Wednesday, January 20, 2010

200) China, India, Brazil: Poverty Reduction - World Bank paper

The Poor and the Middle Class
Submitted by Eliana Cardoso on Tue, 12/08/2009 - 16:00

Start counting the poor in India and you are bound to get into controversy. In “A Comparative Perspective on Poverty Reduction in Brazil, China and India,” Martin Ravallion (October 2009) calculates that 42% of the population in India in 2005 lived in households with income per person below US$1.25 a day (converted using purchasing power parity exchange rates for consumption in 2005). But he finds only 20% of the population under the US$1.25 poverty line when using a different method as a sensitivity test. The difference is huge. One number is twice the other and corresponds to two hundred million people (more than the whole population of Brazil!).

Ravallion repeats the exercise and finds that in Brazil, in 2005, the population who lived in households with income per person below US$1.25 a day (converted using purchasing power parity exchange rates for consumption in 2005) is 8%. When using the alternative sensitivity test method, it is 10%. Compared to India, the difference is small (2% of the population) between the two measures.

I suspect that instead of trying to calculate the number of people with less than US$ 1.25 a day, policies for poverty reduction should focus on the bottom quintile of the population: the 20% poorest group in the country.

One of my reasons is that inequality matters. Think of poverty as a relationship.

The increase in food prices excludes the poorest section of the world’s population from the market. Acquiring the majority of things that money can buy depends on your position in society’s income pyramid. Access to quality education, or good health coverage, depends not just on how much money you may have, but also on how much other people is willing to pay for them. Therefore, your wealth or poverty is relative to that of the rest of society.

But even when focusing policies for poverty reduction on the 20% poorest group in society, we must investigate what can be done to reduce inequality. A large middle class is one of the characteristics of a developed society – one where 50% of the population has access to good education and medical cover. And, according to Aristotle, the existence of a large middle class is a condition for a well administered State because it reduces polarization and violence. In well administered States the probability of economic progress increases.

Understanding why economic progress depends on the existence of a middle class becomes easier when we examine periods where it did not exist. In Antiquity, the Egyptians were capable of impressive feats of engineering, but only used their knowledge to build tombs for their Pharaohs. Centuries later, and before other civilizations, India was able to produce good quality steel – but only used it to make swords. The Romans knew about steam engines, but were content to use them simply to open temple doors. These are all examples of how a very uneven distribution of income accumulates physical and human capital for the privilege of the elite.

Gunpowder, the printing press, paper and the compass were invented during the Ming dynasty, around the 14th century. However, the industrialization that would transform China at the end of the 20th century only took place once the gap between the rich and the poor had been bridged. Economic progress is dependent on a middle class.

Politics is another area that suffers when faced with great inequality because it intensifies polarization (the apparent distance groups feel in relation to each other). Organized social movements, such as strikes, rebellions and terrorism are impossible without the notion of a group identity. Polarization feeds off an identification with the group one belongs to, as well as inequality. Amartya Sen dedicated his book, Identity and Violence to the hypothesis that most conflicts and acts of atrocity are based on the illusion of a single identity. The art of creating and nurturing hate invokes a dominant identity and suffocates other associations. And inequality simply intensifies polarization.

Defining a middle class is not so easy. Even in the US – taken as the benchmark for a middle class country – economists and sociologists are unable to define it with uniform precision.

Just as the paradox of the chicken and the egg, it is difficult to know which came first: is it the well administered State that allows equal growth, or the egalitarian society that produces good public administration?

So, what about your country? Do you think your country has a large middle class and so satisfies Aristotle’s condition of a well administered State? Do you think we should count the poor below US$1.25 or focus policies on the bottom quintile of the distribution?

Read more here.

A Comparative Perspective on Poverty Reduction in Brazil, China and India
Martin Ravallion (October 2009)
Article in The Economist
Paper, World Bank

Author: Ravallion, Martin ;
Document Date: 2009/10/01
Document Type: Policy Research Working Paper
Report Number: WPS5080

Brazil, China and India have seen falling poverty in their reform periods, but to varying degrees and for different reasons. History left China with favorable initial conditions for rapid poverty reduction through market-led economic growth; at the outset of the reform process there were ample distortions to remove and relatively low inequality in access to the opportunities so created, though inequality has risen markedly since. By concentrating such opportunities in the hands of the better off, prior inequalities in various dimensions handicapped poverty reduction in both Brazil and India. Brazil's recent success in complementing market-oriented reforms with progressive social policies has helped it achieve more rapid poverty reduction than India, although Brazil has been less successful in terms of economic growth. In the wake of its steep rise in inequality, China might learn from Brazil's success with such policies. India needs to do more to assure that poor people are able to participate in both the country's growth process and its social policies; here there are lessons from both China and Brazil. All three countries have learned how important macroeconomic stability is to poverty reduction.

In pdf version.

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