Monday, November 2, 2009

Assessing impact of post-reform Indian economic growth

It is increasingly becoming evident that the depth and vibrancy of urban economic growth will determine whether India achieves its twin objective of poverty reduction and double-digit economic growth. More evidence comes from Martin Ravallion and Gaurav Datt, who examined household survey-based poverty measures for urban and rural India for the 1951-2006 period and claim that in the post-reform period, urban economic growth may be driving overall poverty reduction.

Contrary to earlier studies which found that "the main driving force for overall poverty reduction was rural economic growth" and that urban economic growth brought "little or no benefit to rural poor", the authors find evidence that in the post-reform period, the urban economic growth has emerged as the driving force in overall reduction in poverty. They find much stronger evidence of a feedback effect (through trade, migration, and transfers) from urban economic growth to rural poverty reduction (and living standards) and distributional effects from urban growth benefiting the country’s rural poor than found in the pre-reform data. In fact, they find that the "estimated elasticities of rural poverty measures with respect to urban growth are even higher than those with respect to rural growth". On the flip-side, the authors caution that this reversal of feedback effects also means that the rural poor will be vulnerable to "urban-based economic shocks" (which are more probable, especially given the greater interface and integration between the urban economy and the global economy).

Interestingly, from the survey-based data, they find little conclusive evidence that the higher growth rates of the post-reform era have resulted in faster reduction in poverty. Except for the headcount index, they do not find any statistically significant decreases in poverty between the pre- and post-reform periods from either the linear trend (the annual percentage point reduction in the poverty measures) or the responsiveness of poverty to growth in the survey mean (the growth elasticity of poverty reduction).

Further, using national accounts, they find that the post-reform period has a "lower proportionate rate of poverty reduction from a given rate of growth". They also find from the latest available NSSO data for 2004-05 that contrary to expectations of labor intensive growth in the post-reform period, the employment growth rate in the period 1993-94 to 2004-05 has been virtually the same as the preceding 10 years. On both the role of urban economic growth on national poverty reduction and the impact of higher post-reform rates of growth on poverty, they conclude,

"While pre-1991 urban growth did not seem to matter for national poverty reduction, after 1991 not only did a significant urban growth effect emerge, but the urban growth elasticities of all three national poverty measures were higher (in absolute terms) than the corresponding elasticities with respect to rural growth... Overall, while the higher rate of growth in the post-reform period has come with a higher proportionate rate of progress against poverty, we do not see in these data a robust case for saying that the growth elasticity of poverty reduction has risen since the reforms began."

They do find a "long-run trend decline in poverty" in both rural and urban areas and that the biggest gains have accrued to those living well below the poverty line. Using various measures of poverty reduction (outlined in the last two paragraphs), they find that in the post-reform period, both the depth of poverty (as measured by the mean poverty gap relative to the poverty line) and inequality amongst the poor are reduced by economic growth. Some of the results are captured in the graphics below

Both in terms of headcount and squared poverty gap indices, poverty in urban and rural areas have been converging, with urban poverty now even overtaking rural poverty.

Even as the economic growth rate increased, the continuing disparities in the endowments that allow people to take up new market opportunities, has meant widening inequality. The antecendent inequalities in human capital, unless rectified quickly, threatens to leave the poor far behind. The increase in inequality within both urban and rural areas in the post-reform period has been steep.

Further, in an indication that urban areas have been pulling away from their rural counterparts, the grpahic below indicates how urban consumption (per capita monthly consumption expenditures) has increased in relation to rural consumption.

It is clear from the aforementioned graphics and analysis that the faster post-reform economic growth has not translated into a proportionate or higher poverty reduction due, in large measure, to the increasing inequality, both between urban and rural areas and within each of them. And going forward, bridging inequality, especially on the human capital and endowment front, will be critical towards ensuring that the benefits of faster economic growth and increasing urbanization and urban economic growth (with its greater elasticity of poverty reduction) are accessible to the poor.

The human capital dimension assumes greater significance in view of the fact that the dominant share of population is still rural (about 70%) and the human capital deficiency is greatest among the rural poor. Sustaining high rates of growth, especially for economies in its initial economic growth take-off stage, requires drawing in of massive quantities of incremental physical capital inputs, most critically human resources (mainly semi-skilled and skilled), most (if not all) of which has to be supplied from the rural areas. Surely we cannot make much headway with poverty reduction when almost half (rural areas housed 72% of the poor and rural areas formed 71% of population by end of 2005-06) of its main source of human capital supply are income (and most likely and more importantly human capital) deficient and are therefore not likely to be able to access the opportunities created by the high rates of economic growth.

Even assuming the role of Kuznets effect in explaining the widening inequality, it is important that effective universal education and health care policies, coupled with targetted government redistribution programs, are in place to ensure that everyone is able to access the opportunties thrown up by economic growth and those affected are cushioned from the adverse effects of growth. The latter assumes even greater significance in the aftermath of globalization and the impact of the global events of the past eighteen months on foodgrain prices and the lives of the poor.

As a footnote, the authors define "pro-poor growth" in terms of that which reduces an agreed measure of poverty (measured by the extent of poverty reduction) and that which disproportionately benefits the poor when judged relative to the rate of growth (measured by the elasticity of the agreed poverty measure with respect to economic growth). And they use three poverty measures to translate these two definitions of pro-poorness - headcount (HC), poverty gap (PG) and squared poverty gap (SPG) indices. The HC index is the percentage of the population who live in households with a consumption per capita less than the poverty line. The PG index is the mean distance below the poverty line expressed as a proportion of that line (the mean is formed over the entire population), counting the non-poor as having zero poverty gap, and this is a measure of the depth of poverty. The SPG index is the mean of the squared proportionate poverty gaps and reflects the income distribution amongst the poor and is a measure of the severity of poverty.

The study uses data from 47 surveys carried out by the National Sample Survey Organization (NSSO) since 1951 to track various poverty measures, and the national accounts to derive economic growth and consumption data. However, with more sustained high rates of economic growth, widening inequality and greater dispersion of benefits of growth among the population, the divergence between NAS and survey-based data would increase. It may be appropriate to track the trends in the now well established category of below poverty line (BPL) population. Another dimension of the impact of economic reforms on poverty reduction can be brought out by analysing the relative impacts on the different categories (industrialized to agriculutral to mineral resource rich) of Indian states.

Update 1
See this discussion on different poverty estimates for India. The conventional NSSO's household survey based estimate (2400 calories consumption for rural areas and 2100 for urban areas) puts rural poverty at 28.5% for 2004-05. An expert group, headed by Suresh Tendulkar, appointed by the Planning Commission, expanded the criteria for defining those below the poverty line (BPL) by including education, health and actual spending on rent and conveyance as part of an individual’s consumption basket, besides expenditure on food and found that four out of 10 people in rural areas are poor. It pegged national poverty at 36% (65.2 million families) for 1993-94.

Another report, prepared by the National Commission for Enterprises in the Unorganized Sector, headed by Arjun Sengupta, and published in 2007, found that 77% of the population subsists at just Rs 12 per person per day, much below the prevailing minimum wage, which ranges between Rs40 and Rs150 a day across states.

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