Opinion
Public goods aid poverty reduction but it needs sustained economic growth too
Summary
- While the Great Indian Poverty debate has been animated by welfare data, it doesn’t alter our main aim of expanding India’s economy.
Absolute poverty has declined across the world over the past four decades, one of the clear successes of the fading age of neoliberalism. The evidence is overwhelming. However, there continue to be lively debates about the extent of this decline in the number of people living in penury. India has seen two huge (and necessary) debates on the extent of poverty, the first around the turn of the century, followed by a more recent one after the pandemic. These debates have attracted extra attention since India has not had an official poverty estimate for a decade now.
There are two traditional metrics to understand how many people live below a defined poverty line. The first method is based on the disposable income of households, or the sum of labour income, capital income and cash transfers minus direct taxes paid to the government. The second method looks at actual household consumption expenditure, or disposable income minus savings. In a country such as India with a low base of income-tax payers, poverty estimation is usually done through household surveys that estimate consumer spending, rather than from data on household income.
One tricky issue is how to deal with public services that have either a zero or minimal price. In a paper published in November, Amory Gethin of the Paris School of Economics has tackled this problem by constructing new measures of poverty that take into account government spending on public goods that benefit households, especially poor ones. He has built a new database of the global poverty headcount ratio between 1980 and 2022. The main conclusion from these estimates is that traditional measures of poverty actually underestimate the extent of its decline in the past four decades. (‘Revisiting Global Poverty Reduction: Public Goods and The World Distribution of Incomes, 1980-2022,’ World Inequality Database Working Paper.)
Public goods matter in the poverty debate, though what Gethin writes about in his paper includes merit subsidies such as spending on healthcare, education and housing, in addition to pure public goods such as police services and roads. Of course, a lot will also depend on whether such government spending reaches those at the bottom of the income pyramid or those at the top. Political power may allow the rich to corner subsidies, so just the extent of government spending on social services is not enough to understand its impact on poverty.
There are two fundamental analytical insights here. First, public goods and private goods are substitutes in household budgets. One important example is healthcare. There is a strong negative correlation between the proportion of households that get pushed into poverty because of healthcare costs and the extent of public health spending in a country. In India, an estimated 5% of families live below the global poverty line of $3.65 a day because of out-of-pocket health expenses. (This poverty line is based on purchasing power parity rather than market exchange rates.)
Second, public goods also have an important impact on measures of well-being that are not strictly monetary. For example, multidimensional poverty in countries with significant welfare spending is usually lower than the standard monetary estimates of poverty based on household income or expenditure surveys. Multidimensional poverty covers a wider arc of well-being. The Global Multidimensional Poverty Index from Oxford University, for example, is based on three dimensions: living standards, education and health.
Gethin argues that “more attention should be given to public goods in the design of living standards surveys. Surveys routinely fielded by statistical institutes spend considerable time and effort compiling detailed data on household expenditure, yet the information they collect on access to basic public goods remains rudimentary at best. Adding regular questions on both objective indicators and subjective perceptions of public service delivery would allow for a much more complete view of the well-being of low-income households."
Two papers that were central to what has been described as the Great Indian Poverty Debate 2.0 are worth mentioning here. Both showed that Indian poverty has declined substantially over the past decade, though their routes to that conclusion have been different. A World Bank paper by Sutirtha Sinha Roy and Roy van der Weide uses data from the Centre for Monitoring Indian Economy, though only after re-weighting the raw data to make it comparable to the official National Sample Surveys. An International Monetary Fund paper by Surjit S. Bhalla, Karan Bhasin and Arvind Virmani begins with the official consumer expenditure survey of 2011-12, extrapolates growth in consumption in the national accounts, and adds government food subsidies. So, in a limited way, their approach aligns with what Gethin has done.
It would be incorrect to jump to the conclusion that countries can spend their way out of poverty. Implicit in much of the discussion on the role of public goods in poverty reduction is the question of the government’s fiscal capacity, or its ability to fund such spending through tax revenues. That, in turn, requires both a dynamic economy as well as an efficient tax system. Poverty reduction over the long-term is strongly correlated with sustained economic growth.
