Why Is Poverty Declining So Slowly in India? - PowerPoint Presentation

Slide1

Why Is Poverty Declining So Slowly in India?

Ashok

Kotwal

and

Arka

Roy

Chaudhuri

Prepared for IGIDR Conference Dec 1-3, 2012.Slide2

We draw on the followingSlide3

Outline

Motivating Question: Why is the poverty decline slow (compared to other Asian countries) despite fast growth?

Possible factors driving the process of poverty decline.

Are the sectors driving growth the same as the sectors driving poverty decline?

Changing employment picture from 1983-2009.

The role of consumption demand in the process of poverty decline.

Reflections

on development policy.Slide4

Poverty Decline in IndiaSlide5

Poverty Elasticity of GrowthSlide6

Compare India to China and Indonesia

Greater poverty decline in China and Indonesia during the relevant 17 years period.

Note that China’s steepest drop in poverty is during the initial phase 1980-86 when it had not yet become a manufacturing giant; it was due to agricultural productivity growth.

Unlike India, both China and Indonesia have periods when the agricultural labor force declined significantly.Slide7
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Questions to Explore?

What drove India’s fast growth?

Why was this growth accompanied by a slow trickle down?

Why is the process of labor movement out of agriculture slow in India?Slide11

Structure of Indian Economy

Most of India makes its living in the informal (unorganized) sector. In 2004-05, total employment was 457 million. Only 7% in the organized or formal sector.

If we exclude agriculture, 83% of all non-farm employment is in the informal sector.

Informal sector produces 58% of NDP.

Informal sector is characterized by low level of: technology, skills, scale.

Most of the poor work in the informal sector. Agricultural wages are inversely correlated with poverty.Slide12

Possible Sources of Poverty Decline

TFP increases in the informal sector.

Expansion (either due to an increase in TFP or due to derived demand) of the non-farm sector (formal as well as informal) that draws labor out of agriculture increasing wages of labor remaining in agriculture.

Income increases in any sector create demand increases inducing the resources to move to those sectors. Do these sectors employ unskilled labor?

Education system transforms unskilled labor into skilled labor who find employment at higher wages.Slide13

TFP Increase in the Informal Sector

Greater possibilities in agriculture: irrigation, seed improvements, diversification to dairy, poultry, horticulture etc.

More difficult in non-farm informal: unlike the formal sector, available technology is not easy to transfer. Some exceptions such as cell phones.

Skill accumulation, infrastructure, access to credit are crucial for productivity improvements but they depend on institutional improvements.Slide14

Formal Sector Growth and Poverty Decline

Fruitful to examine the following conduit: Technology transfer brings about TFP increase in the formal sector that increases demand for both skilled and unskilled labor.

We will first look at the empirical picture to understand the development process at work and then see if we can capture it in a simple model.Slide15

Growth Drivers & Employment:

1983 – 93. Slide16

Growth Drivers & Employment:

1993 – 2004. Slide17

What do we infer from the previous two slides?

The fastest growing sectors did not create employment for the unskilled. Business Services was the fastest growing sector.

The fastest growing sectors are typically export oriented sectors.

Transport (13

th

fastest growing sector), Construction and Trade (25

th

and 26

th

fastest growing sectors) were the only sectors in 1983 that created any substantial employment for the unskilled.

Similarly, Trade (12

th

) and Transport (21

st

) and Construction (22

nd

) were the creators of the unskilled labor in 1993. Slide18

Labor Movement out of Agriculture 1983-2004Slide19

Labor Movement out of Agriculture 2004-09Slide20

Changes in the labor to land ratioSlide21

Observations on Labor Movement Out of Agriculture.

From 1983 to 2004, labor to land ratio has in fact increased in all but 4 states.

From 2004 to 09, it decreased in most states but not enough to overcome the increase since 1983. In fact, it is a lot higher in 2009 than in 1983.

This suggests that if there had not been TFP growth in agriculture, the wages would have in fact declined (i.e., poverty would have increased).Slide22

Elasticity of the Inverse Labor Demand Function

2004-09 period is encouraging but how much impact did the reduction in labor to land ratio have on wages?

The maximum reduction in labor to land ratio took place in Bihar (12%).

Kanika

Mahajan’s

estimation of the elasticity of inverse labor demand function based on NSS data is -0.3.

The maximum increase in agricultural wages from 2004 to 2009, by this estimate, would be 4% out of the actual increase of 25% in average real wages.Slide23

What then is non-farm sector’s contribution?

If non-farm sector had not created additional jobs, the labor to land ratio in agriculture would have been worse and the wages would have been lower.

A counter factual would help us to gauge the relative contribution of non-farm in shoring up the wages and hence in reducing poverty.

See the next figure.Slide24
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Agricultural Sector Development

Indeed, the yields have gone up between 2004 and 2009.

Partly, it may be due to an increase in irrigated land.

Yield increases have also played a significant role in the increase in agricultural wage.Slide27

Employment Share of Different Sectors

1983 to 2009Slide28
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ModelSlide34

ResultsSlide35

Qualifications

Indian economy is not exactly a small open economy.

Domestic demand composition matters

Non-traded goods and services form a large part of the economy.

Is it possible that those whose incomes are growing fast have low income

elasticities

for the sort of goods and services that the poor (unskilled) can produce?Slide36

Consumption Pattern across Income GroupsSlide37

Consumption of Food grains & Other Unprocessed Foods Slide38

Expenditure on Informal and Formal Sector OutputSlide39

Income Elasticities

The income

elasticities

in the descending order of magnitude are: Formal sector output, Group#2 (dairy, horticulture, poultry etc), Informal sector output (excluding agriculture), and then Group#1 (food grains and pulses).

Group#2 shows most potential for trickle down.Slide40

Educational Premia

Q: Is there continuing excess demand for skilled workers?

For the 34-42 cohort, the educational

premia

for those with middle school education and graduates over those with no education were

Rs

. 96 and

Rs

. 224 in 1983. These

premia

had risen to

Rs

. 197 and

Rs

. 696 in 2004. (

Eswaran

et al (2009)).

We have yet to carry out this exercise for 2004 to 2009.Slide41

Defining skilled?

Of course, years of education is an imperfect indicator of the level of skills.

ASER (Annual Status of Education Report, 2010) reports that 47% of class 5 children could not read a simple Class 2 level text. Even in Class 8, 17% of children could not read a class 2 level text.Slide42

Conclusions

Too small a part of the labor force

is truly skilled

. (Educational premium increasing)

Growth spearheaded by skill intensive sectors.

Any possibility for TFP increase in the informal sector is dependent on local institutions whose transformation will take a long time.

TFP growth in dairy, horticulture, poultry etc will have a direct positive impact on the poor.