Poverty in Asia

Widespread poverty and excessive inequality remain the principal challenges to the legitimacy of the process of globalization that has been underway during the last two decades. Even as economies and governments adjust to afford a larger role for markets and a smaller role for the State in development, the importance of public action to deal with poverty and vulnerability has only increased. It is for this reason that the 1995 World Summit for Social Development called upon countries not just to set "time-bound goals and targets" to substantially reduce overall poverty and eradicate extreme poverty, but to implement national anti-poverty plans to achieve these targets. This task is indeed daunting in the Asian region, where in 1998, 800 million people, amounting to 67 per cent of the world's poor, were below the international poverty line of $1 per day per capita at 1993 prices.
 
This measure focuses on the lack of monetary means to meet a specific set of needs, and usually takes the form of identifying consumption poverty. Within that definition, absolute poverty is identified as an income or expenditure level at which the food component of expenditure is inadequate even to meet the physiological needs for survival. That is, the poverty line is defined "as the total consumption expenditure at which one can expect a person to be adequately nourished in the specific society under consideration." The identification of "needs" being subjective, the latter definition, which ties the required need down to a calorific requirement essential for subsistence, is seen as having an element of objectivity about it. Many "national" poverty line figures derive from such a notion of poverty. The arbitrary international poverty "standard", which identifies the poor as those earning less than $1 or $2 per capita per day in purchasing power dollars, also derives from a similar notion.
 
Once need and its relevant monetary equivalent are arrived at, a number of measures on the incidence of poverty can be worked out. The most widely used is the head-count ratio, which estimates the numbers below the poverty line and their proportion to the relevant total population. The problem with poverty lines tied to a specific calorific requirement is that they presume that at the point when expenditure is adequate to meet that requirement, the non-food component of expenditure is adequate to cover required "basic needs". In reality, of course, it does not. In as much as a decent subsistence requires that other "basic needs" such as clothing, shelter, safe drinking water, adequate sanitation, and accesses to health and educational facilities are also met, over time the definition of poverty was expanded to include these, even though this involved some loss in measurability in the form of a single number capturing incidence. Poverty now was reflected not just in the per capita income of households being inadequate to meet specified consumption needs, but also in the inadequate access to a range of services that impacted on crucial indicators of health and morbidity.

The Achievements in the Asia-Pacific

With income and consumption surveys hard to come by in the case of most countries, assessments of the gains registered in the reduction of income poverty must necessarily be spotty. However, World Bank figures (Table 1), based on national surveys from which comparable estimates have been computed, indicate that between 1990 and 1998, while poverty reduction in East Asia, including China, has been quite significant (from 27.6 per cent to 15.3 per cent), it has been slow in South Asia (42.4 per cent to 40 per cent) and the incidence of poverty has risen in East Europe and Central Asia (3.95 to 5.14 per cent). The sharp reduction in the incidence of poverty in East Asia as a whole, as well as in China in particular, has meant that the number of income poor in these countries has also fallen quite substantially during the 1990s. However, in South Asia, which includes India that is characterised by a large population and a high incidence of poverty, the smaller reduction in poverty incidence has not helped prevent an increase in the number of income poor. Moreover, between 1996 and 1998, during which time East Asia was afflicted by the financial crisis of the late 1990s, poverty in fact rose marginally in the whole of East Asia and significantly in China, resulting in an increase in the number of income poor in those countries.

The unusually large reduction in East Asia between 1993 and 1996, does indeed render the East Asian figures suspect. It must be reported that the regional aggregates are based on global and regional aggregates computed by the World Bank using distributions from 265 national surveys from 83 countries, representing 88 per cent of the population of the developing world. Coverage varies geographically, ranging from 53 per cent of the population in the Middle East and North Africa to 98 per cent of the population of South Asia.
 
Unfortunately of the 83 countries in the data set 17 had only one survey, 31 had just two surveys and 35 had three or more survey over the period 1980 and 1998. This has meant that poverty estimates for individual reference years in many countries have been computed by extrapolation, using the figure on mean consumption from national accounts statistics and by assuming that the distribution has not changed since the previous or succeeding survey. This makes the figures yielded by the World Bank's exercise partially unsatisfactory, though it is the principal source of data for making international comparisons of poverty trends.
 
Needless to say, within the region and its sub-regions, individual countries have performed very differently in terms of the record of reduction in income poverty. Table 2, which provides figures on poverty computed by the World Bank using three different poverty lines in 8 countries in the East Asian sub-region, yields a number of pointers. First, the World Bank's poverty line of $1-a-day delivers in most countries poverty incidence figures that are far lower than that yielded by country-specific poverty lines. Second, poverty incidence is extremely sensitive to the poverty line, with poverty incidence rising dramatically when the poverty line is doubled to $2-a-day. Third, poverty in the rural areas tends to be far higher than in urban areas in all East Asian countries, with the exception of Mongolia. Finally, within East Asia, poverty differs substantially, falling from a high of  26 per cent to a low of 0 per cent on the basis of the $1-a-day poverty line in five countries for which figures are available.

Given the higher incidence of poverty based on country-specific or "national" poverty lines, some indication of trends in poverty based on such figures would be useful. Poverty estimates based on country-specific poverty lines in 12 selected countries of the Asian region indicate that with the exception of Mongolia, Nepal and Sri Lanka, poverty was declining in the remaining nine countries during the 1980s and early 1990s. During the 1990s however poverty has increased in Indonesia, Mongolia, Pakistan and Thailand and remained constant in Nepal, while no comparable figures are available for Sri Lanka. What is more, the rate of poverty reduction has slowed during the 1990s in Bangladesh, India, the Philippines and Korea. In the event, in six of the 12 countries, the number of income poor in the last reported survey relating to the 1990s was higher in the immediately preceding survey. Thus, trends in the incidence of poverty as revealed by the country-specific figures tally with the idea that during the 1990s, which were the years of globalisation, the advance registered in the war against poverty in some parts of the Asia-Pacific has either weakened or been partially reversed.

Basic Needs Indicators

Measures of consumption poverty implicitly assume that at the point when expenditure on food is adequate to meet essential nutritional requirements, the non-food component of expenditure is adequate to meet non-food needs. This is unlikely to be true. Besides, basic needs of many kinds are not met out of private expenditure but accessed as a result of public provision. Hence, it could happen that nations and regions characterised by a high degree of consumption poverty are also characterised by a poverty of basic needs and reflect poor human development outcomes.
 
The figures in Table 4, which captures trends in the composite human development index point to the fact that progress on the human development front during the 1990s amounted to less than 10 per cent in the case of 11 out of 19 countries. Thus while progress cannot be denied with substantial advance in some countries like Lao PDR, Cambodia, Bangladesh and India, that progress was uneven and below what was warranted by the massive scale of deprivation in the developing countries of the Asian region.

Determinants of Poverty

Answering the question, "Why was there not more progress against poverty?", Chen and Ravallion (2000) argue: "In the aggregate, and for some large regions, all our measures suggest that the 1990s did not see much progress against consumption poverty in the developing world. Yet this was a period of aggregate economic growth; the overall rate of growth in real per capita private consumption for the low- and middle-income countries over 1990-97 was 2.6% per year (World Bank, 2000a). The elasticity of the aggregate ($1/day) poverty gap in 1987 was –2.3. Even assuming no growth from 1987 to 1990, an annual rate of growth in mean consumption of 2.6% over 1990-97 alone would have virtually halved the aggregate poverty gap, as long as overall inequality did not worsen.
 
What went wrong? Rising inequality was one factor… the world distribution of consumption in 1985 was such that it would not take much of an increase in overall inequality to wipe out the benefits to the world's poor of modest growth in consumption per capita. The simulations in Ravallion et al. (1991) indicated that about a four percent increase in the world's Gini index, spread over 15 years from 1985, would be sufficient to wipe out the gains to the poor from a sustained one percent per annum rate of growth in consumption per capita. There is now evidence of quite sharply rising inter-personal income inequality in the world during this period; Milanovic (1999) estimates that the world Gini index increased by 5% between 1988 and 1993 (from 0.63 to 0.66). This could easily wipe out the gains to the world's poor from global economic growth.
 
Why was world inequality rising? Very few individual countries have experienced a trend increase in inequality over the longer term (a few decades, say) (Bruno et al., 1998). Over shorter periods (one to five years) one finds rising inequality in about half the developing countries, though this is uncorrelated with growth rates in average household consumption per capita. The more important factor in rising global inequality has been rising inequality between countries. This accounts for three-quarters of the increase in the world Gini index from 1988 to 1993. The unconditional growth divergence we have seen in the 1980s and 1990s — whereby growth rates have tended to be lower in poorer countries — appears to be a far more important reason for the low rate of aggregate poverty reduction than rising inequality within poor economies. Nonetheless, even when it is not rising, inequality within countries is an important constraint on prospects for pro-poor growth. There is evidence that the same rate of growth can have very different impacts on absolute consumption poverty."
 
The argument that it is growing inequality between countries rather than within countries that accounts for slow progress in the war against poverty in the Asia-Pacific region, is however, difficult to sustain. This is because the two countries that have the largest population and the largest number of the poor, namely China and India, were also countries which registered high or creditable rates of growth by international standards during the 1990s. Thus both globally and in the Asia-Pacific region in the aggregate, the burden of the explanation for the low overall rate of poverty reduction in the 1990s must fall on either persistent or rising inequality or on factors that neutralised whatever positive effect that growth in these countries had on poverty reduction.

Even the World Bank on its web page focussed on inequality
 
http://www.worldbank.org/wbp/data/trends/inequal.htm
 
admits this. It argues: "Countries with high levels of initial inequality have reduced poverty less for given rates of growth than countries with low initial inequality, and if growth is accompanied by increasing inequality, its impact on poverty will be reduced. However, our understanding of long-term trends in inequality is limited, partly because of weaknesses in the data. Trends in inequality have been extremely diverse. For example, Malaysia saw declines in inequality (as measured by the Gini coefficient) during the 1980s, but this trend was reversed in the 1990s. Korea and Indonesia experienced rapid growth during the 1980s with little change in inequality, while China and Russia experienced large increases in inequality over the same period. The available data show no stable relationship between growth and inequality. On average, income inequality within countries has neither decreased not increased over the last 30 years. However, since within-country inequality has increased in some populous countries, overall more people have been affected by increases in inequality than by decreases."
 
In China and South Asia, which are the areas that have contributed to the weakening of the war against poverty in the Asia-Pacific, rising internal inequality does seemed to have played a role. Though recent data on inequality is difficult to come by, the available evidence does suggest that the years of reform are worsening inequality in China. Before the start of reform in 1978, the ratio of urban to rural income had declined to 2.36 from 3.48 in 1978. Price and production reform in agriculture, ensured that this trend continued till 1985. However, after 1985, the ratio began to rise again and stood at 2.61 in 1994. Further, within rural and urban areas the gini coefficient of income distribution rose from 0.31 and 0.19 respectively to 0.41 and 0.37 between 1986 and 1994. This worsening of income distribution which appears to have continued since then has neutralised some of the significant benefits in terms of poverty reduction ensured by the rapid rates of growth in aggregate income China has managed to ensure since the beginning of the reform.
 
The adverse effects of rising inequality resulting from the process of structural adjustment and reform are visible in a country like Pakistan as well. The move to encourage exports during the 1980s, with the removal of export restrictions, devaluation of the currency and provision of a range of export concessions to the textile sector, did result in a rapid expansion in textile exports. As a result cotton textile manufactures such as yarns, fabrics, apparel and clothing accessories, which accounted for 35 per cent of Pakistan's exports in 1980, registered an increase in share to 75 per cent in 1998. The profitability and rapid growth of these exports rendered cotton cultivation an extremely lucrative activity, resulting in resumption and leasing in of land for self-cultivation by large farmers. Cotton output tripled between 1980 and 1992. Simultaneously, farm holdings of size greater than 50 acres, which accounted for 0.3 per cent of farms and 8.4 per cent of area in 1981, came to account for 8.4 per cent of farms and 23.8 per cent of area. The rural gini coefficient is estimated to have risen from 0.32 in 1978-79 to 0.41 in 1990/91. This increase in inequality would have adversely affected progress on the anti-poverty front. Further, this inequality would have made the consequences of the slowdown of growth in the 1990s particularly adverse for the poor.
 
The proximate role of inequality in worsening poverty or limiting gains in terms of poverty reduction has conventionally been situated in arguments that point to a complex combination of influences on poverty in predominantly rural communities. The early literature attempted to focus on two kinds of variables: those that capture movements in agricultural production or productivity and those that capture movements in prices that are seen as impacting directly or indirectly on real income and poverty. Poverty analyses tended to focus on the relative significance of each of these sets of variables as well as the best way in which their effects can be captured. Thus, as noted above, even though movements in agricultural production would obviously impact on poverty, the significance of that impact would depend on whether agricultural growth is accompanied by an increase in inequality or whether there is a simultaneous increase in sources of non-agricultural income in the rural areas.
 
As for prices, what needs to be looked at is not the nominal price level of food, but the relative price of food and the rate of increase of nominal food prices. A faster rate of increase of agricultural prices can have two contradictory effects on poverty. First, to the extent that agricultural growth is stimulated by a shift in terms of trade in favour of agriculture, and assuming that inequality does not increase, the rise in agricultural prices would contribute to a reduction in rural poverty to some extent. Second, since a large part of the rural population consists of agricultural labourers, small farmers and non-farm workers, who are all net purchasers of food, a sharp increase in the price of food would squeeze real incomes and worsen poverty.
 
This dual effect on poverty of higher agricultural prices has implications for those who emphasise the importance of “getting prices right”. These economists have traditionally argued that protection in developing countries, which in all cases has been exclusively provided to or concentrated on industrial goods, was indefensible on grounds of both “efficiency” and “equity”. In their view, protection for industry and none for agriculture has in the past tended to skew the industry-agriculture terms of trade in favour of industry. This is seen to have adversely affected incentives for investment in agriculture, resulting in slow agricultural growth that limited poverty reduction or even worsened rural poverty. Liberalisation, by reversing the skewed structure of incentives, it is argued, would spur agricultural growth and reduce poverty.
 
What this argument, given its exclusive emphasis on growth, ignores, is the adverse effects on poverty that higher food prices can have. So long as the prices of food do not rise faster than rural money wages and the prices of non-food agricultural products, the growth effect of higher agricultural prices would manifest itself and impact positively on poverty reduction. However, in practice the liberalisation of agricultural trade by subjecting non-food agricultural crops to international competition and by displacing domestic jobs keeps the prices of the former down and dampens money wage increases. On the other hand, shifts of acreage out of food into non-food crops and the release of food prices after liberalisation, tend to increase the price of food. In such an event, policies of stabilisation and structural adjustment worsen poverty, by neutralising whatever positive effects any increase in agricultural growth may have.
 
Even from a growth point of view, liberalisation has not benefited developing-country agriculture substantially, because of the limits to trade expansion generated by the subtle protectionism in the two principal developed country markets: the US and the EU. Although world trade as a whole as grown much faster that world GDP, this is more true of manufacturing trade and production than of agriculture. For those developing countries which, expecting to gain from an expansion of agricultural exports, liberalised agricultural export trade, this was a major setback. And since, agricultural growth is one of the important means to poverty reduction, it indirectly contributed to a slowing of the pace of poverty alleviation.
 
Agricultural Growth, Non-agricultural Activity and Poverty

If inequality is increasing, we should expect that the effect of any increase in per capita agricultural output on poverty would be weaker. However, there have been a number of experiences to the contrary. In India, for example, the Green Revolution of the 1970s and 1980s, while leading to some increases in agricultural output per capita, was characterised by some increase in concentration of operated area and marketed surpluses, as well as a substantial increases in regional inequalities in agricultural production. Yet, the incidence of poverty during these years was declining significantly, forcing researchers to look to other factors that could explain the decline in rural income poverty.
 
This decline was all the more surprising because evidence indicated that the output increases during the Green Revolution years and later were accompanied by a decline in the output elasticity of the demand for labour in agriculture. There seemed to be one factor which was neutralising the effect of these trends, viz. a rise in agricultural wages, which was then seen as an important influence on poverty. But why were real agricultural wages rising , if employment in agriculture was inadequately responsive to agricultural growth? The empirical answer seemed to lie substantially in an increase in rural non-agricultural employment. Over the 15-year period from 1972-73 and 1987-88, the share of rural male non-agricultural employment in total rural male employment rose by 9 percentage points and that of female non-agricultural employment in total rural female employment by 5 percentage points. This seemed to make the growth of rural non-farm activities and rural non-farm employment an important cause for reduction in rural poverty – a conclusion supported by experience in other Asia-Pacific countries, especially China.
 
Here too, the role of the State is crucial, not only in the form of State support for rural enterprises. Rather, a significant part of the impetus for growth in non-agricultural activities could come from outside the rural sector, mediated in large part by government expenditure on the provision of extension services, on social service provision and on employment generation. That is rural incomes are no longer based on or derived only from agricultural production, but by the specific forms in which rural areas are being integrated into larger macro-economic decisions regarding expenditure. If such decisions favour larger expenditure in rural non-farm activities, the effect on poverty alleviation is likely to be positive. And inasmuch as liberalisation and structural adjustment result in international competition that displaces small enterprise production and in fiscal policies that reduce government expenditures, countries which were benefiting from the poverty-reducing effects of the increase in non-agricultural activities, may suffer a setback in their poverty alleviation efforts in the wake of globalisation.
 
These aspects of the poverty problem make clear that the war on poverty requires that the State plays a significant role in economic activity and implements a well-worked out anti-poverty plan. As the UNDP's Poverty Report 2000 put it: ‘Why have a plan at all?’ some might ask. Isn’t planning old-fashioned in market driven economies? Perhaps, but markets don’t promote social justice. That takes organised public action.