Column : Free market isnt to blame for poverty

Written by Sanjay Banerji | Updated: Dec 31 2009, 04:09am hrs
The forecast that the Indian economy is expected to grow at the rate of 8% in the near future will certainly be music to many ears. The current spurt in industrial production, increases in advanced tax receipts of the government, and influx of foreign portfolio investment into Indian capital markets indicate that the industrial and service sectors in India are wriggling out of recession. However, one nagging question remains: for whom is the slowdown coming to an end

At one level, the question is trivial. Since this has been an industrial slowdown, a recovery brings good news to those who would find gainful employment in the sector or could become a part of the vast supply chains or are in some way related to the set of industries poised for resurgent growth.

However, this story leaves out the lives of other people living away from industrial clusters in conditions of low income, poor health, inadequate education and the lack of opportunities in a society still dominated by religion, caste and immobile social hierarchy. Of course, this chain of thought is repeated in almost every discourse on political economy and growth. I, however, strongly disagree with the typical leftist academicians/ politicians that the growth process worsens inequality and free market policies that promote growth should be curbed. Nor do I agree with the Kuznets curve theory (depicting an inverted U-shaped relationship between inequality and growth) which says that economic growth must widen inequality. Of course, concern for a non-inclusive process of growth is genuine, but one must get the perspective right.

First, the Kuznets curve has been calculated for a very long-run period starting with the 1800s. Since much of our growth has taken place in the last 10 years, the appropriate relationship that one should investigate is the one between the rate of reduction of poverty and growth of per capita income. And then compare the pre- and post-1991 period to see whether status quo has been maintained or not. Second, the Kuznets ratio (ratio between income of the top 10% of the population and the income of the bottom 10%) is 7 in India while the same figure is 16 for the US, 6.1 for Norway, 85 for Brazil and 63 for Venezuela. This indicates that at least in absolute terms, we are not faring worse. Third, the Gini coefficient (a measure of inequality that lies between 0 and 1 (with 1 being the most unequal and 0 being most equal) for India is 0.33. The similar figures for the US, EU and Australia are 0.46, 0.36 and 0.35, respectively, with the caveat that Gini is measured in terms of consumption expenditure in India instead of income elsewhere.

While these facts should silence the critics of free market policies, the more disturbing figures come from elsewhere. The educational Gini of the country is around 0.56 and it ranks India 104th among 125 nations. Less than 2% of the poorest sections of society complete high school . These facts together with other miserable human development indices point out a simple truth. Many Indians will miss any resurgence of the industrial sector because they lack education and human capital.

In an important piece of research work, Kaushik Basu and James Foster discuss how the presence of a literate person in an otherwise illiterate family could create a positive externality for the rest in making better decisionsboth economic and non-economic. Though their work is in the context of measurement of literacy, it has a direct policy implication. If the government selects one person each from the poorest families and introduces them to a process of education that ends with acquisition of cognitive and vocational skills that are readily marketable to segments of the industrial or service sectors, it would act as a big push to overall accumulation of human capital.

To achieve this, what we need is a massive education guarantee scheme similar to NREG. Though much more expensive, because of commitment of funds for a sustained period of five to seven years for each person, it has great benefits as well. The externality argument of Basu and Foster implies that an increment of one literate person in a family or neighbourhood would generate a multiplier of informed and semi-educated persons by association and connectivity with the newly educated person and would thus reduce social costs of bringing others into mainstream economic life. That is, while NREG can prevent the level of poverty from rising, a similar policy on education would make the upward movement of lower strata of the population more feasible.

Of course, the design of such a programme (format of the specific skills to be acquired), its implementation (via panchayats, NGOs or school vouchers to introduce elements of competition) and evaluation (measured by the number of people acquiring concrete and marketable skill at the end of such a programme) are thorny issues and need to be resolved.

The author is reader in finance at Essex University