Economics for poor is not poor economics

Sunday, December 29, 2013, New Delhi

Our obsession with inflation and GDP numbers does not leave much space to ponder over the benefits that comes with a solid economic foundation. While favourable numbers do depict the general health of an economy, they are unlikely to offer the correct picture on demographic shift of a nation such numbers represent. To this effect, our approach towards handling poverty leaves a lot to think about.

Lately, we have seen a lot of academicians highlighting the positive effects of fighting poverty on an economy. Not that economic professors from the West have suddenly stuck a new formula to rid the world our of poverty; they are, in fact, surprised by the scale of success developing countries like China and India have achieved from their experiments. In the backdrop of development programs, these countries have been able to bring about massive change in their social landscape. To a developing nation like India, it may be worth considering a focused approach to fight poverty that brings tremendous benefits both economically and structurally.

As a case in point, the incidence of poverty has reached historic low worldwide recently. The extreme poverty rate (population living on less than $1.25 per day) has fallen by half in 2010 since 1990. That still leaves more than one billion people living under extreme poverty. More than 30 percent of them live in India. Interestingly, India has performed fairly well in this period. As much as 300 million people graduated from severe poverty to a thriving middle class that can envisage better life. However, it also added 370 million to the population in the same period. In other words, India has a lot to do in fighting poverty. The silver lining to the problem is in improved economic structure that India can create to move them up the economic ladder.

It is invariably argued that an increased trade help reduce poverty as it creates opportunities to earn. In reality, the relation of trade to poverty is complex. Increased trade demands swift demographic mobility across sectors, as it also tends to eliminate low-skill jobs. With a heavy uneducated and unskilled base, India has unique problem of pulling a massive population out of poverty. In a sense, we face structural issues that prohibit people from entering economic mainstream and contribute positively to the economy.

Contrary to what the political establishment wants us to believe, the problem of poverty cannot be resolved by handing out freebies. Experiments across the world have shown that creating trade opportunities have had significantly better results in eradicating poverty. Post liberalization, the massive development program undertaken by India created enough opportunities to bring 300 million people out of extreme poverty. Taking the initiative from this end, it is further possible to repeat the success with a few additional benefits.

For a country that still cries for development, a focused approach is crucial for infrastructure developments that are known to bring direct benefits to people. It is also important to ensure is that we stop the productivity loss by not letting amassive population spends its time in poverty. For a country such as India, engaging this population shall attract social benefits besides economic benefits.

As general elections approach, we can expect a lot of political melodrama be played around poverty. Interestingly, no one seems to differ on the need to fight poverty, yet, we always fall short in producing results. People of India must understand the importance of fighting poverty and express their desire to engage in the endeavor. After all, the benefits of overcoming poverty are for all of us to enjoy.

(Samar Vijay is Director, InvestCare, a leading fund management company. You can reach him on twitter @samarvijay)

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