In 1980, economist Gary Fields, who specializes in poverty, described India as a “miserably poor country.” Yet the reforms that followed, especially beginning in 1991, transformed it from a basket case into a powerful engine of growth, with poverty declining at rates never before observed in the country. Because India experimented within the same democratic framework, first with command-and-control and autarkic policies and then with a move away from those controls and toward a greater role for markets and globalization, its experience offers important lessons to other developing countries regarding their development strategies and for the many government aid budgets and NGOs that seek to end poverty in the developing world.
Common sense suggests that we should expect a rapidly growing economy to create more jobs and opportunities for the poor to escape poverty, whereas slow-growing economies would hardly do so. Poor and stagnant economies can no more offer hope to the poor than private-sector enterprises making losses can offer additional jobs. Pro-growth advocates are often confronted with the failure of “trickle-down” economics, which sounds like the Earl of Nottingham and his courtiers and vassals are eating venison and roast legs of lamb at the sumptuously endowed dining table and crumbs are falling to the serfs and dogs below.
We don’t care for the concept or analogy. Instead we use the now-popular phrase “pull-up” growth strategy, which much better describes what we have observed: a radical, activist set of policies to accelerate growth and to pull up more of the poor into gainful employment. In fact, with the shift to systemic reforms after the 1991 crisis, Indian growth did take off dramatically and poverty declined as well. And as we demonstrate, the benefits extended to the marginalized groups, with poll data also confirming that these groups actually consider themselves to be better off.
Growth would directly pull more of the poor above the poverty line.
What is the mechanism by which this happened? Bhagwati argued nearly a quarter century ago that growth would create more jobs (in the rural sector itself) and opportunities for gainful improvement in income (as, for example, through migration to growing urban areas). It would directly pull more of the poor above the poverty line. Additionally, it would allow the government to pull in more revenues, which would enable the government to spend more on healthcare, education, and other programs to further help the poor.
Growth therefore would be a double-barrelled assault on poverty. The pre-reform policies produced little growth and therefore undermined any attempt at using growth to affect poverty directly. Slow growth failed to generate revenues, so the ability to finance health and education expenditures was stymied as well. Why did the Indian government not find the money to finance these objectives by raising taxes or diverting, say, military expenditures? It is revealing that Mahbub ul Haq of Pakistan, who reminded us often how arithmetic showed that one less military tank would mean several additional primary schools, joined the cabinet of the military dictator Zia ul Haq, under whom military expenditures did not diminish, Islamism was encouraged, and education of the people was neglected.
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Arithmetic cannot solve the problem of lack of resources; only appropriate pro-growth policies will.
Besides, raising tax rates runs into the usual problem that this remains an unpopular course of action in democratic countries. This resentful attitude to taxes, unless they are to be paid by others and not oneself, is beautifully captured in the Beatles song “Taxman.”
Growth raises revenues without government’s having to raise tax rates, as India experienced with the reforms since 1991. Only then, as our analysis shows, could the Indian government finally find the money to adequately fund the health-care, education, and other programs to help the poor.
Redistribution, as distinct from growth, cannot be the answer to removing poverty. In countries such as India, China, and Brazil, the large numbers of the poor mean that redistribution will do little and that, too, will not be sustainable. A peasant may get no more than another chappati or burrito a day. We quote the great communist economist Kalecki of Poland, who told one of us in 1962 that the problem for India is that “there are too many exploited and too few exploiters.” The pie has to grow; growth is a necessity.
The above excerpt is taken from the preface of Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries. Public Affairs (a member of the Perseus Books Group), 2013.