Public policy on poverty eradication revolves around the perspective of consumption. People are classified poor if they do not have access to adequate food, clothing and other basic consumption necessities.
Rapid economic growth in many developing countries over recent decades has liberated millions from such consumption poverty. However, as an article in The Atlantic by Derek Thompson (7 September) highlights, as economies develop and incomes grow beyond subsistence requirements, a new set of necessities—education, healthcare, housing, and energy—are taking an increasing share of people’s incomes. Consequently, despite their relative consumption affluence, the urban middle class in many developed countries, already squeezed by stagnant incomes, is showing increasing signs of discontent.
This evolution in the nature of deprivation from one that was concerned with food and basic consumption needs to one that is caused by the rising cost of a new set of necessities, has profound implications for developing countries. As a generation of people emerge from the shadows of consumption poverty in these countries, they face the prospect of bumping against another poverty wall, one arising from these newer necessities. Further, apart from those recently liberated from poverty, this deprivation will also affect a major portion of the middle class. In fact, one possible reason why China’s consumption remains depressed, despite spectacular gains in poverty eradication, is the rising costs of these new needs.
The challenges associated with each of these are different. As economies and jobs become more knowledge and skill-based, the premium on college education, and more specifically those related to certain elite colleges, will increase. In the circumstances, if supply fails to keep up with demand, as is certain to be the case with current policies, access to education will be a major source of middle-class deprivation. In healthcare, as technology improves and the scope of medical interventions expands, affordability will emerge as the biggest concern. Already, life-threatening healthcare problems and related expenses have the potential to push a generation or more into poverty.
Affordable urban housing is already an anachronism in many large Indian cities. This threatens to jeopardize the urban growth engines. As the economy develops, people will embrace more energy-intensive lifestyles. Household electricity consumption and fuel usage for personal transport and cooking will multiply. Simultaneously, it will become untenable for public utilities to supply energy at the current subsidized and cheap prices. The combined impact of both these trends will significantly increase the share of energy in household budgets.
Taken together, all of them have the potential to squeeze family budgets and increase relative deprivation among the vast majority of population. In the circumstances, it is critical that public policy assumes an important role in mitigating its adverse consequences.
The spectacular productivity improvements of the last quarter century in many sectors have largely bypassed both healthcare and education. A doctor or a teacher continues to service the same number of clients as before. Therefore, unless supply keeps pace with ballooning demand, college education and healthcare will become unaffordable. The use of technology, by way of satellite-based distance education and tele-medicine, in some form or other, is critical to resolving this challenge.
Further, college education will have to be carefully deregulated to attract private investments without compromising on quality. Governments have to ramp up investments in higher education and establish more colleges. Most importantly, appropriate policies have to catalyse a vibrant market for financing higher education.
The only sustainable way to address the problem of rising healthcare costs is to have a mandatory nationwide health insurance system. This has to complement substantial investments in public secondary and tertiary care facilities. Besides covering the remote interiors, government facilities are necessary to maintain market competition and keep private health service providers and insurers honest.
In case of urban housing, the supply of affordable housing stock has to keep pace with rapid urbanization. This supply-side challenge requires that urban planning regulations be liberalized and vertical growth encouraged, while simultaneously providing the infrastructure to support such growth. Apart from massive investments by governments themselves, public policy will have to incentivize private investments. Instead of conferring house ownership rights, the objective should be to develop a large enough stock of affordable housing and rent them out.
Enabling affordable access to energy requires policies that can mitigate both rising prices and consumption. Policies that promote conservation, such as strict energy efficiency standards in buildings, vehicles and appliances, will play a major role in minimizing household energy consumption. Good public transport facilities can considerably reduce the reliance on private transport. Given its innumerable other benefits, subsidizing public transport may be one of the least distortionary and most effective strategies to cushion people against rising fuel costs.
Fortunately, if we start immediately, developing countries like India have some time to put in place these policies before these deprivation problems fully materialize. However, if we fail to act, the rising generation of aspirational middle class will face the same problems of deprivation that now threatens developed economies.
Gulzar Natarajan is a civil servant. These are his personal views.
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