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The Poor Half Billion--what is holding back lagging regions in South Asia?

Ejaz Ghani's picture

South Asia presents a depressing paradox. It is among the fastest growing regions in the world. But it is also home to the largest concentration of people living in poverty. While South Asia is at a far more advanced stage of development than Sub-Saharan Africa, it has many more poor people than Sub-Saharan Africa.

Figure 1: Number of Poor People has increased in South Asia

Source: World Development Indicators, World Bank 2009.          
Note: Number of people living on less than US$1.25 a day at 2005 international prices. South Asia includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. East Asia Pacific includes China.

Increasing Number of Poor People: Even though economic growth has reduced the poverty rate, the poverty rate has not fallen fast enough to reduce the total number of poor people. The number of poor living on less than $1.25 a day increased from 549 million in 1981 to 595 million in 2005. In India, where almost three fourth of these poor reside, the numbers have increased from 420 million in 1981 to 455 million in 2005.

Moreover, human development has not kept up with the pace of income growth. Children and women appear to suffer more than others. More than 250 million children are undernourished and more than 30 million children do not go to school in South Asia. More than one-third of adult women are anemic. The share of female employment in total employment is among the lowest in the world.

South Asia is a land of sharp contrasts and mind boggling disparities. It has more pronounced regional disparities than the rest of the world and is in fact divided into two Asias. A lot of attention has been given to “Asia Shining”.  However, there is another Asia which exists in parallel “Asia Suffering”. The distinction between the two is so sharp that they seem to be anchored in two different centuries. The gap between the two is increasing.

Spatial Disparities: The leading regions in South Asia are an envy of the rest of the world. Leading regions are the gateways connecting South Asia to developed economies. The city of Bangalore in India is an example of this, and it is riding the wave of globalization of service. Growth has benefitted from technological externalities (self discovery, demonstration effects, learning by doing), pecuniary externalities (thick labour markets that promote better matching), and agglomeration. The city of Bangalore has acted like schools and universities that promote face to face learning and entrepreneurship. The transformation that is taking place in the leading regions seems to have become a virtuous circle, where an initial advantage has spiraled into greater growth, leading to more growth. Indeed, rapid growth can eliminate poverty in the leading regions in a generation. But the lagging regions of South Asia are doing no better than many Sub-Saharan African countries.

The problems of South Asia—poverty, conflict, hunger, and gender disparities—are concentrated in the lagging regions. There seems to be limits to growth in lagging regions, since economic geography, institutions, and globalization will continue to favour increased concentration of economic activity in the leading regions. Because the migration rates are low, poor people do not move from lagging to leading regions. The lagging regions seem to be trapped by the dual failure of the market and the State.

What can be done? While economic growth is critical for poverty reduction, reviving growth in lagging regions will take time. Given limits to growth, growth should not be the sole solution. Policy makers should consider direct policy interventions to reduce poverty. Direct interventions can have a double dividend--it will reduce human misery, which in turn, could spark growth.

A high priority should be given to increasing the pro-poor fiscal transfers. Poor regions have a low base of economic activity to tax, and typically these regions have lower revenues. This revenue constraint prevents them from expanding safety nets, investing in human and physical capital and hampers the delivery of government services. Achieving equity through fiscal transfers can ensure a level playing field. This equity is particularly important if the government services are important inputs into future growth potential, such as in developing a healthy and educated workforce. Simply directing financial resources to lagging regions, however, may not be sufficient. It will need to be complemented with an improvement in capacity, accountability, and participation at the local level.

Migration rates are low in South Asia for its stage of development. Frictions and imperfections in the labour market seem to be hampering less skilled workers more than skilled workers. This is reflected in lower migration rates for uneducated than uneducated migrants. In India, the mobility rate increases with the education level. The mobility of university graduates is much higher than the mobility of unskilled workers. Removing barriers to human mobility--such as labour laws, state-specific social welfare programs, and housing market distortions--should be an integral part of development. Human mobility allows poor people to move to geographic areas and economic sectors where the demand and the returns are higher. By pulling up wages in lagging regions, migration benefits non-migrants in these regions. Migration also empowers the traditionally disadvantaged groups, in particular women.

Slow agricultural growth has constrained economic opportunities for the vast majority of poor people in lagging regions. Policy makers should recast agriculture in the new environment of globalization, supply chains, and growing domestic demand. The food price crisis has served as a “wake up call” for policy makers and has created an opportunity to revisit existing agricultural policies. 

Regional development policies aimed at promoting equitable growth are not a solution for two simple reasons. First, empirical evidence shows that convergence of per capita income between lagging and leading regions is neither a necessary nor a sufficient condition for achieving poverty and social convergence. Poverty and social convergence can co-exist with (widening or reducing) income divergence. Second, regional policies that promote balanced growth could lower overall growth rate itself and, therefore, slow down the pace of poverty reduction. It lowers growth when it targets the creators of wealth and the concentration of economic activity. South Asia has numerous examples of such failed regional policies.

The escape from human misery need not be a slow process. Not so long ago, Bihar, the poorest state in India, was known for law and order problems, extortion, carjacking, kidnapping, and low growth. However, with the restoration of law and order, improved governance, increased use of fiscal transfers, and greater market integration and human mobility, Bihar has started to turn a corner. So can others.

South Asia is at a critical stage of historical transformation. Time is of the essence. There is no room for complacency. Growing disparities could stifle growth itself. If not handled well, it could undermine the security of development.

This is a summary of Oxford University Press: The Poor Half Billion in South Asia. It was originally published in VOX EU, The poor half billion: Pockets of poverty in South Asia | vox

Comments

Submitted by Swaminathan S Anklesaria Aiyar on
You keep using the word "is" when the right word may be "was" (in regard to rising numbers of poor). The thin sample NSSO survey of 2007 suggests a phenomenal decline of 10 percentage points in poverty compard with 2004-05,meaning poverty has fallen as much in three years as in thepreceding 11 years. The thin sample may not be a conclusive one, but suggests thatyou are in danger of treating pre 2005 trends as current trends, and this may not be the case at all. Besides, as Surjit Bhalla points out, the NSSO poverty data for 2004-05 now look highly suspect since theyshow consumption as being only 48% of what national accounts estimates show. Arjun Senguta interpreted the NSSO data to mean 77% of Indians live on less than Rs 20/day. Yet rural marketeers of a wide range of products say rural demand is booming. Nota single real-life marketeer pays the slightest attention to what the NSSO reports say. To my mind this shows how dangerous it is to take the NSSO estimates too seriously--they look like serious understimates of actual consmption. Even with such understatement, they seem to show a huge fall in poverty between 2004 and 2007. Regards Swami

Submitted by Ejaz Ghani on
Dear Swami Good point. I agree with you that given the rapid pace of growth, there is no doubt that poverty rate is trended down (and the absolute number of poor will come down), and that the pre-2005 trends should not be considered as current trends. What we do not know is what is happening to income inequality and where is growth concentrated. This may influence the pace of poverty reduction. So the verdict is still out. Ejaz

Speaking of the rapid pace of growth, here is an intereting online debate between Jagdish Bhagwati and Amartya Sen. Link- http://www.cuts-international.org/media/Jan11_Economists...UPA.htm