Thursday, May 26, 2011

Poverty and vulnerability in India

One of the most interesting graphics in the recently released World Bank report on poverty in India is one that highlights how much vulnerable are a large proportion of the non-poor to aflling into poverty. Vulnerability is defined in terms of the threat of the family falling into poverty in future. It is a measure of the volatility of household incomes and exposure to various external risks.

The graphic below captures the clustering of rural, urban, and mega-urban populations around the poverty line. The intensity of clustering has hardly changed over the decade.

I can think of four implications for poverty eradication and development policy-making from this finding

1. It is as much important to monitor and support those who have moved into poverty (from being non-poor) as it is to assist those who are below the poverty line. In other words, the poor are a dynamic population, more so in rural India. People continuously move in and out of poverty, possibly with seasonal periodicity. Given the close clustering of people around the poverty line, especially in rural areas, large numbers of people are likely to fall into poverty in times of economic uncertainty (in rural areas mainly, weather related shocks, say, a poor monsoon).

2. Targeting those below the poverty line becomes a near impossible task given this close clustering, especially in rural areas. Even if we are able to narrowly and quantitatively measure those below and above the poverty lines, it is impossible to qualitatively assess, with any reasonable degree of satisfaction, whether their lives correspond to those of the poor or non-poor.

In other words, accuracy in targeting, even with technologies like bio-metric identification, will come up against the difficulty of cracking the eligibility criterion. The fact is that, atleast in rural areas, most people are either poor or run the risk of falling into poverty. This also means that strategies that seek to leverage self-selection (the non-poor will naturally de-select themselves from accessing the benefits, and therefore enable more effective targeting) becomes relatively ineffectual.

3. In view of the tight clustering of the overwhelming share of the population around the poverty line, is there a case for universal subsidy transfers, especially in rural areas? Why not subject the same flawed below poverty line (BPL) figures in various states to more rigorous analytics to identify the degree of clustering, and decide on making subsidy universal if the numbers of poor exceed an agreed cut-off parameter? The transaction costs and inefficiency distortions associated with targeting (and a dual-price regime) would far outweigh the additional expenditure required for the expansion.

4. Addressing this type of pervasive poverty may require going beyond the prevailing development paradigm in India that seeks to overcome poverty through wealth re-distribution (welfare programs, self-employment and livelihood programs, etc) instead of wealth creation (rapid and equitable economic growth, and massive job creation).

Welfare enhancing policies cannot address the issue of development when poverty is so widely pervasive. It works best when poverty exists at the margins, and that too only to the extent of providing welfare support. It is growth promoting policies that are required to pull an entire population out of poverty, as is the case with the widespread poverty in India.

This is not a call to junk all welfare programs, but only a reminder that welfare policies cannot achieve the objective of poverty eradication. That requires policies that promote growth and create jobs. Welfare policies can at best provide the cushion or platform on which wealth creation policies can be sustained (or its risks mitigated).


IndiaPowerReforms said...

The graphic that has been shown, is naturally dependent on the data provided by governments. We also have seen the system where the poor are surprisingly low in number whenever a feel good/shining factor is needed. Whenever a benefits program is on the anvil, the number increases logarithmically. How good is the data on which the graphic is based.

Secondly, do u believe that we have an effective targetting system? Worst of all, have we attempted targetting seriously ?

gulzar said...

effective targeting is extremely difficult to implement. i am increasingly veering to the opinion that, in an ideal world, all subsidies should be universal and cash-based. the targeting should then be by way of taxing those recipients whose incomes are higher than a defined level.

admittedly we do not live in an ideal world. but the same principle could be adopted with the proposed cash transfer subsidies for LPG - say, all income tax assessee recipients of the subsidy to be taxed to recover the subsidy.