Fighting poverty through markets
Insufficient economic freedom is the root cause of low living standards
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Economic reforms in the early 1990s helped India drastically reduce both the intensity and scale of its poverty levels. In per capita terms, however, the country still lags behind peers such as China and South Africa which have crossed over to the middle-income bracket. This failure owes largely to the flawed attitude of the Indian state towards the question of economic development, driven by the idea of state-backed entitlements as the solution to poverty. Poverty eradication was seen not as a problem of insufficient freedom for the poor to earn a decent living, but as the result of their incapability.
Quite notably, something as basic as the right to property was removed from the list of fundamental rights under the tenure of Indira Gandhi, while the state gradually took over an active egalitarian role in both economic production and distribution.
The sustainability of such an economic model came into serious question in the early 1990s, during when the country was forced to liberalize. Since then, improving economic freedom has allowed for higher living standards among all economic classes, including the poorest. Notably, last year the Planning Commission announced that the population living under the poverty line declined to a record low of 22% in 2011-12.
Despite such considerable progress, there remains little doubt about the tremendous scope for improvement, especially in the sphere of restoring economic freedom to the poor.
Labour services—mostly low-skilled—remain the mainstay for the majority of the poor to earn their daily living. Policy measures improving the flexibility of the labour market would help enlarge opportunities available to the poor, many of whom remain stuck in the agricultural sector unabsorbed by other sectors such as manufacturing. Also, the freedom available to the country’s largely poor farming population remains minimal thanks to laws, such as the Agricultural Produce Market Committee Act, that block free access to competitive markets. Allowing foreign investors into the supply chain industry too will improve their prospects. But more importantly, strong policy decisions will be required to reform both the country’s archaic labour and agricultural laws.
Apart from their labour services, the poor are also owners of assets of different kinds. As tiny as these asset holdings may be, they usually serve as much necessary seed for small-scale enterprises and act as important source of leverage. The formal legal recognition of de facto possessions of the poor is the key to exploiting such hidden asset potential. According to the Heritage Foundation’s index of economic freedom, property freedom in India has remained stuck at the same level for over two decades now. Other sources have shown decline in the security of property rights in the country.
Land is one obvious asset at the disposal of India’s poor, which due to improper titling has been prone to ownership disputes leading to their under-exploitation. Transparent titling norms in land ownership would clearly be welcome. But legal recognition of property rights alone will not solve the problem. The country’s judicial system remains clogged, and given the many archaic laws, the formal legal system may in fact act as a barrier to the exploitation of assets held by the poor.
Not to forget regressive laws to expedite land acquisition that allow governments to transgress rights of poor land owners. Thus, strong respect for property rights will send out the right signals not only to big-ticket investors but also to the downtrodden poor.
Lastly, the access of the poor to financial capital remains low despite efforts to bring about financial inclusion through compulsory lending norms. But this has merely added more to bad loans and threatened financial stability while indebting poor borrowers. Increased competition among existing banks, and granting entry to non-conventional providers of finance is then the surest way to release the poor from the clutches of predatory moneylenders while also preserving the health of system.
In all, a much freer market is what will provide better opportunities for the country’s poor to rise out of poverty, not entitlements backed by the state.
Does India need a new round of structural reforms? Tell us at firstname.lastname@example.org