:: Jayati Ghosh

Overcome rural poverty

Jayati Ghosh

July.21: Comparing China and India has been one of the more popular pastimes among social scientists for several decades now. But one of the areas for which the comparison is most fruitful is in the area of rural poverty reduction. China’s success in poverty reduction, especially in the period 1980 to 1995, was striking — rural poverty was brought down from 32 per cent of the rural population to only eight per cent. Thereafter, rural poverty reduction has stagnated, but at fairly low levels. By contrast, poverty reduction in India has been much slower from around 52 per cent in 1978 to around 30 per cent in 2005, while independent estimates suggest it is likely to be even higher.

These differing stories of poverty reduction show that while economic growth matters, in itself it need not deliver poverty reduction. Instead, what matters crucially is the nature of growth: the extent to which it is associated with growing inequalities that do not allow the benefits of growth to reach the poor; the extent to which the structural change generates sufficient opportunities for productive non-agricultural employment; the extent to which markets and states function in ways that ensure the provision of basic needs and universal access to essential social services.

The egalitarianism that the Chinese revolution ensured and the control the state could continue to exercise because of the persistence of substantial state ownership of and investment in capital assets and control over the financial system, meant that the process of global economic integration was carried out under fundamentally different premises from that which occurred in India. To a significant extent, some basic development issues, including ensuring adequate food supplies and universal primary education, were already dealt with before the process of global economic integration began. The domestic market for consumption goods was also significantly larger than proved to be the case in India. The control retained by the Chinese state over financial institutions and the activities of state-owned enterprises (SOEs) allowed it to sustain high levels of investment and to deal with volatility, as well as to prevent undesired levels of inflation from persisting beyond relatively short periods.

The early phase of economic reforms in China, which essentially involved increasing remuneration to farmers, operated substantially to reduce rural poverty. Subsequently, the heavy emphasis on infrastructure development, combined with some "controlled" trade and investment liberalisation, created much greater possibilities for employment generating, export-oriented industrialisation, which became the next engine of growth. As this began in a context of still heavily regulated imports, it ensured that export employment provided a net addition to aggregate manufacturing, rather than having to balance for losses in employment in other domestic sectors. When import liberalisation accelerated, some devaluation of the yuan in 1994 limited import competition. Thereafter, entry into the World Trade Organisation (WTO) required more sweeping import liberalisation, but to some extent, that impact was counterbalanced by access to other markets that enabled the continuous expansion of exports with a cheap currency policy.

While delivering growth, the transition to a market-driven system in China also generated more inequality, not only in income terms, but also with reference to basic services. But recent measures by the Chinese state aimed at countering such tendencies and the migration-mediated process of trickle-down have helped to check these outcomes. However, since the current pattern of economic expansion is predicated on high rates of saving and investment as well as loosening the earlier credit and cash planning system, the dangers of volatile growth and inadequate reductions in unemployment and poverty persist.

After the onset of the global economic crisis, it is clear that new growth stimuli will have to be sought from within the domestic market. So in China, this is the moment to embark on a wage-led economic path that will simultaneously deliver growth and reduce poverty.

In comparison, India, with its market-driven and demand-constrained system, did not experience the same growth success and has been far less successful in poverty reduction. Clearly, macroeconomic flexibility in a market-driven environment could not deliver the desired structural change in terms of the composition of output and employment that would have ensured substantial poverty reduction.

These inadequacies of the recent growth process in India were related to the reduced public expenditure by the Indian state in the period of reform, most significantly the substantial reduction in central capital expenditure (mainly on infrastructure) as a share of gross domestic product (GDP), but also public spending directed towards rural areas generally. In addition, Central government policies created resource problems for the state governments in various ways, forcing them to cut back on crucial developmental expenditure. As a result, employment growth was well below the rate of GDP growth. These problems were compounded by the effects that trade liberalisation had on small-scale production in some manufacturing sectors. Agrarian distress and inadequate employment generation have thus emerged as the most significant macroeconomic problems currently.

Of course, it is also true that the Indian experience allowed for greater financial and macroeconomic stability than experienced by many other "emerging markets" over this period. However, this was primarily because, until relatively recently, liberalisation of the capital account was limited, and India was not an attractive destination for finance capital until 2004. In the past four years, changes occurred on both these fronts, and the Indian economy experienced a surge in capital inflows that exerted upward pressure on the exchange rate and reduced macroeconomic flexibility.

It is in this context of much greater global economic integration than even a decade earlier (with the value of all current account transactions amounting to more than 110 per cent of GDP in 2007-2008) that India is now experiencing the unfortunate collateral damage of the global financial crisis and economic slowdown. These have already affected output and employment quite substantially. Since the development project in India is still far from complete, and indeed is much less advanced than in China, it is crucial for the Indian government to use this opportunity to use expansionary fiscal policy and redirect both public and private investments towards the creation of infrastructure and the provision of basic needs. It is only with such a determined effort that any future growth will actually deliver poverty reduction.