Myths of growth and poverty7 min read . Updated: 17 Dec 2008, 10:11 PM IST
Myths of growth and poverty
Myths of growth and poverty
In various writings over the years, Amartya Sen has shown an acute interest in the comparative performance of China and India, the two largest countries of the world, both with poor, agrarian economies and rich, ancient civilizations.
While high economic growth in both countries in recent decades has attracted a lot of attention, particularly in the international financial press, Sen’s interest has usually been more in issues relating to poverty, inequality and gender inequities in general, and health and education matters in particular, in both countries.
In the last quarter century, a great many reforms have taken place in both China and India—in market liberalization and macroeconomic policy, trade and industrial policy, tax and financial policy, privatization and deregulation. In China, the reform in agriculture, with de-collectivization and the shift to the household responsibility system around 1970, along with a rise in agricultural procurement prices, led to a large growth in the agricultural sector. According to the estimate of Lin (1992), agricultural output grew at 7.1% per year on an average during 1979-1984, compared with 2.7% during 1970-1978. As much of the extreme poverty was in the rural sector, this led to a large fall in poverty. If one takes the admittedly crude World Bank poverty line of $1 a day per capita (at 1993 purchasing power parity), the proportion of people below that poverty line in China fell from 64% in 1981 to 29% in 1987.
This is a dramatic decline in a short span of years. Part of this decline may not be real: Poverty may have been somewhat overestimated in 1981, as the official price deflator used for this estimation may not have been adequate for rural areas before 1985. But a large part of this decline may be genuine, and not due just to the large rise in the agricultural growth rate during this short period but also, perhaps, to the fact that de-collectivization was associated with what may have been one of history’s most egalitarian land redistribution exercises, with every rural family getting an equal piece of land (subject to differences in family size and regional average), thus giving a floor to the household income of the poorest people.
In India, the reforms of the 1990s seem to have been associated with a more vigorous and competitive corporate sector, but most of the economy is outside the corporate sector. One can note a rise in the annual growth of total factor productivity in industry, from 0.3% in 1978-1993 to 1.1% in 1993-2004. The more significant rise in India is in the service sector; growth in total factor productivity in that sector rose from an annual average of 1.4% in 1978-1993 to 3.9% in 1993-2004. The Indian growth process has been described as a service-sector-led growth, whereas in China, it has been more manufacturing-centred (note, however, that in the first period, 1978-1993, even service sector total factor productivity grew faster in China than India). One immediately thinks of the widely acclaimed performance of Indian software and other IT-enabled services. But it seems that not all of the growth in the economy’s service sector during the period 1993-2004 can be explained by finance, business services or telecommunications, where reform may have made a difference.
So, the link between economic reforms and growth in the whole economy is not yet clearly established, even though it is very likely that the reduction in controls and regulations and the increased leeway of market discipline and the forces of competition may have unleashed entrepreneurial energies in both the formal and informal sectors (I would also like to speculate that the concurrent social changes in India, namely, the political rise of hitherto subordinate social groups after many centuries of social oppression, may also have played some role in this unleashing of energies).
It is often claimed, both in the media and academia, that it was global integration which brought down the extreme poverty that had afflicted China and India over many decades. While expansion of exports of labour-intensive manufactures lifted many people out of poverty in China in the last decade (albeit not in India, where exports are still mainly skill and capital-intensive), the more important reason for the dramatic decline of poverty over the last three decades may actually lie elsewhere. Two-thirds of the total decline in the numbers of poor people (below the poverty line of $1 a day per capita) in China between 1981 and 2004 had already happened by the mid-1980s, before the big strides in foreign trade and investment in China in the 1990s. Much of the extreme poverty was concentrated in rural areas and its large decline in the first half of the 1980s is perhaps mainly a result of the spurt in agricultural growth following de-collectivization, land reforms and upward readjustment of farm procurement prices—mostly internal factors that had very little to do with global integration.
In India, the National Sample Survey (NSS) data suggest that the rate of poverty has, if anything, somewhat slowed down from 1993 to 2005, the period of intensive opening up of the economy, compared with the 1970s and 1980s. This may not be unconnected with the fact that agricultural output (and total factor productivity) grew at a slower rate in the last decade compared with the earlier decade. This may be largely on account of the decline in public investment in rural infrastructure (such as irrigation, roads and prevention of soil erosion), which has little to do with globalization. There has also been a decline in the rate of growth of real wages in the period 1993-2005 compared with 1983-1993.
The Indian pace of poverty reduction has been slower than China’s, not just because growth has been faster in China, but also because the same 1% growth rate reduces (or is associated with reduction in) poverty in India by much less. The so-called growth elasticity of poverty reduction is much higher in China than in India; this may have something to do with the different inequalities in wealth in the two countries (particularly in land and education). Contrary to common perception, these inequalities are much higher in India than China.
The link between economic reform and inequality in China and India is also not very clear. At least two major problems beset the analyst in this matter. One is that so many other changes have taken place in the last quarter century of reform, it is difficult to disentangle the effect of reform from that of other ongoing changes (such as technological progress—often skill-biased—demographic changes or macroeconomic policies). Secondly, in both countries, there are reasons to suspect that economic inequality (or its rise) is underestimated because of the widely noted difficulty facing household surveys (in many countries) of large (and increasing) non-response by rich households. It is also difficult to compare China and India, as most of the inequality data cited in this context are usually for income inequality for China and consumption expenditure inequality for India (as the Indian NSS does not collect income data). These two disparate sources do show a rise in expenditure inequality in both countries in the last decade or so. But, as we have suggested, this rise may be an underestimate, and there is very little analysis as yet to show that this rise is primarily due to economic reform.
While reforms per se may thus have had a rather ambiguous effect on inequality, let us end with a general comment on (1) the link between initial inequality and the reform process and (2) the link between rising inequality and social discontent which, in turn, affects the sustainability of the reforms. I believe that in the Indian situation of extreme social heterogeneity and income inequality in a contentious democratic framework, what happens to inequality is important for the success of the reform process, particularly because inequality makes the social and political environment quite conflict-ridden, and it is difficult in this environment to build consensus and organize collective action towards long-term reform and cooperative problem-solving. When groups do not trust one another to share the costs and benefits of long-run reforms, there is an inevitable tendency to go for “bird-in-hand" short-run subsidies and government handouts instead. This is in line with a large theoretical and empirical literature on the relation between inequality and collective action.
In China, the disruptions and hardships of restructuring under a more intense process of global integration were rendered somewhat tolerable in the 1980s and 1990s by the fact that China has had some kind of minimum rural safety net, largely made possible by an egalitarian distribution of land and land cultivation rights following the de-collectivization of 1979. In most parts of India, there is no similar rural safety net for the poor. So, resistance to the competitive process that market reform entails is much stiffer in India. This is in line with a worldwide phenomenon: Resistance to globalization is generally stronger in countries where social safety nets (particularly unemployment benefits and portable health insurance) are weaker (compare Scandinavian countries and the US in this respect).
Of course, both China and India have done much better in the last quarter century, both in economic growth and poverty reduction, than in the last 200 years. But our effort here has been to dispel some prevailing myths on the links between economic reforms, economic growth and improvement in the lives of the poor in these two countries.
Edited excerpts. Pranab Bardhan is professor of economics at the University of California, Berkeley. Comments are welcome at firstname.lastname@example.org