Poverty and Reforms: Friends or Foes?

• Author: Bhagwati, Jagdish

As reforms in economic policy--generally centered on dismantling inward-looking policies on international trade and attracting equity investment--and the privatization of many public-owned enterprises have swept across the developing world, critics have charged that these reforms are inimical to the reduction of poverty. Thus, it is not unusual for a long-standing proponent of these reforms like myself to get into recurring debates on the question. Only a few months ago, I and Martin Wolf of The Financial Times teamed up to face two rather impassioned opponents in a BBC debate. Our opponents claimed that proglobalization policies are responsible for the accentuation of poverty, while we argued exactly the opposite.

In fact, this debate is only a replay of the debate that we Indian economists and planners had almost four decades ago, with occasional argumentation thereafter, when we began planning for national poverty amelioration. India at the time had (and still has, precisely because of the policies that presently call for proglobalization reforms) the misfortune of having a comparative advantage in poverty. Since policy economics is like literature and reflects the immediacy of one's experience, Indian economists have not surprisingly been at the forefront of debates about how to reduce poverty.

As I shall presently argue, this debate in India was precisely between those who maintained that growth reduced poverty and those who argued that it bypassed or even increased it. Proponents of the pro-growth strategy were divided into those who came to see the inward-looking import-substitution (IS) model toward trade and direct foreign investment (DFI) as the culprit that crippled growth and hence accentuated poverty (a minority in the 1960s and 1970s), and the vast majority that continued to cling to the increasingly implausible notion that these antiglobalization strategies were in fact pro-growth policies, despite compelling theoretical arguments and a growing body of evidence suggesting the opposite.

Since the 1980s, a majority of policy economists around the world have begun to favor economic reforms that increase global integration, in the strong belief that such reforms would, ceteris paribus, promote growth and would, both directly and indirectly (by raising resources for spending on social programs and in other ways discussed below), help to improve living standards among the poor. Today, the widespread view among Indian intellectuals and policymakers is that the absence of pro-growth economic policies for nearly three decades only served to accentuate Indian poverty. Ironically, the growth-retarding and hence poverty-enhancing policies in place throughout this time were adopted at the urging of those very economists who claimed that they were the virtuous ones who wished to attack poverty, while the rest of us were interested in growth for itself.(1)

Against this backdrop, I argue that pro-globalization and proprivatization economic reforms must be treated as complementary and indeed friendly to both the reduction of poverty and social agendas. I maintain that poverty reduction and advancement of social agendas require not merely a policy focus on schooling, public health, etc., but also simultaneous attention to reforms aimed at improving the economic efficiency and growth of the economy. More precisely, I shall argue specifically in this paper that:

* Growth (or "development") has been regarded for several decades as a principal instrument for reducing poverty, rather than as an objective in itself. Hence the contention in some influential developmental circles and international agencies that poverty reduction has only recently been designated as an objective of development, displacing the earlier preoccupation with growth per se, is totally off the mark. The falsity of this argument is a cause for concern insofar as it encourages the harmful ethos that somehow growth is irrelevant, if not inimical, to poverty reduction and to the promotion of social agendas. Growth is, in fact, an important force for poverty alleviation and has been regarded as such, at least in Indian planning and policy circles, since the 1950s.

* Growth is properly regarded as an instrumental means of reducing poverty because, generally speaking, it moves poor unemployed and underemployed people into gainful employment. Growth can still have varying degrees of efficacy in terms of its impact on poverty, depending on the "structural" forms that poverty and growth take and on the political and social contexts in which the growth process unfolds.

* Increased integration into the global economy (through trade and DFI) and other reforms (such as privatization) currently being proposed in poverty-ridden countries can be fully expected to assist in poverty eradication.

* Growth attacks poverty in yet another way: economic prosperity alone increases tax revenues which, in turn, can be used to finance conventional anti-poverty programs such as the building of schools and the provision of clean water, electricity and health facilities for the poor. Without revenues, these expenditures cannot be sustained, let alone expanded. But this requires that these agendas be on the radar screen of governments: the availability of funds is no guarantee that they will be used for the right purposes.

* In this respect, there is a clear role for democracy to guarantee effective political participation among peripheral groups, nongovernmental organizations (NGOs) and social activists. There is also a profound need for a combination of government and private NGO work to maximize the impact of governmental expenditures on social and economic programs that target the poor. Growth will also support social and poverty-reduction agendas, since it will enhance the effectiveness of legislation aimed at helping the poor.

Thus, in conclusion, those who viscerally oppose economic reforms today as anti-poor are misguided and unfortunately accentuating poverty instead. We need to build bridges between economic reformers and anti-poverty campaigners, not burn them.

GROWTH AS AN ANTI-POVERTY STRATEGY, NOT AS AN OBJECTIVE IN ITSELF

In the mid-1970s and 1980s, I began to encounter assertions, from the International Labour Organization (ILO) and elsewhere, that growth had long been the primary objective of development planning and that poverty had been recognized as worthy of attention only recently. Such claims profoundly surprised me. A few dramatic examples of some of the untrue statements I was exposed to are illuminating.

First, I remember reading a biographical sketch of one of the South Asian architects of the Human Development reports of the United Nations Development Programme (UNDP). The thrust of these reports is that the UNDP deals with human beings, and hence with poverty and social agendas, whereas those of us who have worked at encouraging growth over the years are somehow tangential or inimical to those...