India Uncut

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Wednesday, December 08, 2004

The myth about the rich and the poor

Time magazine recently ran a cover story (at least in the India edition!) titled “A Tale of Two Indias” by Alex Perry, in which Perry tells us that there are two Indias, one for the rich and one for the poor. His narrative begins on Parmeshwar and Adi Godrej’s “clifftop terrace”, and after impressing us with the sophisticated setting and the elite guests, Perry informs us that it is “10 km from Asia’s biggest slum”.

It’s a familiar angle, constantly mined by those distrustful of capitalism, and the economic liberalisation that Manmohan Singh, as finance minister, began in the early 1990s. It centers around that terribly misguided complaint about capitalism, that it benefits only the rich, and the poor get left behind. Jean Dreze, in a viewpoint accompanying Perry’s piece, says, “The gains of faster growth have been largely captured by the privileged. The poor, for their part, barely manage to continue their slow exit from hunger and misery.”

Dreze is essentially stating the cliched belief that capitalism leads to the rich getting richer and the poor getting poorer. But the evidence he presents merely shows that the rich are getting richer while there are poor people. There is a significant difference between these two statements. The poor of India are far better off than they would have been if India’s economic liberalisation had not taken place, and there are far less of them than there would have been. This is not because they have died of starvation, but because of what Gurcharan Das describes, in a counterpoint to Dreze, as “the explosive growth of the middle class”. Free markets aren’t magic, and past inequities don’t disappear as soon as the economy is opened up, but they are better than any alternative.

One of the most pernicious myths of the last two centuries is of the unequal gains from capitalism. A landmark study titled “Growth Is Good for the Poor”, by David Dollar and Aart Kraay, surveys available economic information from 137 countries, over four decades, and demolishes the myth of the “trickle-down effect”. In an open economy, wealth does not trickle down gradually from the rich to the poor simultaneously. Instead, “incomes of the poor rise proportionately with average incomes”. Read the full report for yourself, and draw your own conclusions. Note these lines, of special relevance to India:

In recent years there has been a great deal of emphasis in the development community on making growth even more “pro-poor.” Given our evidence that neither growth nor growth-enhancing policies tend to be systematically associated with changes in the share of income accruing to the poorest fifth of societies, we interpret this emphasis on “pro-poor” growth as a call for some other policy interventions that raise the share of income captured by the poorest in society. We empirically examine the importance of four such factors in determining the income share of the poorest: primary educational attainment, public spending on health and education, labor productivity in agriculture relative to the rest of the economy, and formal democratic institutions. While it is plausible that these factors are important in bettering the lot of poor people in some countries and under some circumstances, we are unable to uncover any systematic evidence that they raise the share of income of the poorest in our large cross-country sample.

Manmohan Singh speaks about reforms needing to be “pre-poor” as, I suspect, just a conciliatory gesture towards the infantile rhetoric of the Left, because Singh no doubt knows that reforms are helping, and will continue to help, the poor as well as the rich. The likes of Sitaram Yechury and Prakash Karat always ramble on about how the poor are getting poorer but, like Dreze, present evidence only of the existence of poor people. And when they are not talking of inequalities, they are denying that open markets lead to any benefits at all, which is a ludicrous assertion. As Jeffrey Sachs and Andrew Warner concluded in their study, “Economic Reform and the Process of Global Integration” (not available online, so I can’t link to it), open economies double in size every 16 years, while closed economies take 100 years to do so. They found that in the 1970s, poor countries that opened their markets grew six times faster than those that didn’t.

The transition from a closed economy to an open one has its share of hiccups, but they come mostly from big government, the sprawling bureaucratic superstructure that arose out of Jawaharlal Nehru’s Fabian socialism. But all the data of the last 10 years indicates that more people are leaving the poverty line behind than ever before, as the middle class burgeons in size. There is still a long way to go, but at least we’re headed in the right direction, instead of where the Left would like to take us – backwards.

Back to Perry. In his piece, Perry speaks of how Mahatma Gandhi’s message was “one of freedom from oppression by wealth as much as by race”. Gandhi was a great political leader, but his understanding of economics was dubious, and such sloganeering even more so. Wealth is not oppressive, it is liberating, and a poor man is always the best person to ask about that. Poverty is oppressive. And the best chance that the poor have to be liberated, as all the empirical evidence demonstrates, is in a meritocratic capitalist society, with free markets and equal opportunities. And we are getting there. It is a sign of the changing times that, to quote Das, “the rich no longer excite envy but hope and aspiration”.

In case you are one of those with doubts about globalisation, I urge you to read these three excellent books on the subject, in which many of the common anti-globalisation myths are systematically stripped bare:

Open World by Philippe Legrain
In Defence of Globalization by Jagdish Bhagwati
Why Globalization Works by Martin Wolf
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