Monday, January 25, 2010

Economic Times OPED

Friday, January 15, 2010

Poverty Reduction and Poverty Creation in India

Do they happen concurrently and for what reason?

Summary of a recent paper entitled 'The Irrelevance of National Strategies:
Rural Poverty Creation and Reduction in States of India' jointly written with
Anirudh Krishna of the Duke University, USA

There are only a few controversial and somewhat puzzling economic dimensions which are academically unresolved and subject to serious debates. While there is recognition about the speed and direction of growth scenario suggesting India’s arrival on the global economic scene, what is puzzling at the same time is not only the continued prevalence of poverty but also a possible increase over the past decade, at least in the rural hinterland. Poverty measurement is an unsettled issue, both conceptually and methodologically. In fact, since poverty is a process as well as an outcome; many come out of it while others may be falling into it. The net effect of these two parallel processes is a proportion commonly identified as the ’head count ratio’, but these ratios hide the fundamental dynamism that characterizes poverty in practice. Note that the most recent poverty re-estimates using a supposedly refined methodology by a Government of India expert group has also missed this crucial dynamism (Report of the Expert Group to Review the Methodology for Estimation of Poverty, 2009. New Delhi: Government of India, Planning Commission). Studies carried out by one of the authors of this article, in parts of Andhra Pradesh, Gujarat, and Rajasthan have, however, helped bring to light the essential fact of poverty dynamics: which is simultaneously both created and reduced. Some households fall into poverty, becoming the new poor; other households concurrently escape from poverty.

Following up on these insights, we examined, for the first time in India, a nationally-representative panel data set for more than 13,000 households studied in 1993-94 and re-interviewed in 2004-05. We found that while 18.2 percent of the rural population moved out of poverty, another 22.1 per cent fell into it over this twelve-year period. This net increase of four percentage points was found to have a considerable variation across states and regions. In states, such as Himachal Pradesh, Kerala, Rajasthan and West Bengal, where more people moved out of poverty than fell into poverty, there has been an overall decline in rural poverty. Conversely, rural poverty increased in Andhra Pradesh, Bihar, Gujarat, Haryana, Maharashtra, Madhya Pradesh, Orissa, Tamil Nadu, and Uttar Pradesh, where descents into poverty were more numerous than escapes from poverty.

States – as well as regions within states – differ from one another. Some have high descent rates but low escape rates; in a few other states, both descent and escape rates are low. Different combinations of poverty policies will be required in states that are characterized by different patterns of escaping poverty and falling into poverty. A typology emerging from our analysis is presented below:

Consider the upper-left cell which lists regions that have most successfully reduced poverty over the 12-year reference period, because a high escape rate went together with a low descent rate. Two small states, Kerala and Himachal Pradesh, and another group of states (Assam and the Northeast) fall within this high-performing group. A poor person in India is best-off living within some region of this cell: the probability is highest that her circumstances will improve over time. For a contrasting situation, consider the bottom-right cell, characterized by low escape rates and high descent rates. Compared to other regions in India, the prospect for poor people in these regions is bleak; chances for further impoverishment are the highest. Future efforts in this region will do well to concentrate, first, on lowering the high rate of descent, and second, on ramping up the low escape rate.

A more nuanced prognosis emerges for regions included within the off-diagonal cells. Consider, for example, the two regions belonging to the bottom-left cell (Karnataka- Inland Southern, and Madhya Pradesh-Vindhya). A high escape rate within these regions has been compromised by a concurrently high descent rate. Future poverty reduction efforts in these regions should focus primarily on reducing the high rate of descent into poverty. It makes greater sense to raise the escape rate only after the high risk of falling into poverty has been brought under control. The opposite policy prescription seems appropriate for regions of the top-right cell. In Maharashtra-Eastern and Haryana-Western, additional resources should be deployed primarily for raising poor people’s chances of escape.

Thus, different policy mixes, combining different elements of prevention (against descents into poverty) and support (for escaping poverty), are required in diverse regions and states. A uniform national poverty policy will not be effective for entire states, far less for the entire country.

A Typology of Poverty of States and Regions in India
Escape Rate
High (43.0-21.3) Medium (21.2-15.9) Low (15.8-4.4)
Descent Rate Low (18.7-9.1) Assam & Northeast AP-Coastal Maharashtra -Eastern
Karnataka - Coastal, Ghats, & Inland Eastern Punjab-Northern Haryana-Western
Kerala AP-Inland Southern
WB-Central Plains
Himachal Pradesh
West Bengal-Eastern Plains
Medium (24.7-18.8) Gujarat-Plains Northern UP-Western MP-South Western
TN-Coastal & Coastal Northern TN-Southern Orissa-Coastal & Southern
Rajasthan-Southern & South-Eastern UP-Uttaranchal Gujarat-Saurashtra & Dry areas
Bihar-Central Maharashtra-Inland Western & Coastal
Gujarat-Eastern & Plains Southern
High (47.4-24.8) Karnataka -Inland Southern UP-Eastern & Central Orissa-Northern
MP-Vindhya Maharashtra-Inland Eastern Maharashtra-Inland Central
Bihar-Northern TN-Inland
Karnataka-Inland Northern AP-Inland Northern
Maharashtra-Inland Northern
AP-South Western

What kinds of policies and programs will help prevent descents into poverty? And what kinds of programs and policies are required to promote escapes from poverty? We examined the escapes and the descents that have occurred in rural India between 1993 and 2005, and we identified the factors that mattered for each of these trends. A few factors are involved with both escapes and descents, but there is also another group of factors that affect only escape or only descent.

Factors significantly associated both with escape and descent : Age of household head, household size, household composition (reflected by the variable “male advantage”), households with telephones (land lines or mobile), change in the share of rural non-farm income (RNFY), remittances, women’s media exposure, and loan taken in last five years.
Factors associated with escape but not with descent: A few other factors influence escapes but do not matter much for descents. These factors include being a member of ‘minority other than Muslim’, presence of adult son during the previous period (1993), and that the household was located within 5 km of nearest town with the availability of bus stop. Sickness within households had an adverse effect.
Factors associated with descent but not with escape: A household belonging to SC, ST or OBC faced a significantly greater risk of descent into poverty, whereas having the head of the household educated to secondary level or higher reduced the risk of descent. Possession of land and other assets reduced the risk of descent. Significantly, such rural assets were not germane to escapes from poverty.

States with high and low growth rates have variously experienced high and low rates of escape and descent. No clear correlation exists at the level of states and regions between high growth rates and higher poverty reduction. Thus, to claim that “growth of aggregate consumption/income is a sufficient condition for poverty reduction,” as one influential government document does, is hardly an appropriate or adequate policy prescription. Rather than waiting for growth to occur and work its putative magic, direct actions to reduce poverty are necessary.

Action along two fronts is simultaneously required: descents into poverty must be prevented using context-specific measures even as escapes from poverty are promoted vigorously. Different escape and descent rates characterize diverse states and separate regions within states. The reasons that matter for escape and descent also differ considerably across and within states. Considering only the aggregate results obscures these important differences. Diverse policy designs are required in order to deal with these different trends. Any uniform national policy does not, therefore, represent the best use of resources. State- and region-specific threats and opportunities must be separately identified and directly addressed.