60600 POVERTY THE WORLD BANK REDUCTION AND ECONOMIC MANAGEMENT NETWORK (PREM) Economic Premise MARCH 2011 · Number 53 JUNE 2010 · Number 18 The South the CompetitivenessParadox: Trade and Asian Development Agenda Can Social Thomas Farole José Guilherme Reis and Outcomes Keep Pace with Growth? Ejaz Ghani The global economic crisis has forced a major rethinking of the respective roles of governments and markets in the processes of trade and growth. Indeed, industrial policy seems to be back in fashion--or, at least, talking about it is. South renewed "activism" by government in the in the world, yet it agenda need the largest concentration of people But a Asia has one of the fastest growing economiestrade and growth is also home tonot mean a return to old-style policies of import substitution and "picking coexist? The paradox of South Asia is that growth has been instrumentalby living in debilitating poverty. How do the two winners." Instead, it may mean a stronger focus on competitiveness in unlocking the constraints to private sector­led fallen fast enough discusses the renewed role poor people, and there reducing poverty rates, but poverty rates have not growth. This note to reduce the total number of of government in trade and growth room from the competitiveness angle, and it suggests some priorities for the new remains hugepolicy for improvement in education, health, and women's economic participation. competitiveness agenda. South Asia has attracted global attention because of its rapid growth may not be adequate in itself. The growth story is incom- Export-Led Growth, the Crisis, country in End economic growth. India, which is the largest and the the re- plete the crisis on the policy indicators such as education, pacts of without improving socialenvironment regarding trade of an Era gion and accounts for nearly 80 percent of the regional gross health, and women's participation apparent. activities. Which and growth were becoming morein economicIndeed, in addi- domestic product (GDP), is seen as an emerging economic of these two concerns over the global commitment to trade tion to raising stories is consistent with the reality of South Asia? The dramatic expansion in global trade from low-income powerhouse. The region is transitioning wellover recent decades liberalization, the crisis has also led to some serious rethink- has contributed status. Unfortunately, South Asia is also to middle-incomesignificantly to diversification, growth, and Growth of Poverty ing of someandthe conventional wisdom regarding the poverty reduction in many developing countries. debilitat- home to the largest concentration of people living in This period growth agenda--the most important result of which is the ing rapid export deprivation, and gender disparity. two critical of poverty, social growth has been enabled by The number of poor people (defined much living under likelihood that governments will play aas thosemore activist structural changes in globalhas changedthe vertical and spatial The geography of poverty trade: (1) over the last two de- $1.25 per capita per day There purchasing power parity) in role in the coming years. at 2005are three principal reasons cades (Kanbur and Sumner 2011). Moreinto 70 percent of the fragmentation of manufacturing than highly integrated South Asia increased likely to million in 1981 to involved in why governments are from 549 be more actively 595 million world's poor now live not in low-income,(2) in middle-income "global production networks," and but the rise of services in 2005 (figure 1). policy in the coming years. industrial and trade In India, where almost three-fourths of the countries. This growth of "offshoring."the poor living in the trade and the concentration pattern of Both of these, in turn, First, the crisis has undone faith in markets and in 1981 poor reside, the numbers increased from 420 milliondiscred- middle-income countries major technological revolutions; and were made possible by is likely to continue into the next de- to 455 million approaches that rely simply on fell from 60 ited laissez-faire in 2005. South Asia's poverty ratetrade policy they were supported by multilateral trade policy reforms cade (Chandy and Getz 2011) and raises two big questions: Has percent in 1981 to 40 governments and India, see Chen and liberalization. Instead, percent in 2005 (forlocal markets have the pace of liberalizations in domesticwith that ofinvestment and broad poverty reduction kept up trade and income Ravallion [2009]). But this not fall fast enough to reduce the been "rediscovered." Init did sense, the demand for activist growth? Has theworldwide. environments pace of improvement in human development total number of poor go well government is likely topeople. beyond financial markets and andThe global economicwith that of income growth? middle gender parity kept up crisis came crashing into the So have poverty affect the policy environment in which regulation, and it willtrends in South Asia underperformed the The conventional wisdom is that growth can be sufficient for of this long-running export-led growth party during 2008 global trends? The answer is no, empirical evidence shows that trade and industrial strategies are designed. poverty reduction and social progress; theof 2007 and the second and 2009. Between the last quarter alternative view is that Second, the crisis the highlighted the critical importance South Asia matches has global trend. Figure 2 compares change quarter of 2009, global trade contracted by 36 percent. But of diversification (of sectors, products, and trading partners) as the recovery started to strengthen in 2010 (at least until in reducing the risks of growth volatility. The recent era of the clouds began to form over Europe), the longer-term im- globalization contributed to substantial specialization of 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise 1 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 1. Increase in Number of Poor People in South Asia Why has India--with roughly the same pop- ulation as China--not performed as well as China? Why is the poverty rate in India higher number of poor people (millions) 1,000 than in China? The poverty rate depends on East Asia income growth and how it is distributed across 800 the population, that is, inequality. India has experienced a slower income growth relative 600 South Asia to China, which partly explains the higher poverty rate in India (figure 2). What about inequality? Is the poverty rate 400 higher in India because inequality increased sub-Saharan Africa more rapidly in India compared to China? No: 200 figure 3 shows the annual change in house- 1981 1984 1987 1990 1993 1996 1999 2002 2005 hold survey mean consumption (horizontal Source: Ghani (2010). axis) against the change in inequality (vertical axis). Brazil and Thailand are in the southeast in the poverty rate and change in real GDP per capita in South quadrant, indicating that they have experienced a reduction Asian countries with the rest of the world and shows that most in inequality and an increase in growth. A reduction in in- South Asian countries are close to the global trend line. India, equality makes growth more pro-poor (Bardhan 2009). Chi- Sri Lanka, Bangladesh, and China are all extremely close to the na, India, and other South Asian countries are in the north- regression line; that is, their poverty reduction is precisely in east quadrant--they experienced an increase in growth and an line with what economic growth would predict. increase in inequality. Inequality in China increased more But merely matching the global trends may not be enough rapidly than in India. Despite this, China managed to reduce for a region that has the largest concentration of poor people. poverty faster than India, because it has grown faster than In- South Asian countries have not done as well as some of the bet- dia. So growth can trump inequality when it comes to poverty ter performers such as China and Thailand. reduction. Figure 2. Change in Poverty and Change in GDP, 1977­2007 3 Trinidad and Tobago Belarus Djibouti 2 Albania annualized change in poverty Peru Georgia Bolivia Côte d'Ivoire Uzbekistan Colombia Guyana Paraguay Tanzania Turkey Guinea-Bissau Mongolia Rwanda South Africa 0 Zambia Madagascar EthiopiaPakistan India Burundi Bangladesh Niger Cambodia Brazil Honduras Morocco Nicaragua Indonesia Kenya Kazakhstan Guatemala Moldova, Rep. of Malaysia Vietnam Costa Rica Romania Armenia Mexico Chile Uruguay (urban) Jamaica Thailand -2 Russian Federation Poland Ukraine -4 -.05 0 .05 .1 annualized change in GDP per capita (controlling for initial log poverty) Source: Ghani (2010). 2 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 3. Change in Inequality and Change in Consumption Growth, 1997­2007 Macedonia, FYR .06 .04 Slovak Rep. annualized change in Gini Nepal Rwanda Hungary Bolivia .02 Bulgaria Paraguay Sri Lanka Peru Botswana China Djibouti Georgia Bangladesh Croatia Côte d'Ivoire Mozambique Pakistan Lao PDR Indonesia Vietnam Poland Tanzania Argentina Nigeria Philippines India Mexico 0 Mongolia Brazil Costa Rica Yemen, Rep. of Ethiopia Thailand Chile South Africa Guatemala Venezuela, R. B. de Nicaragua Guinea Cameroon Malaysia Trinidad and Tobago Kenya Belarus -.02 Russian Federation Senegal Mali Kyrgyz Rep. Ukraine Guyana Burkina Faso Swaziland Sierra Leone Malawi -.04 Uzbekistan Guinea-Bissau -1 -.05 0 .05 .1 annualized change in per capita consumption Source: Ghani (2010). Growth and Social Progress pal, Pakistan, and Sri Lanka are just as devastated by neglected tropical diseases. What about social outcomes? Comparing the changes in educa- South Asia has the highest rates of malnutrition and the tion, health, and gender outcomes in South Asia with the rest largest numbers of undernourished children in the world. Un- of the world, conditional on income growth, results in a mixed dernourished children have higher rates of mortality, have story. lower cognitive and school performance, and are more likely to Income growth has contributed to improved adult literacy drop out of school. Figure 5 compares the level of child malnu- rates in the region, which match the global norm. However, hu- trition against real GDP per capita in 2005. Most South Asian man development lags behind when it comes to secondary and countries have much higher child malnutrition rates for their tertiary education, which are becoming more relevant than pri- stage of development. Even leading states such as Gujarat and mary education in an increasingly skill-intensive growth experi- Haryana in India are as much above the regression line as lag- ence in the region (Ghani 2009). ging states like Bihar, Chattisgarh, Jharkhand, Madhya Pradesh, Figure 4 compares the change in secondary education and and Uttar Pradesh. income for 100 countries for 1990­2006. India's performance matches the global trend, but it has not performed as well as Growth and Gender Disparity China. India's growth enrollment ratio in secondary school is 40 percent, compared with 70 percent in East Asia. Over the last 50 years, women's roles in the economy and soci- Health indicators too have not kept up with income growth. ety have been revolutionized. Around the world, the most More than 200,000 people in India die annually from malaria, striking forms of inequality, including discrimination against mainly in poor regions. Similarly, India accounts for one-quar- women in access to education, health, employment, political ter of global intestinal worm infections, such as hookworm and voice, and resources within the household, have been largely roundworm, and more than half of the world's cases of ele- reversed. But dramatic gender inequities persist in South Asia, phantiasis, leprosy, and visceral leishmaniasis (Hotez 2011). more so than in low-income countries. The state of Bihar alone accounts for a large percentage of the Although gender parity in primary education has im- world's cases of kala-azar, which affects the bone marrow, liver, proved, dropout rates for girls are higher than those for boys. and spleen and is associated with high mortality. While much The dowry tradition puts pressure on families of girls to marry of the global health attention is focused on sub-Saharan Africa, them early, leading to preference for sons. Legal and judicial the truth is that India and adjoining Bangladesh, Bhutan, Ne- systems, as well as law enforcement mechanisms, have failed 3 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 4. Comparing Change in Secondary Education and Growth, 1990­2006 .1 Malawi annualized change in secondary school enrollment Cape Verde Guinea Mali Burundi Thailand Oman .05 Ethiopia China Costa Rica Djibouti Tunisia Bolivia Lao PDR Colombia Sudan Mexico Venezuela, R. B. de UAE Pakistan Indonesia Nepal Guyana India Italy Madagascar France Uruguay Chile UK Moldova, Rep. of Sweden Poland Ireland Kenya Japan Korea, Rep. of 0 USA Latvia Ukraine Uzbekistan Belarus Estonia Cameroon Switzerland Kazakhstan Russian Federation Romania -.05 0 .05 .1 annualized change in GDP per capita Source: Ghani (2010). Figure 5. Comparing Child Malnutrition Rates in Indian States with Selected Countries, 2005 4 Bihar MP Jharkhand Chattisgarh UP Gujarat MadagascarNepal Orissa Indian states Bangladesh West Bengal Haryana Rajasthan Burkina Faso Karnataka Maharashtra Eritrea Assam Pakistan Chad HP Mali Cambodia AP Angola Maldives Comoros Tamil Nadu Indonesia log child malnutrition Mozambique Zambia Punjab 3 Kerala Namibia Vietnam Malawi Rwanda Guatemala Kenya Cameroon Senegal Algeria Morocco Honduras Nicaragua 2 Bolivia El Salvador Egypt, Arab Rep. of Peru Uzbekistan Dominican Rep. Jordan Brazil Jamaica Turkey Kyrgyz Rep. 1 6 7 8 9 log GDP per capita Source: Ghani (2010). 4 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise Figure 6. Comparing Growth in Female Employment and Income Growth, 1990­2005 14 BLZ TON change in female labor participation 12 GTM ARG 10 VEN ECU BRN BOL HKG COL TTO 8 IRL (% of total labor force) NPL LUX PRY FJI TCD DZA YEM CYP SDN BTN 6 BWA CHE BEL PAN TUN CHL ARE ETH MEX 4 BHR DEU MDA ZAF URY CPV ITA KOR -2 PNG NOR MUS MRT HND SGP DJI WSM LAO JPN EST IND CHN GAB 0 TGO BGD LKA TJK BDI CAF MWI TKM BFA THA SLB SLE -2 GEO UZB SLV VNM NER BGR MKD SVK KGZ -4 ZAR TUR -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 average annual change in per capita income Source: Ghani (2010). to address the high incidence of violence against women. inequality increased more rapidly in China than in India, Chi- Death rates for young girls are much higher than boys. Sex- na still managed to reduce poverty faster than India due to a specific abortions targeting female fetuses are high in the re- faster pace of income growth. The story on social progress--hu- gion (Sen 2003). man development and gender disparity--is mixed Higher death rates for young girls and abortions are symp- So the conventional wisdom that growth is important for tomatic of a general pattern of discrimination against girls. The poverty reduction is consistent with the empirical facts in South expectation that girls will grow to do little other than serve their Asia. Growth creates the fiscal space for poverty reduction. How- husbands reduces parents' incentives to invest in their daugh- ever, the alternative view that growth tends to be incomplete is ter's education. Uneducated women then have few alternatives, also consistent with empirical facts. Human development, par- and so the expectation becomes self-fulfilling, leaving women ticularly education and health, has not kept pace with income in a continuous circle of neglect (Summers 1992). Gender dis- growth. And growth has not been gender inclusive; women's par- crimination, which begins at childhood in the region, has sig- ticipation in economic activities has not kept up with income nificant adverse long-term effects. growth. From the human development and gender equality per- Figure 6 plots the change in the share of the female labor spectives, growth in South Asia may not be adequate. force in the total labor force and real GDP growth per capita for Policy makers should consider direct policy interventions to 160 countries. It shows that gender disparity in employment is accelerate social progress, with a particular focus on human de- reduced with income growth. Most South Asian countries, velopment and gender inclusiveness. Greater gender equality with the exception of Bhutan and Nepal, are below the line. So can contribute to economic growth and development. Major growth in the region seems to be less gender inclusive. In 2008, initiatives to increase the opportunities for women can trans- India's female labor force participation rate averaged 35 per- form society. If more girls had gone to school a generation ago, cent, while low-income countries averaged 58 percent. A large millions of infant deaths could have been averted each year, and proportion of women in the region are employed in the infor- tens of millions of families could have been more educated, mal sector. healthier, and happier. Policy makers should not think of growth separately from Conclusion social development. Increased social disparities should not be The paradox of South Asia is that growth has been instrumen- viewed as the price to pay for high growth. Neither should edu- tal in reducing poverty rates, but poverty rates have not fallen cation, health, and gender parities be considered as second- fast enough to reduce the total number of poor people. Poverty stage reforms. A development response that promotes growth reduction in India, China, Sri Lanka, and Bangladesh is precise- first, and then deals with human misery, is not sustainable. ly in line with what economic growth would predict. Although Policies need to be designed so that the redistribution process 5 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise does not feed off public finances, and the growth process itself Chen, S., and M. Ravallion. 2009. "The Developing World Is Poorer Than We is not hampered. Thought, but No Less Successful in the Fight against Poverty." World Bank Policy Research Working Paper, WPS 4703, 2009/08/05, Washington, DC. About the Author Ghani, Ejaz, ed. 2009. The Service Revolution in South Asia. Oxford University Press USA. Ejaz Ghani is an Economic Advisor in the South Asia Region at ------. 2010. The Poor Half Billion in South Asia: What Is Holding Back Lagging Regions? Oxford University Press USA. the World Bank. The author is grateful to Lakshmi Iyer and Hotez, P. 2011. "In India's Forgotten Diseases, an Opportunity." The Hindu Ravi Kanbur for their comments, and to Saurabh Mishra for March 8. research assistance. This note is based on the work in The Poor Kanbur, R., and A. Sumner. 2011. Poor Countries or Poor People? Development Half Billion in South Asia (Ghani 2010), and the views ex- Assistance and the New Geography of Global Poverty. Institute of Develop- ment Studies. pressed here are those of the author and not the World Bank. Sen, Amartya. 2003. "Missing Women--Revisited." BMJ 327: 1297­98 doi:10.1136/bmj.327.7427.1297 bmj.com. References Summers, Lawrence. 1992. "Investing in All the People." World Bank Policy Research Working Papers 905, Washington, DC. Bardhan, P. 2009. "Notes on the Political Economy of India's Tortuous Transi- Sumner, A. 2010. "Global Poverty and the New Bottom Billion: Three-Quar- tion." Economic and Political Weekly 46 (11): 31­36. ters of the World's Poor Live in Middle-Income Countries." IDS Working Chandy, L., and G. Getz. 2011. "Poverty in Numbers: The Changing State of Paper 349, Brighton. Global Poverty from 2005 to 2015." Brookings March 19. World Bank. 2009. Povcal Net. Washington, DC. The Economic Premise note series is intended to summarize good practices and key policy findings on topics related to economic policy. They are produced by the Poverty Reduc- tion and Economic Management (PREM) Network Vice-Presidency of the World Bank. The views expressed here are those of the authors and do not necessarily reflect those of the World Bank. The notes are available at: www.worldbank.org/economicpremise. 6 POVERTY REDUCTION AND ECONOMIC MANAGEMENT (PREM) NETWORK www.worldbank.org/economicpremise