South Asian economies – a depressing paradox

Ejaz Ghani of World Bank in this blogpost ponders why South Asian region remains so poor despite strong economic growth. He calls it a depressing paradox.

Even though economic growth has reduced the poverty rate, the poverty rate has not fallen fast enough to reduce the total number of poor people. The number of poor living on less than $1.25 a day increased from 549 million in 1981 to 595 million in 2005. In India, where almost three fourth of these poor reside, the numbers have increased from 420 million in 1981 to 455 million in 2005.

Moreover, human development has not kept up with the pace of income growth. Children and women appear to suffer more than others. More than 250 million children are undernourished and more than 30 million children do not go to school in South Asia. More than one-third of adult women are anemic. The share of female employment in total employment is among the lowest in the world.

South Asia is a land of sharp contrasts and mind boggling disparities. It has more pronounced regional disparities than the rest of the world and is in fact divided into two Asias. A lot of attention has been given to “Asia Shining”.  However, there is another Asia which exists in parallel “Asia Suffering”. The distinction between the two is so sharp that they seem to be anchored in two different centuries. The gap between the two is increasing.

He says the problem is huge disparity between performing and laggard regions. India has Bangalore which is praised all around the world but also has several regions which have not picked up. The spatial disparities are huge.

Then agri growth has been very poor leading to disparity:

Slow agricultural growth has constrained economic opportunities for the vast majority of poor people in lagging regions. Policy makers should recast agriculture in the new environment of globalization, supply chains, and growing domestic demand. The food price crisis has served as a “wake up call” for policy makers and has created an opportunity to revisit existing agricultural policies. 

What should be done? He says we should have pro-poor fiscal transfers.

A high priority should be given to increasing the pro-poor fiscal transfers. Poor regions have a low base of economic activity to tax, and typically these regions have lower revenues. This revenue constraint prevents them from expanding safety nets, investing in human and physical capital and hampers the delivery of government services. Achieving equity through fiscal transfers can ensure a level playing field. This equity is particularly important if the government services are important inputs into future growth potential, such as in developing a healthy and educated workforce. Simply directing financial resources to lagging regions, however, may not be sufficient. It will need to be complemented with an improvement in capacity, accountability, and participation at the local level.

Migration rates are low in South Asia for its stage of development. Frictions and imperfections in the labour market seem to be hampering less skilled workers more than skilled workers. This is reflected in lower migration rates for uneducated than uneducated migrants. In India, the mobility rate increases with the education level.

Indian government has been trying these fiscal transfers but have backfired. Brazil has  been more successful with these schemes (atleast that is what economists believe so far).

He adds regional development policies aimed at equitable growth will backfire:

Regional development policies aimed at promoting equitable growth are not a solution for two simple reasons. First, empirical evidence shows that convergence of per capita income between lagging and leading regions is neither a necessary nor a sufficient condition for achieving poverty and social convergence. Poverty and social convergence can co-exist with (widening or reducing) income divergence. Second, regional policies that promote balanced growth could lower overall growth rate itself and, therefore, slow down the pace of poverty reduction. It lowers growth when it targets the creators of wealth and the concentration of economic activity. South Asia has numerous examples of such failed regional policies.

The escape from human misery need not be a slow process. Not so long ago, Bihar, the poorest state in India, was known for law and order problems, extortion, carjacking, kidnapping, and low growth. However, with the restoration of law and order, improved governance, increased use of fiscal transfers, and greater market integration and human mobility, Bihar has started to turn a corner. So can others.

South Asia is at a critical stage of historical transformation. Time is of the essence. There is no room for complacency. Growing disparities could stifle growth itself. If not handled well, it could undermine the security of development.

It is an irony actually. The same disparities could push the government into making policies that lead to lower growth.

Take the case of fiscal transfers. India has been trying to alleviate poverty/disparity by many a measures with NREGA the most famous. Food security bill is another one. All these measures have led to widening of the fiscal deficit without creating any major improvements. With huge corruption, the overall benefit of the program is much lower. The rise in fiscal deficit pushes inflation and makes policy management difficult. With a series of scams, the overall level of governance comes under a question mark. And in all this inequality keeps rising leading to further problems. The problem remains largely unchanged with worse macroeconomic variables. Now, people are lowering the growth potential of the country and so on.

A larger question is why the trickle down theory has not worked or been so limited? Wide scale corruption and Crony capitalism seem to have been one of the reasons. Hence, studies on corruption should be more mainstream.

Rodrik in this super column says dictatorships cannot count on economic growth to keep them in power. He cites examples from Egypt and Tunisia, both dictator economies. The dictators believed high growth will keep them in power. Both were mistaken.  We can say the same for democracies as well.

There seems to be a feeling in Indian government and policymakers that as long as there is growth all is well. They have been treating the 9% growth as a given and kind of birth right. Growth is a derivative of many things and not a standalone factor. Meanwhile, the state of institutions and governance keeps declining.

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