November 3, 2011

Does Redistributing Income Reduce Poverty?

Does economic growth help reduce poverty in developing countries — or do growth-oriented policies merely increase gross national product without ameliorating poverty?

Jagdish Bhagwati

Many on the left are suspicious of the idea that economic growth helps to reduce poverty in developing countries. They argue that growth-oriented policies seek to increase gross national product, not to ameliorate poverty, and that redistribution is the key to poverty reduction. These assertions, however, are not borne out by the evidence.

Since the 1950s, developmental economists have understood that growth in GNP is not synonymous with increased welfare. But, even prior to independence, India’s leaders saw growth as essential for reducing poverty and increasing social welfare. In economic terms, growth was an instrument, not a target — the means by which the true targets, like poverty reduction and the social advancement of the masses, would be achieved.

What the evidence says

A quarter-century ago, I pointed out the two distinct ways in which economic growth would have this effect. First, growth would pull the poor into gainful employment, thereby helping to lift them out of poverty. Higher incomes would enable them to increase their personal spending on education and health (as seems to have been happening in India during its recent period of accelerated growth).

Second, growth increases state revenues, which means that the government can potentially spend more on health and education for the poor. Of course, a country does not necessarily spend more on such items simply because it has increased revenue, and, even if it does, the programs it chooses to fund may not be effective.

In almost willful ignorance of the fact that the growth-centered model has proved itself time and again, skeptics advocate an alternative “redistributive” developmental model, which they believe will have a greater impact on reducing poverty. Critics of the growth model argue that it is imperative to redistribute income and wealth as soon as possible. They claim that the Indian state of Kerala and the country of Bangladesh are examples where redistribution, rather than growth, has led to better outcomes for the poor than in the rest of India.

Yet, as Columbia University economist Arvind Panagariya’s recent work shows, Kerala’s social statistics were better than those in the rest of the country even before it instituted its current redistributive model. Moreover, Kerala has profited immensely from remittances sent home by its émigré workers in the Middle East, a factor unrelated to its redistributive policy. As for Bangladesh, the United Nations’ Human Development Index, admittedly a problematic source, ranks it below India.

Who benefits from growth

In impoverished countries where the poor exceed the rich by a huge margin, redistribution would increase the consumption of the poor only minimally — by, say, a chapati a day — and the increase would not be sustainable in a context of low income and high population growth. In short, for most developing countries, growth is the principal strategy for inclusive development — that is, development that consciously includes the marginal and poorest members of a society.

But the political sustainability of the growth-first model requires both symbolic and material efforts. While growth does benefit the poor, the rich often benefit disproportionately. So, to keep the poor committed to the system as their economic aspirations are aroused, the wealthy would be well advised to indulge less in conspicuous consumption.

At the same time — and more importantly — the poor need greater access to education in order to increase their economic opportunities and social mobility. “Less excess and more access”
must become the principle that guides development policy.

Jagdish Bhagwati is a Chazen Advisor and University Professor of Economics and Law at Columbia University and Senior Fellow in International Economics at the Council on Foreign Relations. He is also Co-Chair with President Tarja Halonen of Finland of the UNCTAD Eminent Persons Group on Developing Countries in the World Economy.

Copyright: Project Syndicate, 2011

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