Fighting Poverty Does Not Damage Economic Growth

Debates about programmes of poverty alleviation are often based on a false dichotomy between equity and efficiency. The claim that we must choose between higher average living standards with higher levels of inequality, or a smaller pie with a larger slice for the poor is simply wrong. That is the central argument of Pranab Bardhan in an article in the September 1996 issue of the Economic Journal. What’s more, he contends, policy options to fight poverty in the developing world, such as land reform, targeting of transfer programmes and greater local self-governance have far more potential than is often believed, as long as they are carefully designed and implemented.

Bardhan accepts that if the equity-efficiency trade-off exists, it may be particularly serious in low income countries, which can ill afford the losses involved in a smaller pie. But while the disincentive effects of government redistributive programmes can be considerable, the trade-off is often false or exaggerated. Inequality itself has adverse incentive effects, constraining the opportunities for productive investment and human resource development, and obstructing the evolution of economically beneficial governance structures. Some aspects of market-driven economic growth expand the productive opportunities for the poor; but some do not help the poor at all.

Bardhan also argues that:

On the issue of cost effectiveness and targeting of redistributive transfer programmes, what is important is self-targeting by the poor: public distribution of subsidised food, covering only coarse grains, which the rich do not eat; public works programmes involving heavy manual work; and primary education and rudimentary health care, for which the rich usually go to the private market.

Leakages to the non-poor in such transfer programmes are small. But at the same time, transition from a universal to a narrowly targeted programme often seriously erodes its political support base. In the food subsidy programmes in Sri Lanka and Colombia, for example, episodes of increased targeting have been followed by reductions in overall benefits.

Targeting the poor at the individual or household level, the usual form of public interventions, may be woefully inadequate. Some regions and groups, such as women and ethnic minorities, are historically handicapped: their initial conditions lock them into poverty, demanding serious remedies to remove the blocks from their escape routes. But group targeting is costly as it inevitably involves some of the non-poor within the group. It may also have perverse incentive effects: if care is not taken in designing the specific type of preferential policy, it may prolong dependency.

New theoretical developments in economics show that efficiency in resource allocation depends crucially on who owns what and who is empowered to make which decisions. These theoretical developments can be used to show how asset redistribution like land reform may improve both efficiency and equity, and may be more important than the policy of subsidised credit that many governments have followed with mixed results.

Given the strength of opposition of vested interests, many regard the prospects for land reform in most poor countries as bleak, and therefore drop it altogether from the agenda of poverty alleviation. This is not always wise. Some aspects of land reform, like extension of tenurial security, may be less difficult to implement than others, like land ceilings.

In the dynamics of political processes and shifting coalitions, the range of feasibility often changes; and options kept open contribute to the political debate and may influence the political process. Some policy advisers from international lending agencies who rule out land reform as not politically feasible are at the same time enthusiastic supporters of policies that may be no less politically difficult. An example is the strict targeting of food subsidies, which leads to cutting substantial existing subsidies to the vocal urban middle classes.

On the issue of governance structure in poverty alleviation programmes, there is increasing awareness that both efficiency and equity will be better served if we move away from state paternalism as well as the harshness of market processes. Instead, reliance should be placed more on local self-governing institutions and community involvement to improve the material conditions and autonomy of the poor.

At the same time, there is a temptation to romanticise the value of the local community as a social and economic organisation. This should be resisted and careful assessment made of the difficulties such organisations face, particularly in terms of poor expertise, lack of organisational and financial resources, and proneness to capture by the local mafia.

ENDS

Note for Editors: ‘Efficiency, Equity and Poverty Alleviation: Policy Issues in Less Developed Countries’ by Pranab Bardhan is published in the September 1996 issue of the Economic Journal. Bardhan is at the University of California at Berkeley.

For Further Information: contact Pranab Bardhan on 001-510-642-4527 (fax 001-510-642-05630 (email: bardhan@econ.berkeley.edu); or RES/ESRC Media Consultant for Economics Romesh Vaitilingam on 0171-878-2919 or mobile 0468-661095