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India Shows Why We Should Focus on Poverty, Not Inequality

08/08/2013 17:01 BST | Updated 07/10/2013 10:12 BST

In an ironic inversion of the First World Problems meme, the world economy has another reason, as if one was needed, to become skittish this year due to China's growth slowing to only 7.7% a year. (As way of reference, the British economy has grown by 7.7% over the last eight years.)

This still contrasts more than favourably with its near, but in so many ways dissimilar, neighbour India which has 'only' mustered 4.8% this year, and is seen to have had a bad couple of years after almost matching China's double-digit growth rates at the start of this decade. Attempting to explain India's stumble, many analysts have focused on the change of government from the free-market BJP to the progressive Congress-led coalition.

India's economic woes, such as they are, provide a neat illustration of the curious and, despite outwards-appearances, temporary reversal of fortune between the 'rich countries' who are having a few bad years and the 'poor countries' who are doing alright - for now.

I have written on this blog before about the hasty and hubristic dash among some in the development community to replace poverty reduction, which was the greatest success of the Millennium Development Goals, with a focus on inequality reduction. These calls seemed unwilling to learn the lessons of the MDGs, namely doing simple things well rather than complicated things badly and only aiming for targets that a consensus can be built around, and were especially ironic given that they came principally from aid agencies in Western countries experiencing economic crisis that poor countries largely weren't. There is an unfortunate assumption that the MDGs has confirmed the aid agencies' world view, when in terms of the growth-first, state-directed attitude of many developing countries the opposite seemed to be true.

A cat-fight has broken out over India's economic troubles, and the role a focus on inequality has played in this, between the country's leading development economists Amartya Sen and Jaghdish Bhagwati. After ramping up over many years of his criticism of Sen and particularly the failure of the Kerala Model of Indian Keynesian that was seen to be behind the National Rural Employment Guarantee Act, NREGA (described as the largest government welfare programme in the world), Bhagwati has argued that Kerala's good quality of life indicators can instead be attributed to what he provocatively calls the Gujarat Model of free enterprise and low regulation.

Sen in turn has attacked Baghwati for missing the fact that Kerala's economy has been built on a highly qualified and healthy workforce produced by the state's long-term investments in education and healthcare. He also points out that unlike many of the states in the economically-thrusting Hindu heartland, Kerala and much of South India has escaped the worst of the associated communal violence and social dislocation that rapid economic growth has brought.

In Indian politics this otherwise obscure spat has become something of a cause célèbre. Summer, it seems, is silly season the world over.

The issue has been presented as Baghwati attacking Sen for focusing too much on income redistribution and too little on wealth creation. This is a somewhat simplistic account of both views. Sen advocates the broadening of the development base by investing more heavily in education and healthcare rather than simply on roads, infrastructure and industrial support. Baghwati claims that wealth creation is the best form of redistribution, particularly for India's vast rural poor, and this needs India to be pro-business and outward-facing.

This may be a storm in an Indian teacup. But the medium-term economic success of India may not be, especially given the transition period that global development is in as the MDGs draw to a close, and the SDGs or whatever follows take over. What happens in the next months and years in a country containing 40% of all the world's poor people has direct implications on what comes next for all of the world's poor.

Those seeking to learn from India, particularly in light of India's experience in addressing inequality, would do well to listen carefully to what Amartya Sen and others are actually saying about inequality. The capabilities approach with which Sen is associated focuses on sharing more broadly the fruits of wealth by investing in human potential (what he calls the ability to be free) by supporting better health and education. He argues that absolute poverty is an imperfect measure more than he argues for a focus on inequality.

The fuzziness in thinking around the SDGs is in danger of settling on inequality as a soft measure of everything that poverty can't capture. But the point about the MDGs was that in a world of imperfect information (something else Sen talks about) focusing on what can be measured well, or rather less badly, should drive change rather than focusing on what we would like to measure. It is the failure to recognise this distinction - that inequality is not just everything unmeasured by the poverty rate - that is leading to so much agonising by some in the development community, oblivious to how hubristic inequality reduction may sound to those for whom poverty reduction is not a completed project.

In a recent article in the Hindu, Sen argues that India has failed to invest the surplus capital from raising living standards in a healthier, better educated, population like China has.

India has experienced something in the region of a 40% reduction in absolute poverty in last 30 years. This is a phenomenal achievement. But India's 1.2bn people still make up a vast number of the world's poor people. Uttar Pradesh (a large poor state) has something like 8% of the world's poor alone.

Compared to China, the Indian model looks positively anaemic. China has pulled something like 800 million people out of poverty in the last generation, often attributed to China stabilising population growth a lot earlier than India, and investments in healthcare, education and infrastructure, rather than trying to equalise income as India has attempted with NREGRA.

India seems to have had the worst of both worlds. Its population has only just peaked, meaning that economic growth has been offset by more mouths to feed. As such, far from lifting hundreds of millions of people out of poverty, India has somehow managed over the last generation to add a few dozen million more poor people despite what passes for acceptable BRIC growth, or phenomenal growth in European terms. Demography, it turns out, and not geography, is destiny.

India has also fudged the figures a bit. The World Bank, which defines poverty as survival on less than $1.25 per day, says India reduced poverty from 60% of the population to 33% between 1981 and 2010. 33% is about 400 million people, a third of the world's poor. But the Government of India uses a much lower estimate, 'The Tendulkar Methodology,' of how much money buys 2,400 calories of food a day - the minimum amount an adult needs. This sets the Indian poverty rate at about 10% lower than the World Bank's rate, which may not sound a lot, but in a country like India 10% fewer poor people is 40m people.

Indian growth has yo-yoed between 4.5% and 9.5% over the last decade. Britain would happily take the lowest of this at the moment, but this is some way shy of the BRIC average, and a long way short of China which has typically been above 8%. And when the growth strategy of BRIC nations is based on persistently high rates over sustained periods to break permanently into the club of economic powers, inconsistent growth discourages investment and increases risk.

Into such a situation where poverty statistics can easily be manipulated, and are tossed about on political currents, how would imperfect measures of development such as of inequality help the poor?

A final objection to measuring inequality - and this is a problem not just limited to India - is that it is qualitatively and intellectually at odds with the need to provide better leadership on the environment, particularly if Sustainable Development Goals are to replace the MDGs. Inequality implies problems of distribution, but as I have argued previously, production and not distribution or consumption should be the focus of economic planning if people are serious about squaring development goals with long-term environmental sustainability and resource management.

Because the central problem of political economy is no longer 'how much coal and steel can the Ruhr Valley produce?' the tendency is to assume that making things and producing energy are problems that have been solved. And with it comes the assumption that the long term drivers of history, access to resources, production, distribution, justice and yes class, have come to an end. India is the world's second largest producer of coal, but the country will not be self-sufficient in energy for very long. Inequality-reduction is premised upon an assumption that the energy and materials used to first reduce poverty are ever-lasting and that prices will always remain low. This remains yet another reason to stick with the goal of poverty reduction for a huge, young, hungry and evermore energy-scarce country like India.