To reduce poverty,India needs to concentrate on promoting healthcare and education of the poor
It is sometimes argued that a country such as India,aiming to eliminate absolute poverty,should only be concerned about economic growth,and not worry about inequality. Is that right?
Yes,growth is (typically) good for the poor but it is no less true that inequality is (typically) bad for the poor. There is little doubt that poverty reduction does tend to come with aggregate growth,though not always,and not to the same degree. The same rate of (positive) growth can bring anything from rapid poverty reduction to little or no progress,depending on initial inequality. The more unequally the pie is shared,the less the poor gain from increases in the size of the pie.
The same inequalities tend to impede economic growth. Given credit market failures,poor people cannot borrow to finance productive investments,such as schooling for their children. So the more poor people in an economy,the more unexploited opportunities for investment and growth there will be,and hence,the longer poverty will persist. There is less growth and less of it reaches poor people. Inequality can also restrict cooperation in society,such that key public goods are under-provided,or desirable economic and political reforms are blocked by coalitions keen to preserve the status quo.
The upshot of these observations is that we should not be posing the policy choice as growth versus redistribution. That is not where the key policy challenges are found for India today. Rather,they lie in how best to address the inequalities that impede future growth and poverty reduction as an important element of a growth-oriented reform agenda.
But it is not just income inequality that matters. I would argue that Indias inequalities in human development are currently doing greater harm. Equitable,broad-based education is the key to assuring that the gains from technical progress and economic growth are widely shared. Indias huge inequalities in human development represent not only lost economic opportunities today,but breed an inequitable growth process going forward. While India has seen higher growth rates since the early 1990s and poverty rates have thankfully been falling,the antecedent inequalities,especially in schooling,have meant that the countrys poor have shared less in that growth than they could have.
Inequalities in education attainments interact strongly with Indias growth process in determining the impact of that growth on poverty. This interaction effect is evident when one compares rates of poverty reduction across states of India. The gains to poor people from higher farm yields have not varied much across states. But the responsiveness of poverty to non-farm output growth has varied greatly. The non-farm growth process has been significantly more poverty-reducing in the states with initially higher literacy rates. That makes sense; the more educated,better fed and healthier poor people are,the better their chances of participating in the opportunities created by an expanding non-farm market economy,and contributing to that expansion. (In this respect,Chinas poor had a huge initial advantage in their health and education at the time its market-oriented reforms began in the late 1970s.) And literacy helps ensure that poor people can effectively access the public services that help them escape poverty. This is not news. The importance of mass education has long been acknowledged in India. Indeed,free compulsory education to the age of 14 is a directive principle of the Constitution. However,implementation has lagged considerably,with large geographic differences and often poor quality schooling across the country.
Addressing Indias inequalities in health and education is crucial for faster long-term progress against poverty,but it is not the only thing that matters. Rural economic growth has long been crucial to more rapid poverty reduction,both from the agriculture and unskilled-labour intensive services sectors. For many decades,there has been too little growth coming from the rural sector,while the urban economic growth process has been disappointing in its impact on poverty. There are encouraging signs of change since the early 1990s,notably with urban growth processes starting to have more impact on overall poverty. While that is good news,India still has a long way to go to assure that its poor can participate in,and contribute to,the countrys growth.
The health and education of poor people must have high priority if India is to see accelerated poverty reduction,as well as for human development more broadly. That is not what we have seen historically,where the emphasis has gone more on the health and education of non-poor people. Fixing the public delivery systems to assure better education and health for Indias poor deserves to be put centrestage in discussions of how to attain more equitable growth.
Direct interventions against poverty through transfers (of cash or kind) and self-targeted workfare schemes have long had a long history in India. These have an important role in fighting poverty,and I do not think India spends too much on social protection. But poverty reduction is about promotion as well as protection,drawing on a useful distinction made by Jean Drèze and Amartya Sen some years back. The balance between these two aspects is arguably the most important thing to get right in fighting poverty. In India,I would argue that the greater attention is needed on promotion. In China,by contrast,I would argue that a shift toward protection is called for. Protection programmes can also be designed to help more with promotion. Transfers can help compensate poor families for the costs of schooling,including the forgone wages of the children. Workfare schemes can help build durable assets.
Targeting always comes up in discussions about anti-poverty policies. Finely targeted policies can be good for protection but bad for promotion,by imposing high costs on poor people when they try to escape poverty by other means.
The writer,a former director of the World Banks research department,holds the Edmond D. Villani Chair of Economics at Georgetown University,US