Growing global economy

"A dynamic, growing global economy is the ultimate poverty reduction strategy" (Colin Powell, July 2001). Discuss this assertion in the light of economic development in "India" and by reflecting on development theory and thinkers to inform analysis.

The assertion "A dynamic, growing global economy is the ultimate poverty reduction strategy" (Colin Powell, July 2001) has long been a controversial topic across the world. Indeed, economic growth is an essential implement to reducing poverty. As Rodrik (2007) said, "Growth is the most powerful instrument for reducing poverty". The evidence, on the other hand, casts serious doubt on this in that millions of people are still living in poverty conditions[1]. This puts into question whether economic growth really guarantees poverty reduction for everyone. This essay carefully aims to focus on India's economic growth, and examines liberalization, the development theory behind its recent spectacular growth. This particularly concerns the period when India's economy transformed from strict "Protectionism" to "Trade liberalization". Furthermore, the paper focuses on the impact of economic growth on poverty reduction in India, in order to critique the assertion above. Lastly, the paper focuses on the meaning of "poverty" and analyses whether GDP, which is normally used to quantify economic growth, is actually the right tool to use in addressing poverty reduction.

India's Economic Development

In terms of economic growth, India has recently emerged as one of the fastest growing major economies along with China.[2] For a better understanding of India's economic development, it is necessary to understand India's historical background. Looking at its long-term history, India has undergone four steps of growth. During the colonial period under British rule, the economy as a whole was not doing well. Per capita economic growth during the period 1870 to independence in 1947 was only 0.2% per year. In 1947, Nehru became the first prime minister. He adopted a strategy of "democratic socialism", which resulted in "Protectionism" focused on import substitution, business regulation, state intervention, and central planning until 1970. During this period, there was strong state control, and everything was heavily regulated. Routine tasks such as bank account opening, money transfers, and foreign investment all required licenses. Consequently, there was sluggish growth under Nehru's License Raj.

Growth improved in 1970-1991 due to the "Green revolution", which introduced new high-yield crop technology. Income was rising, but economic growth remained relatively slow compared to other countries (Sachs, 2005). It had become clear that "the states ambition of pushing the country into the front rank of the developing world had fallen far off its target, with seemingly few prospects of changing in the near future" (Chibber, 2006, p.3). There are many critiques against India's government and its powerlessness in influencing the economy, which was a major obstacle in the country's development.

In the late 1980's, Rajiv Gandhi introduced "market reform" that encouraged growth. His reform policy emphasized on three things: opening India's economy to international trade and investment, deregulation and privatization, and tax reforms. The high growth remained with market liberalization in the 1990's (Sachs, 2005). The 1990's brought on a significant change, particularly after the deregulation and liberalization programmes that were launched during that time (Arup, 2008, p.1057). Since then, India has become one of the world's fastest growing economies, with an average growth rate of 9% over the past four years[3].

The impact of economic growth: Does it really reduce poverty?

India has seen dramatic growth through the latter stages in its economic history. Theoretically, this should lead to a significant reduction in poverty, if we were to go by Colin Powell's assertion. Arup (2008, p.1067) notes that "the inter-relation between economic growth and poverty reduction is the growth process contributes to generate employment opportunities. The unemployment rate in India has reduced consistently from 9.5% in 2004 to 6.80% in 2009.[4] Beside, growth in high skill activities could increase the demand for goods and services which are involved to labour from poor household".

It can be noticed from the graph above that poverty in India has been declining continuously and significantly in terms of percentage in urban, rural, and overall aspects, from 1977 - 2007.[6] This economic data reports that the amount of people living below poverty has been reduced from 51.8% in 1997 to only 19.8% in 2007. India's success as reflected in the improvement in the GDP growth rate and percentage of poverty declined are to be admired. This growth number, however, has to be watched in proper perspective (Kohli, 2006). Undoubtedly, the question remains whether poverty reduction counts only on the price or not.

Thirlwall (cited in Vandana and Robert, 2002) notes that although living standard is usually measured by Gross Domestic Product (GDP)[7], economic growth is not the same as economic development. Clearly, growth is an essential condition for nation economic and social development, but it is not sufficient to identify poverty. The growth rate of nations cannot be taken alone as a sign of well-being of societies because the quality "standard of living" is a much more comprehensive concept, focusing not only on the income level.

Disparity in India

The Gini coefficient is used to measure of income or wealth distribution. A high Gini coefficient indicates more unequal income or wealth distribution, while a low Gini coefficient indicates closer to equal distribution.[8] Surprisingly, although India's GDP, income per capita, and unemployment rate seemed to improve annually as mentioned earlier, it can be noticed from the Gini coefficient graph above that after the 1990's, when the period of "Liberalization" began, the disparity between rich and poor actually increased in both rural and urban areas. In studying this, the class system and social disparities in India have to be strongly considered. Which group receives the benefit from the economic growth is still questionable. One important point that needs to be noted is that the ratio of inequality most likely leads to the problem such as shelter, water, sanitation, health, education, social security and livelihoods, along with the special needs of vulnerable group like women, children and elderly people (UNDP, 2009, P.1). In looking at these aspects of the social situation, GDP growth will have told us nothing of reducing poverty if basic needs are still not met.

Does economic growth fight poverty?

In order to know how to reduce poverty or what the exact strategy of eliminating poverty is, it is important to understand the meaning of poverty itself. The World Bank gives an overview of poverty as follow;

"Poverty is hunger. Poverty is lack of shelter. Poverty is being sick and not being able to see a doctor. Poverty is not having access to school and not knowing how to read. Poverty is not having a job, is fear for the future, living one day at a time. Poverty is losing a child to illness brought about by unclean water. Poverty is powerlessness, lack of representation and freedom". (The World Bank, 2009)

Clearly, poverty is not only measured in income or economic resource, but must involve social and political aspects as well. Literacy and education level, fertility rate, life expectancy and health are essential factors to be included. As Gaurav (2002, p.105) states, the need to combine human development with economic has been well recognized in discussions of policies for fighting poverty. India will require more economic reforms but human development factors should also be included. Only by considering both economic and human development factors can India be alleviated from poverty. Therefore, the Human Development Index, which consists of literacy, education level, life expectancy and per capita income, should also be used to measure the quality of life. According to the UNDP report (2005) "India has an average HDI of 0.63 (medium) and ranks 127 in the world, India high GDP growth contrasts with the poor human development which indicates a failure at the social front. The success in literacy, health and gender equality is far from impressive".

Additionally, some thinkers believe that addressing only economic growth is probably not sufficient to reduce poverty because "poverty" can be valued in various ways. According to the UNDP, since 1997, the per capita income does not make sense because the world should speak of "human poverty" instead of income poverty. Considering not only income, the UNDP also includes the following aspects, "chance of self determination", "health and expectancy of life", possibilities of obtaining an education", "political freedom", "human rights" and "human dignity and self-respect" (Friedel Hutz-Adams, 2006, p.20). Moreover, the UN-Human Development Report (1990) argues that "the expansion of the economy as measured by GDP per capita does not necessary mean that people are in better living particularly, in regards to health, education and freedom".

Goulet (1971) suggests that life sustenance[9], self-esteem[10] and freedom[11] should be regarded as important basic components of development. Moreover, Sen (1999), like Goulet, also noted that economic measures like the GDP should not be evaluated alone because achievements in terms of poverty reduction should include both economic and social development. In his view, poverty is the lack of possibilities of self-realization which includes income, provision of basic needs and access to available resources.

In conclusion, this paper disagrees with Colin Powell's statement. This paper argues that it is impossible to measure poverty reduction by focusing on economic development alone. Similarly, it is also insufficient to state only economic, political or social development alone. Nevertheless, all these factors should be taken together in order to achieve genuine development which leads to poverty reduction in the meaning mentioned here. Economic growth data such as GDP or income per capita do not really tell the entire picture. Since the meaning of "poverty reduction" has more complex dimensions, other factors have to be taken into account. For example, in term of politics, participation and decentralization are the key points for freedom and the ability to decide what each individual wants. The suitable programme or policies then will be designed and implemented properly so people can pursue better lives. Likewise, social development, with various issues such as gender, equality, education, health and social disparity, have to be addressed because so as to create conditions for better living. It can be seen from the case of India that rapid economic growth brings about increasing social disparities. Other evidences have been shown that some social, politic and human composite indices contrast with the economic growth rate which results to difficulties in dealing with development, especially with poverty. Lastly, as poverty here is defined in terms of social, political, and economic dimensions, the word "growth" from now on should be taken in terms of quality rather than quantity.

References:

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  • CHANG, H.-J. (2002) Kicking Away the Ladder:The "Real" History of Free Trade, Anthem, London.
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  • FRIEDEL HTZ-ADAMS, R. H., PEDRO MORAZN, ULRIKE LOHR; HARALD ROHR (2006) Does Economic Growth Reduce Poverty? Poverty Reduction and Social Equity in the Age of Globalization. Structural Violence in the Relationships between North and South, 7, 69.
  • GAURAV DATT, M. R. (2002) Is India's Economic Growth Leaving the Poor Behind? Journal of Economic Perspectives, 16, 89-108.
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  • KRUIJER, G. J. (1987) Development through Liberation: Third World Problems and Solutions, London, MACMILLAN EDUCATION LTD.
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  • MINISTRY OF HOUSING AND URBAN POVERTY ALLEVIATION, UNDP. (2009) INDIA: Urban Poverty Report 2009. United Nations Development Programme (UNDP).
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  • SACHS, J. (2005) The End of Poverty; how we can make it happen in our lifetime, London, The Penguin Group.
  • SCHIMTZ, H. (2007) The Rise of the East: What does it mean for Development Studies? 38, 92-106.
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  1. Almost half the world - over 3 billion people - lives on less than $2.50 a day. There are 1.4 billions people in the developing world who are living in extreme poverty, of which about 600 million are in South Asia. For more information: The developing world is poorer than we thought, but no less successful in the fight against poverty (The World Bank Development Research Group, August 2008: http://www-wds.worldbank.org)
  2. The economy of India is the twelfth largest economy in the world by market exchange rates. India's economy in recent years is growing 9.2% in 2007 and 9.6% in 2006 and has seen a decade of 7% growth. (http://www.economywatch.com/indianeconomy/indian-economy-overview.html)
  3. India country overview 2009; http://www.worldbank.org.in/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/INDIAEXTN
  4. For more detail, please see http://www.indexmundi.com/india/unemployment_rate.html.
  5. http://www.economywatch.com/indianeconomy/poverty-in-india.html
  6. The percentage was calculated from people living below poverty line $ 1.00 a day which was based on India's PPP rate (World Bank.org)
  7. This is calculated by the total amount of goods and services produced per head of the population.
  8. For more details : http://www.poverty.org.uk/e14/index.shtml
  9. Life sustenance is concerned with the provision of basic needs such as housing, clothing, food and education (Goulet, 1971)
  10. Self-esteem focuses on the feeling of independence. One country cannot be fully developed where is exploited by others which in this case can be referred to colonization. (Goulet, 1971)
  11. Freedom regards to ability to determine own destiny.

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