparent that productivity increase in agriculture will lead to the betterment of the vast majority of the poor people in the bottom quintile. Thus, in the context of poverty reduction, it is not sufficient to consider economic growth per se, but it is necessary to pay attention to the pattern of economic growth.

The second issue is also crucially important because the concept of economic growth is very different from the concept of economic development. Often policy makers tend to confuse these two concepts. Economic growth, as noted earlier, is defined in terms of the rate of growth of per capita real income or the rate of growth of real GDP. Economic development is a far broader concept; and it is defined in terms of availability of adequate provisions to satisfy the basic economic needs. These provisions include access to primary education, access to primary health care, drinking water, adequate shelter, and adequate infrastructure of roads, railways and power supply. That is why Human Development Index (HDI) is such a powerful measure that attempts to summarize the relative availabilities of these provisions in a single index number. Economic growth is a necessary but not a sufficient condition for economic development. It is possible to have economic growth without economic development. Consider a fictitious African dictator squandering vast sums of the national budget on building palaces, tanks and army barracks (that contribute to the growth of GDP), while people in the rural areas starve with no access to health care, primary education or drinking water. Deliberate and targeted actions are required to convert economic growth to economic development; and it is economic development that leads to poverty reduction such that the people in the bottom quintile have access to drinking water, health care, reasonable shelter and reasonable quantities of food. It is, therefore, important to recognize that economic growth does not necessarily lead to poverty reduction in low-income countries unless economic policies are targeted to achieve this objective.

Poverty is not an easily definable concept and its empirical specification is even more difficult. Difficulties arise because of the following. Poverty is both an absolute and a relative concept. In the context of global poverty reduction, usually the absolute concept is applied in the low-income countries where absolute or abject poverty is widely prevalent, while the relative concept is often applied in the high-income countries where, for example, income of the unskilled workers falls further behind from the median income as imports of unskilled labour-intensive products flood the economy. Furthermore, in the context of global poverty, a fairly arbitrary poverty line is used as a rule of thumb for the purposes of global comparison and again in two different ways. [An individual is considered poor when he/she is unable to attain a minimum standard of living. The standard of living is usually measured by real income or real consumption expenditure. But in the context of international comparison, a problem arises since the same level of real income could be associated with varying levels of nutrition (or even life expectancy or schooling). The minimum standard of living or the poverty line is defined by a level of real per capita income that yields a minimum level of consumption. For international comparison, jth country’s real per capita income is PPP-adjusted by taking into account the labour cost ratio of the jth country’s cost to the US cost. The alternative is to build a consumption poverty line by defining a minimum internationally acceptable level of calorie intake, and then finding the calorie intake of the actual consumption bundle by using the nutritional values]. It has been pointed out that the critics of globalization use the total number of people living under the accepted poverty line (Head counts) while the international institutions and other protagonists use incidence of poverty (number of the poor as % of the country’s population). The empirical results vary significantly depending on which measure of poverty is used.

Regarding the concept of poverty, serious problems are associated with the problem of monetary versus multidimensional measures. It is argued that poverty is a multidimensional concept and is not adequately captured by monetary values (average income or expenditure). Health and education outcomes, access to clean water and sanitation are equally important factors along with average income in assessing poverty or policy implications. Also, empowerment, participation and vulnerability to shocks are also significant dimensions of poverty. Furthermore, inequality of income distribution is an important component of social welfare, although poverty and inequality of income are two separate components. Once again, inequality could be absolute or relative. It has been stated that the usual emphasis on absolute inequality is a powerful source of empirical finding that globalization increases inequality. After having done a substantial study of the relevant literature on distributional effects of globalization, two bright American economists, Pinolopi Goldberg and Nina Pavcnik, conclude that the current research “suggests a contemporaneous increase in globalization and inequality in most developing countries”. Also they did not find evidence to support the “conventional wisdom” that trade liberalization would benefit the least fortunate poorest. Moreover, in the context of globalization, changes both in inequality in income distribution within a country and in the world distribution of income are important.

In low-income countries, the poor could be divided into two broad groups, namely, the rural poor and the urban poor. The rural poor are largely landless peasants with no secure employment, and the urban poor are the unemployed semi-skilled or unskilled persons who try to eke out a living in the urban informal sector. Consider global trade liberalization. It implies that, as a country lowers protection, there will be higher imports of some goods at a lower price, and that simultaneously the country will find export opportunities because of reciprocal reduction of tariffs in the rest of the world. If the supply of cheaper importable goods leads to lower prices, and if these goods form a significant fraction of the consumption basket of the poor, then there will be some significant gains with ameliorating effect on poverty in general. However, imported goods (with the exception of staple food) are less likely to be a part of the consumption basket of the people suffering from extreme poverty. Lower prices of food grains resulting from trade liberalization will help the poor significantly. [This is somewhat controversial because lower food grain prices could easily be the result of heavy subsidies given to the farmers in Europe and America. These domestic subsidies make it difficult for agricultural exports from low-income countries to Europe and America]. On the other hand, if the exportable good industries expand by efficiently taking advantage of now freer trade, both productivity and employment will increase, and therefore, demand for services from the urban informal sector will also increase (assuming that the export-good industries are light-manufacturing industries in low-income countries) leading to an ameliorating trickle-down effect on urban poverty (as manufacturing firms are likely to be in urban areas or areas close to towns and cities). Furthermore, the impact of expanding agricultural exports will have a highly significant impact on poverty in rural areas. But this avenue is significantly restricted because of immoral and globally inefficient high agricultural protection in high-income countries (European Union and the United States). On the other hand, if trade liberalization leads to an expansion of exports from the service sector, then it is the well-to-do middle-class people with considerable human capital who are likely to benefit directly and significantly, and absolute poverty may only be alleviated marginally through the trickle-down effects. The rapidly increasing exports of software services from India have made a substantial number of people better off in the urban areas, but have had hardly any impact on rural abject poverty.

It is generally agreed that globalization has significant impact on economic growth in India. What is, however, not clear is whether globalization has significant impact on poverty reduction in the sense of reducing the number of people suffering from abject poverty. One may invoke the Dollar-Kraay proposition and argue that the relatively high rate of growth has had positive impact on the average income of the bottom quintile of India. However, it is not as simple as it sounds. The aggregate economic variables of a large country like India with strong regional economic disparity, significantly high degrees inequality of personal income distribution, and the lack of basic amenities to the abject poor are not likely to reveal the true picture. The prime problem in India is the determination of the poverty line itself. Poverty line is based on minimum standard of living which includes “a nutritionally satisfactory diet, a reasonable standard of clothing, housing and other essentials, and access to a minimum level of education, healthcare, clean water supply and sanitary environment” [The Human Development Report on Assam, 2003, p.47]. The Planning Commission of India has been estimating the number and percentage of poor at national and State levels by using the so-called Expert Group Method. [Essentially Expert Group Method estimates poverty from the large sample survey data collected by the National Sample Survey Organization (NSSO). NSSO has published the latest survey data on household expenditure (NSS 61st Round for the period July 2004 to June 2005). Two consumption distributions for 2004-2005 have been obtained from the survey data. The first is based on 30-day recall period for all items (known as Uniform Recall Period or URP) and the second is based on 365-day recall period (known as Mixed Recall Period or MRP) for five less frequently purchased items (clothing, footwear, durable goods, education and institutional medical expenses). The estimates by the Planning Commission are based on both distributions]. In March 2007, the 2004-2005 Rural and Urban poverty lines at State level have been published. The urban poverty line varies widely from Rs.665.90 (Maharashtra) to Rs.378.84 (Assam) per month. The rural poverty line also varies widely from Rs.292.95 (Andhra Pradesh) to Rs.478.02 (Uttarakhand) per month. It is somewhat surprising that in one State, namely, Assam, the rural poverty line is higher than the urban poverty line. [The rural and urban poverty lines in Assam respectively are Rs.387.64 and Rs.378.84]. This is counter-intuitive as one would expect cost of living in urban areas to be higher than that in rural areas. The all-India poverty line is Rs.356.30 for rural people and Rs.538.60 for the urban people per month (that is, Rs.12.18 per day for rural people and Rs.17.95 per day for urban people), and these poverty lines do not take into account health, clothing, housing, education and other essentials. Because of the low threshold of poverty, some refer to these poverty lines as the starvation lines. Based on these estimated poverty lines, there are 221 million people below the rural poverty line and 81 million people below the urban poverty line such that 302 million people in India suffer from abject poverty. UNDP [Human Development Report 2007-2008] estimates that 34.3% and 80.4% of India’s population live respectively below $1 and $2 dollar a day. In our opinion, India’s poverty lines are far too low and, and consequently, the poverty estimates send an inaccurate message to the rest of the world. The 2008 World Hunger Index, as compiled by International Food Policy Research Institute, considers hunger situation in Madhya Pradesh as “extremely alarming”, and thinks that the nutritional problem in Madhya Pradesh is comparable to some African countries.

India being a large country, the geographical distribution of poverty is important, as a particular region because of various constraints (ranging from terrorism to corruption) could get stuck at a low level of economic activity. It is therefore necessary to carry out studies to establish whether the various States are economically converging or diverging over time. This is more important in the context of globalization. Secondly, comprehensive studies are necessary to establish whether there is empirical content in the popular perspective that the rich is getting richer and the poor is getting poorer in India. In India, caste is also an important sociological determinant of poverty as, for example, the untouchable people in Bihar or Madhya Pradesh do not have the same prospects and opportunities as people coming from higher castes.

The focus here is whether rapid economic growth has led to the reduction of the number of people suffering from abject poverty in India. India’s economic growth consequent upon globalization during the last fifteen years has come from the phenomenal expansion of the service sector, and to a significant extent from exports of semi-skilled labour-intensive light manufacturing goods. The contribution of the service sector in 2006 to GDP is 54.6%, and those of the industrial and agricultural sectors are 27.9% and 17.5% respectively. Two important points should be noted here. First, 28% of the total work force is employed in the service sector, while 12% and 60% of the work force are employed respectively in the industrial and agricultural sector. Therefore, one can argue that the benefits from economic growth have largely accrued to the workers employed in the service sector which includes not only software and banking services but also services related to tourism. While the services requiring human capital have endowed wealth to the middle-class people, some of the tourism-related services have also given economic benefits to relatively poorer people from the informal sector in the urban areas. Second, since 71% of the population live in rural areas and only 29% live in the urban areas, benefits from growth led by the service sector do not seem to spread to the rural poor. It is a structural problem that 60% of the labour force employed in the agricultural sector contributes only 28% to GDP. The problem is further complicated by the fact that a large number of agricultural employees are landless workers. It is in the agricultural sector that battle against abject poverty could be won or lost. The problem requires a two-pronged attack. First the poor level of productivity of Indian agriculture has to be raised significantly. Second, the surplus agricultural labour generated by increased productivity will have to be transferred to the industrial and service sectors. Globalization gives the opportunity for such a transformation, and to this extent, globalization can help poverty reduction primarily through this process of economic transformation. Exports from the agricultural sector during the next decade should be another economic force powering India’s economic growth. Globalisation should facilitate such an economic transformation, although the high protection of agriculture in the European Union and America pose a real threat to this golden prospect. If agricultural productivity cannot be raised during the next decade and if transfer of rural labour to urban employment cannot be achieved, then we are heading for a two-India scenario: one for the rich and the other for the poor. While India is generating hundreds of rupee millionaires a year, hundreds of poor peasants are also committing suicide every year.

Abject poverty is endemic among the urban slum dwellers (who primarily work in the informal sector) and the landless agricultural workers in the rural areas. Exports of labour-intensive products boosted by trade liberalization and flow of outsourcing FDI have some backward linkages to the informal sector, and hence many poor people are likely to obtain economic benefits. It is difficult to see how economic growth led by the service sector and to a certain extent, by the manufacturing sector, is going to benefit the rural poor unless these poor people migrate to the urban areas to benefit from the trickle-down effect. Once again, only a phenomenal growth of the agricultural sector appears to be the only way forward.

The above analysis for India aptly describes the situation in Assam. The contribution of the service sector to state GDP is structurally large mainly because of a large work force employed to deliver government services. But the waves of economic prosperity in India peter out before it reaches Assam. This is because of serious constraints ranging from inadequate infrastructure to poor governance and terrorism. The estimate that only 36% of the Assam’s population suffer from abject poverty can again be seriously questioned on the basis of the poverty-line adopted for these estimates. The incidence of poverty is likely to be very deep, and the lack of basic amenities in the rural areas further makes the problems of poverty reduction in Assam worse.

In conclusion, reduction of absolute poverty in low-income countries will depend on several factors: the pattern of economic growth, the economic sector leading the country’s growth, the distribution of rural and urban population, the performance of the agricultural sector, and the linkages with the informal sector. The people suffering from abject poverty are mostly the unemployed and/or physically incapacitated people, and people who do not own human or physical capital or land. Secondly, a significant part of the increase in government revenue as a result of economic growth should be devoted towards providing basic necessities including health care, primary education, adequate shelter and drinking water so that economic growth is converted to economic development. It is the spread of economic development that will have ameliorating effect on deprivation and abject poverty. It now looks increasingly likely that the global aspiration of the developed countries to reduce abject poverty by half by 2015 will not be fulfilled mainly after the global economic shock of 2008. The statements made by the Western leaders at Global Summits often turn out to be a far cry from delivering the resources required to make poverty history. If we consider poverty in general, rather than abject poverty, it will perhaps take 75 to100 years before abolishing poverty in this planet. It is now clear that eradicating abject poverty in terms of reducing the number of human beings with an income of $1.25 per day simply means helping people to avoid starvation without paying any attention to whether the poor have shelter or access to medical care or access to drinking water or access to primary education. This is simply not good enough. Why should we be happy if the poor in low-income countries have an income of just, say, $1.75 per day? It is after all a starvation line. In the Western world poverty line indeed is defined at a relatively very high level as compared to the abject poverty line for the low-income countries. In the UK, for example, the poverty line is £145 a week in the pocket of single adult (that is, Rs.11,600 per week, or Rs.52,267 per month @ Rs.80 = £1), £217 a week for a childless couple, £332 a week for a family with two children, and £260 for a single parent with two children. Those whose income falls short of these figures are officially defined as living in poverty, and the government compensates their income. This is where relative poverty comes into action, and this is how poverty is handled in a developed country. We are today grappling with eradicating absolute poverty in low-income countries by attempting to keep the poor above the starvation line. The prospects for achieving even this very modest aim seems to be bleak in view of global warming, with the vast Sub-Saharan region threatened to become a famine area. The promised funds from the G20 countries have not been coming through, and food prices are most likely to increase because of relatively higher demand and unfavourable weather conditions. A more determined international effort is required if we are to make some modest progress in eradicating global poverty.

[Dr. Jitendralal Borkakoti is an economist who lives in Hertfordshire, England]