It is no secret that India and China have both been growing impressively and that the incidence of extreme poverty has been falling. But this column shows that if India’s economic growth had been as inclusive as China’s, poverty would have reduced by twice as much over the past two decades. It argues that India is missing an opportunity if it doesn’t allow its poor to participate more fully in its rapid growth.
Forty years ago, India had far less poverty than China. Now it is the reverse. Until recently, the official poverty lines of both countries were roughly equivalent to $1 a day, adjusted for inflation and local prices. In 1981, around four out of every ten Indians lived on less than this, while this was the case for nearly three-quarters of China’s population. The poverty rate then fell rapidly in China, equalling India’s rate by the mid-1990s. Now the poverty rate is far higher in India. By 2008, about one-fifth of India’s population still lived below $1 a day, while in China it was down to just 7%..
What can explain this difference? Both countries have reformed their economies to become more market oriented. China was the first to do so. Twenty-five years of a controlled economy in China had left plenty of room for improvement from the reforms that started in the late 1970s. India followed in earnest at the start of the 1990s (though there had been tentative earlier efforts at reform). Both countries saw higher economic growth rates after these reforms. There is no doubt that this played an important role in reducing the incidence of absolute poverty.
High growth - but not for all
While the overall growth rate has been higher in China, in line with the higher pace of poverty reduction, there is more to the story. Yes, China has had a higher growth rate – but that growth has also had more impact on poverty than for India. This can be measured by the so-called ‘growth elasticity of poverty reduction’ – telling us what % change in the poverty rate can be expected from a 1% change in GDP per capita. Since China’s reforms, a 1% rise in GDP per capita has reduced the country’s poverty rate by around 1% (an elasticity of unity) – that is roughly twice more effective at reducing poverty than a 1% rise in GDP per capita in India. This means that if India had matched China’s level of poverty reduction, poverty in India would have fallen by twice as much as it has done over the last 20 years.
Differing initial conditions are an important factor in explaining these differing growth elasticities of poverty reduction. China’s high pace of poverty reduction reflects both growth-promoting policy reforms since the late 1970s and the solid foundations for growth left by the pre-reform regime – notably the relatively low inequality in access to land and human capital. The favourable initial conditions at the outset of the reform period meant that the poor were able to share more fully in the gains from growth (Ravallion and Chen 2007). The combination of low initial inequality (in both incomes and other dimensions, including human capital) with ample growth-inhibiting distortions ripe for removal, provided fertile ground for China’s pro-growth strategy against poverty. Over time, those favourable initial conditions have eroded in China, with rising inequality in incomes, and also health and education. Nonetheless, huge progress has been made against absolute poverty.
India’s poor were not so fortunate. The initial conditions at the outset of reforms in the mid-1990s were not stacked so heavily in their favour. Despite the country’s consumption inequality, as measured in the National Sample Surveys, being relatively low, it may well have been under-estimated. Income inequality, on the other hand, is probably higher than consumption inequality, and by one assessment it is even higher than China’s (Ravallion 2011). The real problem is India’s large inequalities in other dimensions, such as human development. These inequalities have handicapped the country’s progress against poverty, particularly from non-farm economic growth. The Indian states that started with higher and more widely shared attainments in human development have been better able to supply labour and entrepreneurs to non-farm activities, which has assured faster poverty reduction for a given level of economic growth (see Datt and Ravallion 2002). Thankfully, there are some encouraging signs of greater poverty impact from India’s urban economic growth process in the reform period (for evidence see Datt and Ravallion 2011).
The presence of ample opportunities for growth-promoting reforms in the pre-1990s days of burdensome red tape, which had earned the name ‘license Raj,’ had a downside. These opportunities came with persistently high inequality in human capital and weak public capabilities for effectively redressing those inequalities. India’s growth could probably not have delivered rapid poverty reduction under these conditions. But today, more effectively channelling the benefits of India’s more rapid growth into better health and education for its poor must surely be seen as the key factor in assuring more rapid poverty reduction – by allowing the poor to participate more fully in the opportunities unleashed by India’s growth, which will also allow them to contribute more to that growth in the future. India needs to address more vigorously its own inequalities, starting with those in human development.
It matters how an economy grows
In both countries, the sectoral pattern of growth has also mattered to the pace of poverty reduction. Among the three sectors – primary (mainly agriculture), secondary (mainly manufacturing) and tertiary (services) – growth in the output of the primary sector has been the main driving force in poverty reduction in China, while in India, the tertiary (services) sector has been more important. Again, initial distribution has played a role in how growth has impacted poverty. In particular, the lower inequality in access to land in (post-reform) rural China has meant that agricultural growth has been more poverty reducing than in rural India. The secondary sector has played a less important direct role in both countries (though there may well be indirect effects via growth in the other two sectors). Given that different types of policies are needed to foster growth in different sectors, the sectoral priorities of policymakers – which have varied over time within each country as well as between them – have mattered for the progress against poverty.
The role of direct interventions
What about the role of direct interventions for poverty reduction? In China’s case, the challenge has been to implement human development and social protection policies more relevant to the new market economy (despite historical advantages in this area, inherited from the past regime). Important new policies have emerged, such as the Di Bao programme, which provides cash transfers targeted to families living below locally-set Di Bao poverty lines.
India, by contrast, has had a long history of direct efforts to fight poverty through various schemes, the most recent being the National Rural Employment Guarantee Scheme. While such a scheme has potential for providing a much-needed safety net for poor and vulnerable people, it would be fair to say that the record of this and other anti-poverty schemes in India is mixed and uneven, especially across states of India. Persistent problems have been the ‘capture’ of such policies by non-poor groups and the weak capabilities of the state (especially the poorer States) for delivering these, often complex, programmes, and indeed for delivering better basic public services generally. Building stronger local states and stronger civil society institutions will be key to India’s longer-term success in fighting poverty.
Reducing inequality should be a policy priority
Policymakers in both India and China need to think hard about their priorities for poverty reduction going forward. In both countries, a key thing to focus on is the existing level of inequality. But not all inequalities are equally important, and different inequalities matter in each country. Both countries need to focus on two types of inequalities. The first are those that impede the ability of poor people to take up new opportunities for economic gain and the second are those inequalities that impede cooperation to assure sustained growth in these economic opportunities. In India, allowing the poor to participate more fully in the opportunities unleashed by India's rapid growth will also allow them to contribute more to that growth in the future.
This brief review of what we have learnt from past research will hopefully point to some promising directions for thinking about the specific policies needed in each country.
The views expressed in this column are those of the author and need not reflect those of the World Bank.
- Chen, Shaohua and Martin Ravallion (2010), ‘The Developing World is Poorer than we Thought, but no Less Successful in the Fight Against Poverty’,Quarterly Journal of Economics, 125(4):1577-1625.
- Datt, Gaurav and Martin Ravallion (2002), ‘Why Has Economic Growth Been More Pro-Poor in Some States of India than Others?’,Journal of Development Economics,68:381-400.
- Datt, Gaurav and Martin Ravallion (2011), “Has India’s Economic Growth Become More Pro-Poor in the Wake of Economic Reforms?”,World Bank Economic Review, 25(2):157-189.
- Dutta, Puja, Rinku Murgai, Martin Ravallion, and Dominique van de Walle (2012), “Does India’s Employment Guarantee Scheme Guarantee Employment?”,Economic and Political Weekly,48:55-64.
- Ravallion, Martin (2005), “A Poverty-Inequality Trade-Off?”,Journal of Economic Inequality, 3(2):169-182.
- Ravallion, Martin (2011), “A Comparative Perspective on Poverty Reduction in Brazil, China and India”,World Bank Research Observer, 26(1):71-104.
- Ravallion, Martin (2012), “An Emerging New Form of Social Protection in 21st Century China,” Oxford Companion to the Economics of China, (edited by Shenggen Fan, Ravi Kanbur, Shang-jin Wei, Xiaobo Zhang), Oxford: Oxford University Press (forthcoming).
- Ravallion, Martin and Shaohua Chen (2007), “China’s (Uneven) progress Against Poverty”, Journal of Development Economics, 82(1):1-42.