Economic growth best antidote for poverty

Much as the UPA would like to believe that its social security programmes would eradicate poverty, there seems to be no better poverty alleviation programme than growth. The decline in poverty in India reported by NSS data for 2004-05 has not happened because of any well-targeted anti-poverty programmes, or because the NDA stepped up expenditure on anti-poverty programmes. It happened because of higher growth. And, interestingly, it has happened not only in India, but also in most of South Asia.

A recent study shows interesting evidence. Quietly, without most of us noticing, some of the poorest countries in the world?South Asian countries?have obtained strong growth and a sharp reduction in poverty in the past five to 10 years. Bangladesh, Bhutan, India, the Maldives and Pakistan have all grown at more than 5% per year on average over the past five years. A recent paper titled Economic Growth in South Asia: Promising, Un-equalising,…Sustainable? by Shantayanan Devarajan and Ijaz Nabi of the World Bank examines the impact of the growth on poverty (url: http://tinyurl.com/kl6dd).

In Bangladesh, India and Nepal, all three among the poorest countries in the world, a decade of economic growth led to a reduction in the proportion of population below the poverty line by 9, 10 and 11 percentage points, respectively. In Bangladesh, it fell from 59% in the beginning of the 1990s to 50%. In Nepal, it fell from 42% to 31%. In Sri Lanka, where the growth rate in the past five years was 4.7%, poverty fell by 6 percentage points.

Pakistan witnessed economic stagnation in the 1990s and, consequently, saw an increase in poverty in the decade. Looking back at the 1980s, when Pakistan grew well, we find that there was a 12 percentage points reduction in poverty over the 1980s. There is recent survey evidence to show that high growth in the post-2001 period in Pakistan has led to a reduction in poverty.

Further, their estimates suggest that if South Asian countries were able to sustain high rates of growth, they could achieve a significant reduction in poverty. While it is true that such estimates are based on past patterns in the economy, on several assumptions between income and consumption growth and poverty elasticity of the economy to income growth, and are at best indicative, they do show that apparently small differences in growth rates matter substantially to poverty reduction.

Projections for poverty incidence in 2013 with a 7% growth rate and a 10% growth rate show the impact of growth-oriented policies for poverty reduction. Bangladesh today has a 50% poverty rate. If the Bangladesh economy were to grow at a sustained 10% for the next seven years, the incidence of poverty could be brought down to 13%. And even if growth was to be sustained at 7%, the poverty rate would get down to 20%.

Pakistan today has a poverty rate of 35%. A sustained 10% growth for seven years, which would double Pakistan?s GDP by 2013, would bring poverty down to 8%. Sri Lanka?s poverty rate could similarly be reduced from 23% at present to 4% with 10% growth, or 10% with 7% growth.

The most interesting reasoning, of course, pertains to India. Going by existing growth rates, there are two alternative projections for the Indian poverty rate in 2013. Devarajan and Nabi find that if India continues to grow at 7%, poverty will be down to 15% in 2013. In addition, the Eleventh Plan Approach Paper finds that over the past five years, poverty in India has been dropping at an annual rate of 0.79 percentage points. Projecting into 2013 using this, we get an estimate of 16% for 2013. It is reassuring that these two estimates are similar to each other.

Devarajan and Nabi additionally estimate that if Indian growth were to accelerate to 10%, poverty in India is likely to get down to 13% by 2013. In other words, such an acceleration in growth would get an additional 30 million people out of poverty by 2013. Those who focus on poverty need to focus on this number. No redistribution scheme can have the impact economic growth can have. High economic growth is the best poverty alleviation programme.