The one dollar question

Whatever the measurement, India is less poor. But donors are incentivised to overestimate poverty

A sense of equity influences policy-making even in market-based economies. However, equity isn8217;t always easy to pin down. First, do we mean absolute notions of equity, such as the idea everyone must possess a minimum standard of living? This is the sort of notion that leads to a poverty line. Or do we mean relative notions of equity, such as the notion there mustn8217;t be wide divergences in living standards across income groups? This is the domain of inequality and many people legitimately argue that while one should be concerned with poverty reduction, an increase in inequality is inevitable and even desirable, especially in a country like India, where inequality levels are low by cross-country comparisons.

Second, assuming we restrict ourselves to the absolute notion of poverty, are we talking about distribution of income which is an outcome or distribution of education and health which are like inputs into the process? There will be greater sympathy for the view that we must remove unequal and discriminatory access to education, health, credit and land markets and the legal system. Extrapolating the argument, one can also make the point that poverty is about uneven participation in decision-making processes. However, most debate and discussion revolve around what is called income or expenditure poverty.

This requires construction of a poverty line, so that one can calculate the percentage of population below this line. The Planning Commission works out India8217;s own indigenous poverty line, while the World Bank8217;s poverty line has traditionally been regarded as 1 or 2 USD per day per person. It8217;s difficult to give a single figure for India8217;s poverty line, since it is based on a minimum number of calories required per day converted to a money figure that varies from state to state and region to region, since prices aren8217;t uniform. Logically, per capita per month poverty line in urban Maharashtra will be much higher than in rural Andhra.nbsp;It is legitimate to argue India8217;s present poverty line covers no more than a minimal subsistence level of consumption more than 80 per cent of which is food and must be jacked up as development proceeds. There is a historical reason behind India8217;s poverty line8217;s preoccupation with food, and a little bit of housing. In the late 8217;50s and early 8217;60s, it was thought items like education and health would be provided by the state and needn8217;t figure in personal expenditure baskets. That assumption is no longer true. However, the calorie assumptions of that time aren8217;t true either.

Life-styles have altered among the poor too. One no longer needs that number of calories. Arguing that poverty lines need to change is one thing. After all, India8217;s poverty line isn8217;t the same as the American. But disputing poverty figures with an unchanged poverty line is another. Incidentally, the World Bank8217;s 1 per day isn8217;t at today8217;s prices, it is at 1985 prices. It translates into a little more than 1.25 a day at today8217;s prices. And whether one uses the indigenous poverty line or whether one uses the World Bank8217;s poverty line, money values are broadly similar, as are poverty numbers. However, that now gets into murky areas of data collection. Globally, these are collected through household surveys. And in many countries, including India, surveys are of expenditure, not income. Consequently, though we want to measure income poverty percentage of population below an income threshold, we end up measuring expenditure poverty. To make matters worse, in every country, there is a gap between aggregate consumption expenditure obtained through household surveys and aggregate consumption expenditure obtained through national accounts. Stated differently, growth shows up in national accounts. It doesn8217;t show up that much in surveys, on which we base poverty estimates.

Statistically, the link between growth and poverty reduction is a red herring, unless we adjust for disappearing consumption. But let8217;s ignore this issue, though it is an important one. What do Indian data show? Satisfactory NSS National Sample Survey data are available at infrequent five-yearly intervals, so we are stuck with 2004-05. On a comparable basis, the poverty ratio is 27.5 per cent, with concentration in Bihar, Chhattisgarh, Jharkhand, MP, Orissa and Uttarakhand. While poverty reduction should have been more, there is no denying much-maligned trickle-down works, as long as there is some per capita growth to trickle down. After all, India8217;s poverty ratio was flat at around 50 per cent for three decades between 1950 and 1980. To state the obvious, poverty reduction isn8217;t only a function of aggregate growth, but its composition. It8217;s impossible to have substantial reductions without revamping the rural sector.

World Bank figures also reinforce the general poverty reduction story. Poverty has dropped substantially in East Asia and South Asia, with the Chinese drop part of the East Asian success and the Indian drop part of the South Asian success. Globally, there are problem areas elsewhere in South Asia and in sub-Saharan Africa. But an additional comment is in order about sub-Saharan Africa. Poverty figures for that region end in 2004. The point to note is that growth has picked up since then in several countries of sub-Saharan Africa and once we have later figures, the trickle-down may be true there too.

Let8217;s acknowledge that the World Bank is now an African Development Bank and that8217;s where donor money is also headed, barring odd peripheral areas. Why has the World Bank now increased the poverty line from 1 a day to 1.25 a day, thereby increasing the number of global poor from 1 billion to 1.4 billion? Media reports suggest better price data are now available and the cost of living in developing countries was earlier under-estimated. This is not a statistically convincing answer at all, since 1 is a real figure at 1985 prices. Better price data should affect conversion of 1 into today8217;s money figures, but is no argument for adjusting the real 1 figure upwards to 1.25.

Story continues below this ad

The answer probably is an attempt to stimulate the ODA official development assistance and ensure the halving of poverty as targeted under the Millennium Development Goals to be attained by 2015. Thanks to India and China, the 2015 target will certainly be reached. As for donor money and World Bank interventions, notwithstanding influential and popular books by Jeffrey Sachs The End of Poverty, Common Wealth, the empirical evidence is unambiguous. Though donors have vested interest in poverty continuing they face an identity crisis otherwise, as do Left parties, poverty reduction is a function of endogenous and internal changes. Paul Polak8217;s new book Out of Poverty explodes three poverty eradication myths and one of these is that we can donate people out of poverty.

The writer is a noted economist

expressexpressindia.com