Why Growth Matters (9 page)

The Scheduled Caste and Scheduled Tribe entrepreneurs have experienced significant growth in their enterprises. Some anecdotal evidence is beginning to appear even on the rise of Dalits (untouchable castes that are included among the Scheduled Castes by the Indian Constitution) to large fortunes. In particular, newspapers have widely reported on thirty Dalit
crorepatis
(a
crore
equals 10 million and a
crorepati
refers to someone having an accumulated wealth of 10 million rupees or more), almost all of them first-generation entrepreneurs, who were invited to a Planning Commission meeting specially organized for them in January 2011. The groups included Milind Kamble, who serves as chair of the Dalit Indian Chamber of Commerce and Industry, formed in 2005. According to him, “Including mine, most of the big Dalit-owned businesses are 15 years old. With the emergence of globalization and the disappearance of the License-Permit Raj, many opportunities appeared and many of us jumped on them.”
²⁴
Referring to the meeting at the Planning Commission, he reportedly said, “The Planning Commission was stunned when they asked how many of us used government schemes to build their businesses. Only one entrepreneur from Mumbai raised his hand and described how he'd applied for $20,000, spent three years visiting government offices to chase his money and finally got $15,000.”

Thus, contrary to the general impression and especially the a priori fears of some critics, reforms and growth, and not governmental assistance,
seem to have opened opportunities for the Scheduled Caste and Scheduled Tribe entrepreneurs to seize, in enterprises large and small.

The suggestion that the Planning Commission plays fast and loose with the poverty lines couldn't be farther from the truth.
²⁵
In setting the poverty lines, India has adhered to the highest standards of professionalism throughout its history.

The official poverty lines used until they were revised in 2011 were based entirely on the recommendations of the Lakdawala Committee of 1993.
²⁶
These poverty lines had been set such that anyone above them would be able to afford 2,400 and 2,100 calories' worth of consumption in rural and urban areas, respectively, in addition to a subsistence level of clothing and shelter. A committee headed by Professor Suresh Tendulkar was likewise behind the revisions to the Lakdawala poverty lines, adopted in 2011 and reported to the Supreme Court by the Planning Commission. The integrity and qualifications of Tendulkar are beyond reproach.

In the second half of 2011, the media created the distinct impression that the Planning Commission, in its affidavit to the Supreme Court, had deliberately lowered the poverty lines to exclude many genuinely poor from the benefits reserved for the poor. The same impression was conveyed yet again when the Planning Commission released a report in March 2012 showing acceleration in poverty reduction between 2004–2005 and 2009–2010 over that between 1993–1994 and 2004–2005. These allegations are false.

In the first case, the Planning Commission had actually raised the poverty line, while in the second case it had made no change. In 2011, the Planning Commission reported to the Supreme Court poverty lines based on the Tendulkar Committee recommendations of raising the rural poverty line from the original level while keeping the urban poverty line at its previous level. The Planning Commission had simply complied with the Tendulkar Committee recommendations.

The claims of reductions in the poverty lines prominently surfaced yet again when the Planning Commission reported in March 2012 that poverty reduction had accelerated between 2004–2005 and 2009–2010 over 1993–1994 and 2004–2005. For instance, a headline on the NDTV website declared, “Planning Commission further lowers the [urban] poverty line to Rs 28 [from 32 rupees in the Supreme Court filing].” But once again, the Planning Commission had done no such thing. The 32-rupee line, reported to the Supreme Court, related to the year 2010–2011 and 28 rupees to 2009–2010, with the difference fully accounted for by the higher price level in 2010–2011.

One final accusation is that the Planning Commission has set the poverty lines at ultra-low levels so that it may exclude a large part of the population from benefiting from the government's redistribution programs. While reasonable people may differ on whether it is desirable to further raise the poverty line, the subject is far more complex than is commonly appreciated. The guiding objective behind the poverty line in India and indeed worldwide has been to monitor progress in combating destitution. Therefore, poverty-line expenditures have traditionally been set at levels just sufficient to allow above-subsistence existence.

The dilemma in raising the poverty lines is best brought out by considering the implications of poverty lines that are significantly higher than those currently in use and are advocated by many of the current critics of the Planning Commission. Thus, for example, suppose we were to raise the rural poverty line to 80 rupees and the urban one to 100 rupees at 2009–2010 prices.

What would these lines imply? First, based on the expenditure survey of 2009–2010, they would designate as poor 95 percent of the rural population and 85 percent of the urban population. But few analysts would suggest that all but 5 percent of the rural and 15 percent of the urban population live in destitution today. Even if we were to argue that poverty goes beyond the destitute, measuring progress at the 95th percentile in rural and the 85th percentile in urban areas is unlikely to tell us very much about success in combating poverty.

Second, turning to the implications for redistribution, how much good to the bottom 30 percent or 40 percent who represent the truly
destitute will we do if the tax revenues raised from the top 15 percent urban population were spread evenly over 95 percent of the rural and 85 percent of the urban population? With the tax revenues still relatively modest, significant redistribution in favor of the destitute requires limiting such redistributions to the bottom 40 percent or so of the population. Spreading them thinly over a vast population would give too little to the destitute to make a major dent in poverty.

To dramatize this argument, suppose we redistributed all expenditures, as reported in the 2009–2010 expenditure survey, equally across the population. Astonishingly, such redistribution would leave each individual with just 45 rupees per day in expenditure. This level is well below even the lowest poverty line any critic of the Planning Commission has advocated during the recent debates on poverty lines.

The final myth we consider in this chapter folds into the criticism that globalization is bad for the poor. It also links a specific policy reform—increased openness to trade—to an increase in poverty. It got a boost from a study by the International Monetary Fund economist Petia Topalova (2007), who argued that enhanced openness adversely impacted poverty in India.
²⁷

However, several economists have successfully challenged her findings, showing that increased openness has reduced poverty instead. Given the importance of this issue, and the Topalova Myth, below we summarize these studies (which can be skipped by readers not interested in the necessary technical arguments).

Topalova asked whether rural and urban districts, which are subject to different degrees of competition from imports depending on which goods they produce and in what quantities, experienced increased or reduced poverty as a result of trade liberalization in India. She measured the openness by tariffs correcting for the levels of employment in high-versus low-tariff sectors. Working at the district level, she found that increased openness had been associated with, and presumably had led to, increased incidence of poverty in the rural districts but had no statisti
cally significant effect in the urban districts. She found no evidence in either rural or urban India that openness was associated with alleviating poverty. These were startling results because, as we argued earlier, trade openness in a labor-abundant economy stimulates growth in general and the expansion of labor-intensive industries in particular so that it can be expected to lower rather than raise poverty.

Hasan, Mitra, and Beyza Ural (2006–2007) have therefore revisited this question. They note that the analysis of poverty and trade openness at the district level poses several problems. For example, the data from the 1993–1994 expenditure survey by the National Sample Survey Organization do not readily allow the identification of urban districts. District boundaries also shift over time. There are also questions of randomness of the sample at the district level. Finally, sometimes the number of observations in a district is insufficient to yield a reliable estimate of poverty.

Therefore, these authors study the question at the level of the state and (National Sample Survey Organization identified) regions within states. There being one or more regions within a state, regions are greater in number than states and therefore allow greater degrees of freedom. As such, their research offers an improvement over the Topalova approach: the focus on regions allows a tighter estimation of poverty than the district-focused approach and also allows for a tighter estimation of regression equations than a pure state-focused approach.

These authors also note that assigning zero tariffs to non-traded sectors in measuring openness, as done by Topalova, is erroneous. Many goods and services may be non-traded precisely because the barriers to trade are prohibitive. So they define openness as an employment-weighted sum of tariffs such that only exportable products are assigned zero tariffs, with non-traded sectors excluded from the calculation. These authors also take into account non-tariff barriers, which Topalova ignored.

In sharp contrast to Topalova's claim that trade openness was not associated with reduced poverty, these authors' superior methodology failed to encounter even a single case in which reductions in trade protection worsened poverty at the state or regional level. Instead, they found that states more exposed to foreign competition had lower rural,
urban, and overall poverty ratios, with this beneficial effect being more pronounced in states that had more flexible labor-market institutions. The authors also found that trade liberalization led to greater poverty reduction in states more fully exposed to foreign competition. The results held for overall, urban, and rural poverty with varying strengths and statistical significance.

Moreover, Jewel Cain, Hasan, and Mitra (2012) have also revisited the issue and reinforced the findings of Hasan, Mitra, and Ural, using data from the more recent round of the sample survey conducted in 2004–2005. They find that every percentage-point reduction in the weighted tariff rate led to 0.57 percent reduction in the poverty ratio on average. This implies that of the overall reduction in poverty during 1987–2004, on average, 38 percent can be attributed to change in the exposure to foreign trade. Since the authors control for time-fixed effects, and poverty has declined over time, they can infer that the greater exposure of the labor force to foreign competition speeded up poverty reduction. The magnitude of impact and its statistical significance naturally vary across rural, urban, and the two sectors considered together, as well as across the different tariff and non-tariff measures used. However, in no case do these authors find increased openness to result in increased poverty.

Finally, Mukim and Panagariya (2012) split the data by social group and analyze the impact of trade openness on poverty within each of the social groups in rural and urban areas. They find no evidence whatsoever in favor of the hypothesis that rising incomes or openness have adversely impacted poverty among any one of the groups. They also find that one or more measures of openness have had a statistically significant and favorable impact on poverty levels in the Scheduled Castes and non-Scheduled castes in rural and urban regions and in both regions taken together. As for the Scheduled Tribes, they find a statistically significant effect of openness on poverty in urban areas only.

T
he surge of the growth rate during the eight years beginning in 2003–2004 to 8.5 percent from less than 4 percent until 1980 has meant the creation of substantial wealth. While there were no billionaires in dollar terms in India as recently as 2000, the 2007 list by
Forbes
reported as many as fifty-five of them.

This new wealth has in turn led to claims that reforms have generated massive income inequalities and that India has entered a state similar to the American Gilded Age in the late nineteenth century. But while such claims may appear superficially plausible, they crumble in the face of close scrutiny.

At the outset, we need to emphasize that what is an appropriate measure of inequality is not simply a technical issue—for example, whether the index of inequality should be the economists' measure of what is called the Gini coefficient (explained below and more fully in Appendix 2), which is widely used by economists studying inequality in India and elsewhere. An appropriate measure of inequality must also reflect broader questions of relevance to the popular concerns.

Thus, for a measure to be relevant to the public-policy discussion, it must have political and social salience. For example, if incomes increase in Mumbai but not in the Ratnagiri district of Maharashtra, evidently inequality of income has increased between Mumbai and Ratnagiri. But
if those living in Ratnagiri are not comparing themselves to what is happening in Mumbai, why is this inequality measure of any relevance? So, measures of urban-rural inequality may have little relevance as well.

On the other hand, when
within
-Mumbai inequality becomes more acute, the poor there are more likely to notice as they compare themselves with the rich in their own neighborhoods. Similarly, within our own university (Columbia University in New York), the inequality between the top salaries—the president enjoys the highest salary—and the lowest salaries is a salient issue, but (at least as of now) not the discrepancy between our salaries and those on Wall Street.
¹
In short, an increase in inequality within one's own village or institution is likely to raise hackles but not inequality between groups that have little relationship or contact with one another.