Growing out of Poverty

• Author: Arvind Panagariya
• Position: a Professor of Economics and Jagdish Bhagwati Professor of Indian Political Economy at Columbia University and a Non-resident Senior Fellow at the Brookings Institution.

THERE can be little hope of making a major dent in poverty in low-income countries—many of them in South Asia and Africa—without sustained rapid growth. Rapid growth provides gainful employment to many while generating swiftly rising tax revenues to finance anti-poverty programs. Critics assert that growth barely trickles down to the poor, ignoring the reality that without it, low-income countries would lack fiscal resources for redistribution on a sustained basis.

Poverty alleviation has been a top priority for Indian leaders since the launch of the country’s development program in 1950. Yet, for decades, India’s anti-poverty programs were grossly underfunded because the country was poor and grew very slowly. That low income and slow growth denied the country’s poor both the direct benefits of growth—increased employment opportunities—and the indirect benefits—well funded anti-poverty programs. In contrast, countries such as the Republic of Korea and Taiwan Province of China, which managed to launch their economies into high-growth orbits in the early 1960s, quickly pulled their entire populations out of poverty. More recently, China has moved in the same direction.

In India, it was the accumulation of slow growth for three decades followed by some acceleration that finally began to make a dent in poverty. But it was only after another two to three decades of approximately 6 percent annual growth that the country could afford to introduce large-scale social programs, such as the employment guarantee scheme for rural households and effective rights to education and food security. That these programs remain poorly conceived with possible adverse consequences for growth is, of course, another matter.

While growth is crucial to generating the resources needed to finance large-scale anti-poverty programs, its direct contribution to poverty alleviation should not be underestimated either. In the Republic of Korea and Taiwan Province of China in the 1960s and more recently in China and Vietnam, rapid growth of labor-intensive industry pulled large proportions of agricultural workers into well paid manufacturing jobs. For example, 9.4 percent of the Korean workforce was employed in industry in 1965, compared with 21.6 percent in 1980, while agricultural employment fell from 58.6 percent to 34 percent over the same period. Reflecting rising productivity, average real wages rose at an annual rate exceeding 10 percent during this period.

...