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Wednesday, 2 November 2011

Does Redistributing Income Reduce Poverty?

Jagdish Bhagwati on the case for "growth-first". He believes the merit for redistribution lies less in its ability to reduce poverty, rather in its power to buy stability for the rich. Unfortunately the analysis is quite light. For example, it does not consider different forms of re-distribution or the wider empirical evidence on how growth is sustained in the absence of redistribution :

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 1950’s, 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.
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 √©migr√© 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.

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.

2 comments:

  1. I would be interested to see this paper illustrated by the Cognitive Media UK artists, so I could watch it alongside this one: http://www.cognitivemedia.co.uk/index.php/blog/2010/06/crises-of-capitalism. I find the 2nd to last paragraph here to be particularly confusing, as he seems to be saying that disproportionate rewards for the already economically advantaged are just fine as long as the poor don't know about it. I think that "growth first", at least as articulated here by Jagdish Bhagwati, sounds a lot like "trickle down" as articulated by Ronald Reagan.

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  2. The trouble is that natural wealth (land, minerals, timber etc) has already been redistributed away from the poor to the rich. Often without their permission. Redistributing a portion of it back is only fair. While it is true that the poor may not have had the knowledge or resources to maximise income from what they had, they still deserve a share.
    Part of the income generated should go directly to the local community and be used according to their priorities. Part should be contributed through taxes at national level to support education, health care and roads.
    The present system where investors aquire land rights, mineral rights, game or timber licenses with no benefit to the local community that loses them, is so unjust that the investor will always have problems with the local community "stealing" the resources back. Currently the only one whose poverty is reduced by the system is the official or politician receiving the bribe. Not the previous owners of the resource.

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