A flood, not a trickle down

Being poor is bad enough. Indeed, I can think of nothing worse. Being poor in India is worse.

Being poor is bad enough. Indeed, I can think of nothing worse. Being poor in India is worse. Not only are you down in the subterranean sphere but your status becomes a political football. This is what I am sure will happen with the new statistics on poverty released by the World Bank.

Is there a lot of poverty in India? Yes, 456 million people. Is the proportion of the poor in the economy going down? Yes, down from 60 per cent in 1980 to 42 per cent in 2005. Is it going down fast enough? No, as the number of poor has risen from 421 million in 1980 to 456 million in 2005. So far, everyone will agree. But then comes a tricky question. Has poverty been going down faster since 1990 than in the decade before? The World Bank says no. It argues on the basis of its new data that poverty in India went down faster between 1980 and 1990, from 60 to 51 per cent, than between 1990 and 2005, when it fell to 42 per cent. Thus, nine percentage points in the first ten years and the same again in 15 years.

What conclusion should one derive from this news? There are no doubt many in the Left who for once would hug the World Bank to their bosoms, having hated it so far. They will argue that this proves that liberal economic reforms do not work and so we should get back to Leftwing economic policies. Elections being near, this will be a stick to beat the poor PM with. As I wish to bring poverty down even faster, I want to caution against jumping on this bandwagon.

A trivial point first. The drop of 9 percentage points from a base of 60 is 15 per cent and from 51 is 18 per cent. Still, let me accept that the drop rate is slower. But the question is, why is this so? The champions of Left policies will say liberal economic reform does not spread growth down far enough. But there are two points against this. India followed Leftist economic strategy until 1980 and the poverty level barely budged. Growth rate was low 1 per cent per capita per year for 30 years, from 1950 to 1980 and unemployment was high. So let us forget about bringing back the Socialist Pattern of Society.

The more important point is, why does not growth trickle down? The answer is that so far, the growth has been in medium- and high-tech manufacturing and even more in services. Manufacturing has not generated enough jobs as it uses only skilled personnel, and not too many, since machines do a lot of work. Services are also skill intensive. A vast proportion of India8217;s population8212;60 per cent8212;depends on agriculture while producing only 20 per cent of the national income. In services, the ratio is reverse8212;20 per cent labour producing 60 per cent of the output. Thus a person in services produces nine times as much as a person in agriculture.

The persistence of huge amounts of labour in low productivity agriculture is the principal reason why poverty is so hard to remove. Again the Left believes we should tax the rich and give money to the poor. But this is neither a viable strategy in the long run nor is it politically feasible. The answer is to shift as many people as possible from agriculture to jobs where their productivity would be higher, while investing more in agriculture to raise productivity there. This would involve improving their health and educational levels. But it would also involve shifting the rural workers from agriculture to manufacturing, especially low-tech manufacturing. Malaysia, China and Indonesia have done this and their poverty levels are much lower than India8217;s. India has failed to enhance employment in low-tech manufacturing as a result of hiring-and-firing restrictions, which have persisted since the Socialist days. It has meant a stagnant manufacturing sector in terms of the share of output and also low employment, because people avoid building large factories.

So the answer is abolish the old labour laws, shift people from agriculture to industry where their output and incomes will rise and be sustainable. Liberalise more and let the trickle down become a flood.