On the birth anniversary of Gandhiji, it is useful to recall that he wanted to evict many things from India. One of those did happen a few months before his death. The others were deprivation, and societal disharmony. These still remain with us.
India currently has a high rank on the post-crisis growth league tables. For a country once known for acute poverty, the issue that should engage us is how fast this growth is pulling us out of that reputation.
There is a recent study on shifting patterns of global wealth by the Development Centre of the Organisation for Economic Cooperation and Development (OECD), which estimates the growth elasticity of poverty reduction in 24 countries, India among them. Incidentally, India is one of the non-OECD members of the Development Centre.
These exercises are difficult to do, and easy to criticise. Clearly, there are going to be severe data difficulties. Even something as standard as GDP growth can be under or overestimated, notwithstanding the worldwide standardisation of methodology under the auspices of the United Nations Statistical Office (one of many useful functions performed by the UN system). As for poverty, annualised changes in the dollar a day headcount index necessarily have to be estimated from the discrete points in time at which survey data are available for each country. Poverty surveys with a large enough sample for statistical robustness are typically not conducted annually. So, we do not know the most critical thing about poverty, namely how much it fluctuates from year to year. Venezuela is a rare example of a country where annual income surveys are done. These show high volatility in growth and poverty from year to year, in response to fluctuations in the price of oil, the key commodity underpinning the Venezuelan economy.
For a family that graduates out of poverty in a particular year, the satisfaction of doing so will be tempered by the probability of slipping back into poverty the next year. If the graduation push came entirely from good rainfall, or some other such exogenous element, clearly there is no structural change in their situation, and no change in the slippage probability. For the graduation to be more sustainable, there has to have been a positive structural change, such as drought-proofing from better watershed conservation, or a relatively stable source of non-farm income.
A survey conducted after, say, a lapse of five years, will show the net change relative to the previous year of survey, but will not by itself tell us anything about whether the improvement recorded is structural, or simply a reflection of fortunate timing.
Notwithstanding these limitations, the growth elasticities of poverty reduction estimated in the OECD report for the 24 countries, over the 10 years from 1995 to 2005, invite our attention. They are obtained from average annual changes in poverty headcounts imputed from survey points, divided by average annual real growth rates of GDP per capita over those 10 years. Six of the 24 countries actually had positive elasticities, implying headcounts and growth moving in the same direction. Of the remaining eighteen with the right (negative) sign, India has the lowest rank, at 0.3 per cent of annual reduction in the poverty headcount for every 1 per cent of GDP growth (tied with Peru). China did much better, at a 1.2 per cent poverty reduction for every 1 per cent of GDP growth.
The stability of the denominator matters a great deal, when evaluating these elasticities. If GDP growth is itself volatile, either because of rainfall dependence or export dependence, the latter exacerbated where there is high export concentration by product and/or destination, a high growth elasticity of poverty would imply wide year-to-year swings in the poverty headcount. Stable GDP growth imparts stability and permanence to poverty reduction, at whatever elasticity.
India, with stable GDP growth, offers the hope that the poverty reduction observed, slow as it is, marks a permanent shift in the economic status of some, if not all, of those graduating out. China, with a high and stable GDP growth, and an (negative) elasticity of 1.2 per cent, is clearly far ahead.
The OECD study prescribes a path going forward for more rapid growth rates in the developing South, based on a global model of trade flows. The simulations show that the gains to the South from reducing North-South trade tariffs to North-North levels, are nowhere nearly as great as the gains from reducing South-South trade tariffs to those same levels. These results in essence place the burden of further acceleration in Southern growth on the South. The North is absolved of all responsibility.
This conclusion is contestable on several grounds. The average tariff in the South on manufactured imports from the South is 7.8 per cent; on imports from the North, it is 2.4 per cent. The reason is that Southern manufactured imports compete with domestic production, where manufactures from the North do not (on average). South-South tariff liberalisation simply cannot overcome domestic political opposition unless, at a very minimum, there is widespread confidence that the damage from closure of outcompeted production units can be contained. This, in turn, requires unobstructed, low-friction factor markets that are still a pipe dream in most countries of the South. It calls for a robust social safety net for those thrown out of work. Not many countries of the South can boast of such preconditions.
The distance between tariffs imposed by the North on imports originating in the South, and those originating in the North, is far wider than the equivalent distance in tariffs imposed by the South, for both primary and manufactured imports. This violation of the spirit, if not the letter, of the MFN principle calls in the first instance for the North to lead the way by reducing the huge disparity in average tariffs by point of origin.
That still leaves a lot to do in the South to insulate those graduating out of poverty from slipping back.
The author is honorary visiting professor, ISI Delhi
