Development Paradox: Economic Growth and Inequality

development.paradox

On completing one year in office, Modi government in India reported that India’s economy grew by 7.3 per cent during 2014-15.  The International Monetary Fund has projected that India will outpace China during the current fiscal year. This is very encouraging news. From the point of view of broader policy-making India is still a recovering economy.  The prime drivers of the growth were the significantly stronger performance of ‘manufacturing’, ‘electricity, gas, water supply and other utility services’ and the ‘financial, real estate and professional services’.

However, this is a development paradox. Indeed, this development paradox is applicable as a truth into most of the developing and least development countries economics; both in Asia and Africa. Taking the example of India, it is true that India has attracted global attention for rapid economic growth. India accounts for nearly 80% of the regional GDP of South Asia, and is the largest country in the region, is seen as an emerging economic powerhouse. Other countries in the region are also well advanced in the transition from low income to middle income status. But this progress doesn’t mask the fact that India in particular and South Asia in general is home to the largest concentration of people living in debilitating poverty and social deprivation on planet earth[1].

The geography of poverty has changed over the last two decades[2]. More than 70% of the world’s poor now live not in low income but in middle-income countries. Indeed, there are more poor people living in South Asia than in Sub-Saharan Africa. This pattern of concentration of the poor living in the middle income countries is likely to continue over the next decade[3]. This raises two big questions. Firstly, why could we not able to reduce poverty despite of the impressive income growth and secondly, does this income growth provide socio-economic development to society? The direct responses to these fundamental questions are not positive.

The number of poor people (defined as those living under $1.25 per capita per day) in Sub-Saharan Africa increased and Poverty headcount ratio for Africa is 46.8%[4]. In case of Asia, the poverty rate is nearly 50%[5]. Inequality has been raised and according to a recent report of Asian Development Bank, it has been increased in Asia two folds in last 10 years[6]. Inequality is an important dimension of development in its own right, but it also has consequences for governments’ fight against poverty and efforts to sustain growth. Both poverty reduction and the foundations for future growth can be strengthened by ensuring that the benefits of development are shared broadly and equitably.

The paradox of economic growth is that it has been instrumental in reducing poverty rates, but poverty rates have not fallen fast enough to reduce the total number of poor people. Poverty reduction in India, China (LDCs which aspires to be in the middle income status) are precisely in line with what economic growth would predict. Although inequality increased more rapidly and an inclusive development remains are dream to be fulfilled. Unfortunately, this is real world development paradox of the contemporary time. Policy makers need to address this paradox strategically, if we do not act on this urgently, it could impair growth and those with low incomes suffer poor health and low productivity as a result. It could threaten public confidence in growth-boosting policies like free trade, or it could sow the seeds of crisis!

Keshav C Das

Addis Ababa

June 1, 2015

[1] Is growth incomplete without social progress? Ejaz Ghani, 2011.

[2] Sumner, A (2010), “Global Poverty and the New Bottom Billion: Three-quarters of the World’s Poor Live in Middle-income Countries’”, IDS Working Paper 349, Brighton: IDS

[3] Chandy, L and G Getz (2011), “Poverty in Numbers: The Changing State of Global Poverty from 2005 to 2015”, Brookings.

[4] http://povertydata.worldbank.org/poverty/region/SSA

[5] http://www.economist.com/news/economic-and-financial-indicators/21614146-poverty-asia

[6] http://www.adb.org/sites/default/files/publication/41630/inequality-asia-and-pacific.pdf

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