28 October 2010
Ejaz Ghani
Economic Advisor at the World Bank
South Asia’s economy is one of the fastest growing in the world, yet it is also home to the largest concentration of people living in debilitating poverty. How do the two co-exist? This column says that South Asia’s division into leading and lagging regions means that stupendous growth hides deep pockets of poverty.
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 on earth. While South Asia is at a far more advanced stage of development than Sub-Saharan Africa, it has many more poor people.
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
Though economic growth has reduced the poverty rate in South Asia, its total number of poor people has increased. The number of poor people living on less than $1.25 a day increased from 549 million in 1981 to 595 million in 2005. In India, where almost three-quarters of these poor live, the number increased from 420 million in 1981 to 455 million in 2005 (Ravallion et al. 2009).
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 anaemic. 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 (Devarajan 2006). 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”. But there is another Asia that exists in parallel, “Asia Suffering”. The distinction between the two is so sharp that they seem to be anchored in two different centuries. And the gap is increasing.
Spatial disparities
The leading sub-sections of South Asia are the envy of the rest of the world. These shining lights are the gateways connecting South Asia with the developed economies. The city of Bangalore in India is an example of this, and it is riding the wave of globalisation in services. Growth has benefitted from technological externalities (self discovery, demonstration effects, learning by doing), pecuniary externalities (thick labour markets that promote better matching), and agglomeration (Krugman 1999). The city of Bangalore has acted like a hub of schools and universities that promote face-to-face learning and entrepreneurship (Glaeser 2010). The transformation that is taking place in the leading areas of South Asia seems to have become a virtuous circle, where an initial advantage has spiralled into greater growth, leading to even more growth, and so on. Indeed, rapid growth can eliminate poverty in the leading regions in a generation.
But the story is wildly different for the lagging sub-sections of South Asia. “Asia Suffering” is doing no better than many Sub-Saharan African countries.
The problems of South Asia – poverty, conflict, hunger, and gender disparities – are concentrated in these lagging areas (Ghani 2010). There are limits to growth in lagging regions, since economic geography, institutions, and globalisation 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 that growth has its limits, growth should not be the sole solution. Policymakers should consider direct policy interventions to reduce poverty (Banerjee and Duflo 2007). Direct interventions can have a double dividend – they will reduce human misery, which 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 governments from expanding safety nets, investing in human and physical capital, and adequately delivering 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.
Reduced migration rates for the poor
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 educated migrants (Caglar 2010).
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.
Poor growth in the agricultural sector
Slow agricultural growth has constrained economic opportunities for the vast majority of poor people in lagging regions. Policymakers should recast agriculture in the new environment of globalisation, supply chains, and growing domestic demand. The food price crisis has served as a “wake up call” for policymakers 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 the overall growth rate itself and, therefore, slow down the pace of poverty reduction.
Regional development policies lower growth when they target the creators of wealth and the concentration of economic activity. South Asia has numerous examples of such failed regional policies (Panagariya 2009).
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, they could undermine the security of development.
References
Banerjee, A and E Duflo (2007), “The Economic Lives of the Poor”, Journal of Economic Perspectives, 21(1):141-167.
Caglar, O and M Sewadeh (2010), “How important is migration?”, in E Ghani (ed.), The Poor Half Billion in South Asia, Oxford University Press
Devarajan, Shanta, 2006, “Can South Asia Eliminate Poverty in a Generation?” World Bank, Washington DC, World Bank.
Ghani, Ejaz (2010), The Poor Half Billion in South Asia – What is holding back lagging regions?, Oxford University Press
Glaeser, Edward (2010), “Making Sense of Bangalore”, Legatum Institute, London
Krugman, Paul (1999), “The Role of Geography in Development”, International Regional Science Review, 22(2):142-161.
Panagariya, Arvind (2009), India: The Emerging Giant, Oxford University Press.
Ravallion, Martin, S Chen, and P Sangraula (2009), “Dollar a Day Revisited”, Policy Research Working Paper No 4620, World Bank, Washington DC.
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