The Hindu Business Line : Missing the wood for the trees

Sustainable poverty reduction or eradication cannot be achieved simply by a redistribution or transfer of funds or productive assets. It requires the beneficiary to make use of the funds or the assets and engage in some economic activity.

Arindam Banik
Pradip K Bhaumik

In the Indian context, most government interventions on poverty are alleviation programmes rather than poverty reduction ones. The National Rural Employment Guarantee Act (NREGA) is no different and is just a short-term solution.

An individual is poor due to factors such as lack of skills or assets or credit and information, obsolete skill sets and old age, non-existence of market and other infrastructure. Skill-less people are candidates for chronic poverty because of their inability to face the challenges. Transient poverty, on the other hand, is caused by lack of market-driven skills at individual level, and is also a product of wrong macroeconomic policy.

Different dimensions

It is evident there are different dimensions of poverty. Dimensions such as ageing, single motherhood, women and minorities, lack of market-linked skills are ignored in the policy issues. Poverty reduction — or any change in the poverty profile of an economy — requires movement of the poor individuals or households. A below poverty level (BPL) household in India is poor not only relative to other households but also because it has very low levels of household income, consumption and wealth.

The definition of the poverty line may have varied between censuses and also from State to State to reflect differences in costs of living, but there can be no doubt that an Indian BPL household has low absolute levels of household income, consumption and wealth and is chronically poor. Such chronic poverty has many possible causes some of which may be reinforcing each other. An understanding of the causes is a must for designing programmes of sustainable poverty reduction.

Systemic rigidities

In case of an economic intervention by the government or a change in the economic environment, the behaviour of an economic unit is affected by its own characteristics as well as by the vagaries of the environment. Consequently, the economic mobility of the households is affected by the rigidities inherent in the household and its members on one hand and the rigidities in the environment on the other.

We refer to the former as conditional rigidities as they emanate from the current condition of the households. The conditional rigidities change with simple passage of time – for example an individual may exhibit a higher resistance to change as (s)he becomes older. The rigidities in the socio-economic structure and in other elements of the economic environment have been referred to as structural rigidities. As opposed to conditional rigidities, these are external to the economic unit and show little change with simple passage of time. Just as higher conditional rigidities create greater inertia, higher structural rigidities create greater friction and decrease economic mobility.

Unlike the alleviation programmes, success of poverty reduction programmes requires the active participation of the poor beneficiaries. Consequently, poverty reduction programmes also need to motivate the recipients of benefits to actively participate in economic activities at higher levels.

Tools for development

Technology and social capital are powerful ingredients in understanding economic development. Some theories stress the importance of social cohesion for societies to prosper economically and also for sustainable development. One can find incentives that are built into the institutional framework and these accordingly play a decisive role in shaping the kinds of skills and knowledge that pay off.

In the East Asian context, it is the egalitarian education policies which have played a pivotal role in growth as well as in poverty reduction. It is further argued that the increased equality has led to enhanced political and social stability, thereby creating a better investment environment. The cognitive skills, in addition to increase in literacy rate, may be considered as a precondition of economic development. It is to be mentioned here that the seeming failure of capital to flow to the capital-poor countries due to marginal return to capital also plays a role. Non-availability of skilled labour and other complementary factors further add to the problem.

Interestingly, the relationship between quality of education and skills is well established. In some States, schooling has been enormously effective in transmitting knowledge and skills, while in others it has been essentially worthless and created no skills. Sustainable poverty reduction or eradication cannot be achieved simply by a redistribution or transfer of funds or productive assets. It requires the beneficiary to make use of the funds or the assets and engage in some economic activity.

RBI role

What should be the macro policy in the above context? Hardly any influential mainstream economist has questioned the rosy picture of economic growth and its relationship with poverty. It is often the case that the central bank in developing economies now takes responsibility for the national outcome through active monetary policy targeted at only inflation and exchange rate.

This is something to do with the politicians because this creates short-term solutions for them. This has meant higher growth, with skilled-driven, price non-sensitive product. But the reality is something different. For example, the recent rupee appreciation and its relationship with the export prospects of price-sensitive products from India. If this continues, this could create a huge number of transient poor persons. Probably, the biggest part of the explanation lies in the Reserve Bank of India’s policy.

It is also possible to achieve national outcome through active monetary and fiscal policies targeted at objectives such as growth of employment and income and stability of prices and exchange rates. Indeed, the expected level of national income may not be a distant dream by combining fiscal and monetary policies that adjust or compensate for the autonomous behaviour of households, firms and government.

(The authors are Professors at the International Management Institute, New Delhi.)