Rising tide raises all boats — Or does it?

By Indu Bhushan on Mon, 29 July 2013

Last week, the development economics world was shaken by an open clash between two of its most distinguished luminaries—Amartya Sen and Jagdish Bhagwati. One is a Nobel Prize winner in the field of economics, and the other is widely believed to be worthy of one.  The debate centered on the role of growth in poverty reduction—an issue which is as old as the stream of development economics itself. Bhagwati accused Sen of paying mere “lip service” on the role of growth in the poverty reduction process and Sen angrily responded back to this “unilateral attack” in The Economist (17 July 2013 issue).  

What surprises me is that researchers have looked at the relationship between growth and poverty reduction in detail for the past several decades. With such a voluminous body of literature, one would expect that the debate would have been settled. However, development professionals remain as deeply polarized on the issue as ever.  

What are the key questions here? Let us start with something on which there is no disagreement. 

Does growth lead to poverty reduction? The answer is an unqualified yes. This relationship has been consistently found across countries, and across time. In fact, sustained poverty reduction cannot take place without robust economic growth. 

Then where is the confusion? The debate is whether governments should primarily focus on growth, which will take care of poverty on its own, or whether they should also focus on making growth more inclusive by strengthening basic public services.

My colleague, Ananya Basu, has done an excellent literature review to understand the relationship between economic growth and poverty reduction. She quotes an article which compares the experiences of Brazil, India and People's Republic of China (PRC). This comparison is very interesting and instructive. These three “BRICS” countries are recognized as economic superpowers. All three have excellent records on poverty reduction as well.

China’s GDP per capita grew at a healthy rate of 8.7% per annum between 1993 and 2005. India’s economic growth was more modest at 4.8% over the same period, while Brazil’s growth was downright anemic at 1.3%. However, their poverty reduction experiences were vastly different. 


 

As shown in Figure 1, annual poverty reduction in China was 1.1% for each percent of economic growth. Since the rate of economic growth was high, this translated into an impressive cut in poverty levels. By contrast, economic growth was less than one third as effective in reducing poverty in India—the rate of poverty reduction was only 0.3% for each percent of economic growth.  Now compare that with Brazil, where economic growth was more than 10 times more effective in reducing poverty as compared to India, and about 3 times more effective as compared to China. Brazil saw poverty reduce by 3.2% for each percent of economic growth. 

Overall, even with a growth rate of just 1.3%, Brazil outperformed India in reducing poverty. 

Why am I sharing this? Because the comparisons clearly show that economic growth has a different impact on poverty in different settings. While economic growth is important, there are other factors which determine its overall effectiveness in reducing poverty. Economic growth does lower poverty but governments can help to significantly accelerate the process by ensuring that the growth is inclusive. Without the visible hand of the government, many people might remain untouched by economic growth as they do not have the necessary human capital to participate in, and benefit from, it.

Indian politician Rahul Gandhi recently mentioned in a speech that when he once said in a public rally that a rising tide will raise all boats, one person from the audience shouted out “Brother Rahul, we do not have any boats to begin with!”

Subjects: