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Is growth sufficient to alleviate poverty?

By Sheba Tejani

Surjit S Bhalla's new book asserts that it is. In fact, Bhalla asserts that most of the developing world has "caught up" with the industrialised world in terms of economic growth, leading to a significant decrease in global poverty

Imagine There's No Country:
Poverty, Inequality and Growth in the Era of Globalisation

By Surjit S Bhalla
Penguin Books India 2003 p 248

Surjit Bhalla believes "growth is sufficient" to alleviate poverty; a tenet he attempts to prove in his book on the linkages between growth, poverty and inequality. Economic growth will trickle down to the poor and lead to a reduction in world individual income inequality (W3i), Bhalla asserts, as he dispenses with the need for policy intervention to affect income distribution. Dwelling on the methodological shortcomings of conventional poverty estimates, he comes up with a startlingly different account of how the poor have been affected in the period between 1980-2000, a period he terms the "golden age" of globalisation.

Notwithstanding Sub-Saharan Africa and Eastern Europe which experienced sharp downturns in the levels of poverty, Bhalla finds that most of the developing world "caught up" with the industrialised world in terms of economic growth which led to a significant decrease in global poverty. In fact he finds a convergence in the per capita output in developing countries and industrialised countries by employing a different methodology which corrects what he terms a "self-selection" bias inherent in comparing the relative incomes of people in the richest country (US) to those residing in the poorest country.

Instead he compares the trends in income across percentiles between the US and other countries and finds that there is a significant closing of the gap between the median earning of the East Asian or the South Asian and her American counterpart. Bhalla asserts that it should be the poorest fraction of a country's population that must be compared to those in another country rather than simply comparing relative incomes across countries.

The World Bank in 1999 estimated global poverty at 23% using a poverty line of purchasing power parity (PPP) $1.08 a day. Using a poverty line equal to $1.50 at 1993 prices, adjusted upward from $1.30 to correct for the possible under-reporting of the rich in household surveys, Bhalla reports that only 13.1% of the world are poor. In absolute terms, the claim is that there are actually 650 million people who are poor rather than the 1.15 billion who are being reported.

Policy implications arising out of these finding are huge and warrant more investigation. Bhalla points to some of the methodological errors that account for this difference: one is the exclusive reliance on survey-based methods to ascertain income and expenditure data used to estimate poverty. Surveys now capture less and less of the national accounts mean of consumption and income due to under-reporting and undercoverage of those who are surveyed, which translates into an increasing poverty line. The other is the impact of the new World Bank "consumption" PPP exchange rates which is understating purchasing power relative to official PPP exchange rates especially for the region with the largest concentration of the poor, South Asia.

Further Bhalla says that although country inequality could have worsened, and it has, the average person in a poor country is better off because her income is increasing at a faster rate than that of the average person in a rich country. Bhalla develops a Simple Accounting Procedure (SAP) to estimate a world Lorenz curve that gives the global distribution of mean incomes in percentiles in order to substantiate his claims.

Bhalla contends that in more than 80% of cases, gains in consumption have translated into decreases in the Head Count Ratio (HCR) of poverty. Further, he says that the consumption growth of the poor people of the world has far outstripped consumption growth of non-poor peoples (for every 10% growth in consumption of non-poor people, the poor have increased their consumption by 18%). Therefore the target of various international financial institutions to reduce the world's HCR to 15% by 2015, according to Bhalla, has already been achieved. He suggests raising the poverty line to $2 a day and a reconsideration of targets for 2015.

Bhalla is Managing Director of Oxus Research and Investments, he has taught at Delhi University and has held numerous other posts at the World Bank, the Rand Corporation, the Brookings Institution and Goldman Sachs. In this new book, he meticulously critiques various methodological assumptions and practices that inform the estimation of vital economic indicators that ultimately influence world policy. These critiques need to be taken seriously if policy is to be based on empirical findings that use rigorous methodology.

However, according to Bhalla's account, it seems that growth, inequality and poverty are the outcomes of discrete market forces that allocate resources by their own internal logic. The role of governments, of socio-political forces, and ideology, which determine how an economy will grow and who will benefit, is completely missing from his account. Bhalla overstates the growth that China and India experienced in the '80s and early-'90s and its consequent effect on individual income inequalities. He also makes no attempt to explain the evidence of sharp increases in inequality coming from Sub-Saharan Africa and Eastern Europe. Those who are convinced that globalisation has led to greater inequality and impoverishment in the developing world will find Bhalla a compelling read simply because he reaches such vastly different conclusions, although he makes no excuses for the fact that his book is quite inaccessible to the lay reader.

(Sheba Tejani has studied economics and international relations. She has worked with the Asia Society, New York, and with the community-based organisation MASUM in Pune, India)

InfoChange News & Features, May 2003