India: Growth Vs Development Debate

Is it really an either-or case, as some people try to portray?

The 2014 Loksabha polls brought this debate into focus through the Sen-Bhagwati dialogue on this issue. Commonsense dictates that the two are related, but they are neither mutually exclusive nor are they perfectly correlated. Experience shows that economic growth doesn’t automatically trickledown to the bottom; it tends to remain concentrated in top few hands. Likewise, targeting human development indicators will not automatically prop up economic growth. Both should be seen side by side in the right perspective.

Moreover, the large population base, widespread poverty and climate change disturbances must be factored in to the development trajectory.

The Sen-Bhagwati Debate

sen bhagwatiIt is a healthy debate between two factions of researchers. One side is led by Nobel winner professor of economics and philosophy at Harvard University, Amartya Sen, whose idea of development culminates in the capability theory. Sen believes that India should invest more in its social infrastructure like health and education to improve human capabilities that will cause economic growth. Without such investments, he fears that inequality will widen which will ultimately falter the growth process. In the recent book An Uncertain Glory: India and its Contradictions, Sen and Drèze stress on state-led social welfare schemes to solve India’s development problems.

This is opposed by Jagdish Bhagwati, a Columbia University professor of economics. Bhagwati argues that focus on growth is important so that enough resources are available for social welfare programs. In his view, inequality may raise with growth initially but sustained growth will eventually also sustain the social benefit programs to redistribute and mitigate the effects of the initial inequality. In Why Growth Matters: How Economic Growth in India Reduced Poverty and the Lessons for Other Developing Countries, Bhagwati and Panagariya recommend focus on economic growth as the best way forward.

Origin of the Debate

In a December 2010 speech to MPs, Bhagwati argued that the reforms of 1991 have brought prosperity to even the lowest social classes and hence they must be continued. He also down played the low ranking of India on the human development index (HDI) which originated from the efforts of Sen and the renowned Pakistani economist, Mahbub ul Haq. Bhagwati thinks that the HDI has little scientific basis.

The Debate

The differences between Sen and Bhagwati may be much smaller than what appears from the media hype. It is certainly not a battle between the left and the right. Yet, Sen attracts left leaning people while those on the right tend to favour Bhagwati’s views. The debate is not about rejecting market economy; it appears to be more about policy preferences rather than policy directions.

For instance, Bhagwati wants growth to precede redistribution to improve people’s capabilities. But Sen wants to focus on increasing capabilities as a way to push growth. He argues that there is no example of unhealthy, uneducated labour producing meaningful growth rates. Bhagwati counters by arguing that putting redistribution before growth is like putting the cart before the horse.

It appears to be more about the process of growth – whether it enriches the rich unequally or spreads down to include even the poor – and the manner of doing so. It is also academic – whether people got lifted out of poverty due to economic growth or redistribution through state policies.

Many critics however point out that the debate bypasses the more pressing issues of global warming and rising population; with fertility rate of 2.6 per women India is still away from the population stabilization target of 2.1, which should have been reached in 2010.

To sum up in one sentence: Bhagwati wants to focus on reforms to push economic growth, and Sen wants the focus on tackling poverty and inequality through social measures.

Beyond Debate, What should India Do

Mind the Inequality Gap

mind-the-gapExperience around the world shows that the corporate led economic growth model, India is trying usher in since 1991, is known to promote high inequality with concentration of wealth in few rich hands. It does not automatically benefit the masses without state led redistribution efforts.

A recent Oxfam research report shows that the richest 1 percent have seen their share of global wealth increase from 44 percent in 2009 to 48 percent in 2014. The Wealth of the richest 1 percent is 65 times the wealth of bottom half. In 2014, 80 richest persons have as much wealth as the poorest 50 percent (about 3.5 billion people). In 2013 85 richest persons held that much, significantly down from 388 in 2010.

Development is not just about growth; it is also about its distribution. So it is entirely possible for an economy to grow even rapidly without creating much jobs as has been the case in India recently – growth only increased inequality.

Focus on Infrastructure

The government also failed to create sufficient basic infrastructure – transport, electricity, communication etc – to help the manufacturing sector. What actually grew is the service sector around the IT. Another sector that has gone up is the real estate. It is kind of rent seeking and speculative sector. So services and construction account for roughly 70% of the increase in output over the last 20 years. The industrial growth remained limited to around 18%. As a result, we ended up with large export-import gap.

The corporate sector grew very fast in past two decades, almost double the rate of the rest of the economy. However, it employs barely 12 million people in a country with a work force of over 450 million. Even here, white collar workers might have gained to some extent but the wages of blue collar workers remained largely flat.

Strengthen Welfare Program

NREGA work

NREGA work

Human development indicators show that the benefits of growth did not each people at the bottom. As Sen points out, many countries with lower per capita income than India have done better. For instance, in Bangladesh infant mortality has come down below that of India’s, starting with much higher figure, and open defecation is limited to just 8% population there compared with India’s over 50%. A unique and outstanding example comes from Bhutan and its use of Gross National Happiness (GNH) to guide development. It’s human development index (HDI) increased from 0.146 in 1991 to 0.522 in 2010 without unduly impairing its cultural, spiritual or natural treasures. Compare it with India’s current HDI of around 0.55.

Clearly, what counts is the distribution of economic growth and its translation into human wellbeing, not the quantum of economic growth.

Without consistent higher economic growth India risks being stuck in the low-income trap for a longer time. It needs to offer the private sector and foreign investors opportunities to earn consistent long-term profits. Securing their interests is much easier if GDP is growing at 8% than at 4-5%. Further, strong institutions are necessary to achieve consistent economic growth and development. It means focusing on good governance, consistent and clear polices and freedom from corruption.

Invest in Skill Development and Entrepreneurship

As the government is shifting focus from agriculture to manufacturing, the challenge is to support this transition by retraining agricultural workers for more productive jobs with better wages. This means that government must focus on areas like skill development, entrepreneurship, and education. The NDA must avoid the UPA type mistakes – it converted a lot of social expenditure into rights and obligations that were enforceable even by the courts. It can potentially turn into problem when the economy slows down.

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Is the World Heading Towards a New Global Order?

21st Century World Needs New Global Rules

cricket game 2The world entered 21st century with new hopes, but could not say goodbye to the baggage of the last century. The intensity of global climatic disorder is now too glaring to be ignored while world leaders show no sign of shedding their slumber and the corporate-consumer model of development shows no sign of respecting the limits of the planet. Even the most ignorant person living in any corner of the planet can tell that the climate is no longer smooth and orderly. The feeling of not being able to do anything is stirring the suppressed conscience of the ordinary people across the world.

As world leaders continue verbal posturing (for public consumption) and carry on international negotiations (not meant to be honoured) giant corporations continue to “maximize profits” and the powerful and “free” corporate media continue to tow the lines of rich and powerful. Yet, the silent pain of ignored ordinary citizens is gathering momentum against the global power centers who dictate terms.

It also infuriates people when they see ‘developed’ nations waging trillion dollar wars in the Middle East and Afghanistan, but when it comes to fighting climate change and global poverty their disinterest makes their status tag of ‘developed nations’ look empty.

5 Drivers of People’s Dissatisfaction

Our world is certainly at a crossroads. The present drivers of global politics, operating since the end of the WW-II, fail to meet people’s aspirations in the changed world we live in today. The new realities demand a new global arrangement better suited to meet the aspirations of global citizens.

  1. Sick Planet

Climatic Disorder and Environmental Degradation

The phenomenon of global warming is a manmade problem that resulted chasing the myth of eternal GDP growth. It is the most serious threat facing the humanity today and is the un-refutable “proof” of many things wrong rooted in our ecologically blind lifestyle. Reflecting more than the rising global temperatures, melting ice-caps and depleting natural resources it covers multiple and associated ills which not just point to the growing inequalities and injustice but also to local, regional and, potentially, global conflict.

Despite serious global attempts of past two decades, we are already at 401 parts per million of CO2 in February 2015 and counting; it was 325 ppm in 1970. Over the past decade, much has been talked about peaking it between 2015 and 2020. Yet, even in 2015 it is still a pipe dream. It doesn’t help when experts claim: “We underestimated the risks… we underestimated the damage associated with the temperature increases… and we underestimated the probabilities of temperature increases”.

From the perspective of common people, the climate battle is already lost and there is nothing to save them from untimely climatic disasters, now getting more frequent than ever before. Farmers in the poor countries are already seeing destruction of their crops by untimely rains and hailstorms. The mainstream global media, led by the rich West, still treats such events as natural accidents unconnected with human activities. The US and its allies still find trillion dollar wars in the Middle East and Afghanistan more rewarding than fighting global poverty or climate change.

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A New Measure of National Progress: Social Progress Index (SPI)

GDP Growth is not a Good Measure of Progress

GDP growth can be misleading

GDP growth can be misleading

Economic growth, measured as per capita GDP, is currently taken as a measure of a country’s progress. It is simple and certainly provides the personal income and governmental resources needed to run the country. In the past half century, economic growth has surely improved lives of people across the world and lifted people out of poverty.

However, it is becoming increasingly clear that GDP growth alone leads to incomplete development and is hitting the environment limits. In many rich societies it appears to have hit the roof, with no further real development with increasing GDP. Moreover, economic growth leads to high levels of inequality that has polarized the world between a “rich North” where obesity and ‘lifestyle diseases’ threaten people’s lives and a “poor South” where people die of under-nutrition and easily preventable diseases. This is a comical situation, speaking in a lighter tone.

Therefore, a change is imperative in how we go about development and this change must be about building not just rich societies but good and just societies. For this, we need to look beyond GDP and include social and environmental measurements into national performance measurement. Tracking the progress of social indicators will also help to better utilize the economic gains for improving the well being of people.

Need to Measure Social Progress

To advance social progress, then, we must learn to measure it comprehensively and rigorously.  Measuring multiple dimensions of social progress is indispensable in understanding its components, benchmarking success, and catalyzing improvement. While there have been some laudable efforts to measure wellbeing, these capture only limited aspects of social progress, and are uneven in breadth and scope across countries.

Systematic measurement of social progress is also important to understand various factors that aid economic advancement. Therefore, social progress also promotes economic development, setting a virtuous cycle. Understanding pressing societal challenges also creates new economic opportunities for business and future directions.

What is Social Progress Index?

The Social Progress Index (SPI) is an attempt to address these gaps and opportunities. It provides a holistic, objective, outcome-based measure of a country’s wellbeing that is independent of economic indicators. It will enable a new level of sophistication in understanding the complex relationship between social progress and economic development. The Index framework is designed to be readily improved and expanded to incorporate new aspects of social progress, as well as improved data. It checks the social progress alongside the GDP for a country’s performance.

The model is based on the following definition of social progress:

“Social progress is the capacity of a society to meet the basic human needs of its citizens, establish the building blocks that allow citizens and communities to enhance and sustain the quality of their lives, and create the conditions for all individuals to reach their full potential.”

This overall definition can be disaggregated into three dimensions of social progress: Basic Human Needs, Foundations of Wellbeing, and Opportunity. Each dimension is made up of four equally weighted individual components. Incidentally, the United Nations has also identified three pillars on which the post- 2015 Sustainable Development Goals (SDGs) must rest: economic, social and environmental.

The three dimensions of the Social Progress Index roughly mirror the progression that most individuals, families, communities, and societies go through in achieving higher and higher levels of social progress. The model draws heavily on previous literature, notably the capability approach pioneered by Amartya Sen, which emphasizes the multidimensional nature of wellbeing and the importance of freedom of choice.

The Three Dimensions of SPI

social progress indicators chart

The first dimension captures the degree to which the most essential conditions for survival are met.  These essential needs must be satisfied to create the minimum standards for further progress.

The second dimension of social progress captures the degree to which a country has created the set of policies and institutions to support improving wellbeing and community in a sustainable natural environment.

The third dimension captures the degree to which all citizens are able to reach their full potential. This rests on things like personal rights, freedoms and inclusion.

The Social Progress Index 2014

The 2014 Social Progress Index reveals striking differences across countries in their social performance, highlights the very different strengths and weaknesses of individual countries, and provides concrete guidance for national policy agendas. It rates 132 countries on more than 50 indicators, including health, sanitation, shelter, personal safety, access to information, sustainability, tolerance and inclusion and access to education.

It gave New Zealand the top ranking followed by Switzerland, Iceland and Netherlands. Chad ranks the lowest in the index. It placed India at 102nd position and Bangladesh at 99th. The best performer in this region is Sri Lanka (at 86th) and the worst is Pakistan (at 124th).

Among the five BRICS countries India is lowest place after China at the 90th position. Brazil (at 46th position) shows best social progress. Both India and China currently underperform on social progress relative to their GDP per capita status; they need to better turn their economic success into improving social conditions.

Recently, the SPI was adopted as an official measure of national performance by the Government of Paraguay which will guide the public and private investment choices. In Brazil too, the Index has been adopted by social entrepreneurs and businesses as a tool to understand community needs and guide social progress.

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Understanding Poverty, Beyond Lack of Income

Poverty has many faces other than income.

Poverty has many faces other than income.

Changing World, Changing Needs

In the 21st century, rapid changes are taking place all over the world – even in the economically underdeveloped countries under the wave of globalization and revolution in IT and communication technologies. The poverty standard of income devised in the historical past is no longer relevant under new conditions. People today are no longer subject to the same laws, customs and social order of the bygone era. Globalization and easy of connectivity is exposing the ultrahigh inequalities between the rich West and the poor East as well as the unjust world-order. People no longer want mere economic growth; they also aspire for equal opportunity, social justice and political freedom to influence the direction of development. Therefore, a comprehensive viewpoint is needed in order to understand poverty properly. It must be seen as a human situation deprived of many things other than income.

Low Income – The Traditional Concept of Poverty

Poverty is traditionally associated with lack of income – you don’t expect a poor to have money. This is the traditional way to look at poverty still popular with most people. People are considered poor when they don’t have enough income to obtain basic necessities of life – food, shelter, drinking water, education, medicines and so on. When poverty is seen from this subsistence perspective it is absolute poverty – a situation where the poor are struggling for survival.

According to the United Nations’ 1995 World Summit in Copenhagen, “absolute poverty is a condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services.

This gave rise to the concept of subsistence or absolute poverty line – people with income below it are poor; in fact, they are extremely poor. India’s official poverty line is actually a subsistence poverty line.

The exploitative colonial powers had used such a poverty line definition to set bare minimum wages for their subjects so that they could get just sufficient food to replenish their energies in order to keep working. This is how the colonial countries like the UK laid the foundation for affluence in their own countries while reducing their subjects to bare survival and plundering their natural resources.

Currently, the Word Bank uses $1.25-a-day benchmark of “extreme poverty” and estimates that globally around 1 billion people are extremely poor.

Basic Needs Approach

Evolved in the 1970s, the basic needs approach revolves around listing most basic needs of people like food, shelter, clothing and other essentials of a household. Then it fixes the quantum of their minimum consumption requirements. It also considered services provided by the state or community such as safe water, sanitation, public transport, medical and education facilities etc. It, thus, established a basic framework for community development.

Of course, these minimum needs are defined by the ‘experts’ and the poor remain as mere passive recipients. However, it is attractive to policymakers due to ease of its implementation. It helped the international agencies make developmental plans.

While it is easier to restrict the poverty perspective to material and physical needs which can be planned easily by the government, it helps to remind that human lives can’t be simplified to the level of policies that the government can plan.

Society can also Dictate “Necessities”

Clearly, people are not robotic creatures needing only replenishment of physical energy needed to work. They also have social demands which must be met in order to live a satisfactory life.

“By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even the lowest order, to be without. . . . Custom . . . has rendered leather shoes a necessary of life in England. The poorest creditable person of either sex would be ashamed to appear in public without them.” – Adam Smith in The Wealth of Nations

After all, people are social beings and are affected by the social opinions and processes. Therefore, poverty can’t be seen in isolation and must necessarily be seen in the overall social context. It must be seen in relation with the society. This relative poverty moves in response to changing social environment and what earlier used to be luxuries can become necessities now. Living in society demands that one has to satisfy social obligations and expectations; not having the resources to do so mean one is living in deprivations – in poverty.

Relative Poverty

The philosophical foundation of relative poverty is provided by Karl Marx, “Our needs and enjoyments spring from society; we measure them, therefore by society and not by the objects of their satisfaction. Because they are of a social nature, they are of a relative nature.

As Peter Townsend, a leading authority on UK poverty, puts it: People are poor if they live with resources that are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities.

People are “relatively poor” when their average resources or average living standard falls below the society average. Relative poverty is also seen as inequality. It will be always present in any society, no matter how much it progresses. Certain sections of the society will always perform less than others, so relative poverty can never be eliminated. However, if the wealth distribution becomes more even it falls.

Moving to relative poverty is in fact a shift from the “needs” to “wants” – people are poor if they “want” to live like others but can’t. Now the measure is “the deficit in the living standard”, compared with the society average. The philosophy of relative poverty is common in the developed nations, since they have progressed beyond the point where people are no more struggling for basic survival needs.

Definition of Relative Poverty in Europe

Relative poverty is when some people’s way of life and income is so much worse than the general standard of living in the country or region in which they live that they struggle to live a normal life and to participate in ordinary economic, social and cultural activities.” – European Anti Poverty Network (EAPN)

The EU’s Relative Poverty Standard

“People falling below 60% of median income are considered to be at-risk-of poverty.”

Capability Poverty

The capability approach of Amartya Sen puts people at the center and discusses development and poverty from people’s perspective. It is perhaps the most comprehensive approach and expresses poverty in terms of deprivation of people’s capabilities – referring to what they can or cannot do, can or cannot be. It sees income, resources and public facilities as mere means to achieve or expand human capabilities. In laymen’s language, Sen’s development approach aims to make people more capable in terms of their skills, physical and mental abilities – it is a kind of holistic approach.

Expanding capabilities increase well-being and shrinking capabilities decrease well-being. The set of capabilities needed to escape poverty is rather limited. The capability poverty is typically lack of capabilities related to satisfying basic needs of food, nutrition, health, shelter, etc. In this approach, expansion of people’s capabilities is the prime goal: income, resources and facilities have no meaning unless they enhance human capabilities.

Consider this simple example: Having a cell phone can enable the capability of connectivity, but only if the person uses it properly. Mere ownership of the cell phone doesn’t tell what the person can do with it; a blind and deaf person may not be able to use it. Therefore, the important point is not the possession of a commodity or its features, but the capability to use it.

Personal freedom to lead the life one values is the central theme of Sen’s theory of development. Cultural and psychological aspects also affect people’s capabilities, so they are also important considerations and account for individual differences.

As mentioned above, when Adam Smith argued that leather shoes became social necessity in order to avoid shame in the public, he was referring the capability of avoiding public shame. As societies get richer and richer, the list of commodities required to “avoid shame” also increase. Being poor in such societies mean lacking the capability to “avoid shame” because the poor lacks the capability to “afford” all those commodities. There is certainly a strong psychological component here because the “needs” are dictated by social customs (and people’s degree of obeisance).

The Human Development (HD) Approach

It was developed in the 1980s when it was noted that handing over economic growth to market forces alone (free market economy) and curtailing the role of government in the economic activities led to increased poverty. It combines the elements of the basic needs and capability approaches and defines the human development as a process of enlarging people’s choices. The most critical choices relate to leading a long and healthy life, to be educated and to enjoy a decent standard of living. Other choices include political freedom, guaranteed human rights and self-respect.

The HD idea revolves around the basic theme: “People are the real wealth of a nation.”  And the basic objective of development is to create an enabling environment for people to live long, healthy and creative life. It was stated in the first Human Development Report (HDR) published in 1990. This is a paradigm shift in developmental thinking: it puts the focus on people and makes them the target of development; incomes and resources are seen as means, not ends goals.

The HD approach offers several advantages: It goes beyond the basic needs of material, services and physical conditions to give importance to other aspects of life like freedom, environment and society. It simplifies the concept of capability approach to include “choices” and “freedom” and sees development as widening human choices. It is open ended, and considers everything that might affect human life, so that different societies can focus on what is important for them. Poverty is just the opposite – people with badly limited choices.

The HD approach has been attracting people who are seeking human-focused and humane alternatives to the usual “economic growth” as development. It also offers an alternate measure of development in the form of the human development index (HDI) which combines life expectancy, literacy and adjusted income. The HDI is an important milestone in efforts to measure human well-being in terms other than per capita GDP or income.

Since the first HDR in 1990, every year a different human development theme is picked up for the report and the global scenario is presented. These reports have greatly impacted the national policies and provide fresh perspective to look at poverty. It has brought into focus the importance of issues like lack of women empowerment and illiteracy, income inequalities, non-inclusive growth, social exclusion etc as major impediment to human development.

It paved the way to look at poverty from a multidimensional perspective. Thus, in 2010 a multidimensional poverty index (MPI) that analyses poverty through a set of 10 indicators was launched. It has been adopted as an effective policy-making tool by many countries around the world.

The Way Forward

Do we really need experts and poverty research in order to eradicate poverty? Why not ask the poor themselves. It would give perhaps the most useful perspective. They see themselves mostly as deprived, marginalized, excluded and vulnerable. They are people without much voice and choice. To be meaningful for them, the development process must empower them so that they come out of these disadvantages.

As professor Muhammad Yunus, the Bangladeshi Nobel laureate of 2006 and better known for the micro-credit movement, puts it “The poor themselves can create a poverty-free world… all we have to do is to free them from the chains that we have put around them.”

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Why Has Capitalism Failed the Poor?

Poverty is much more than lack of income.

Poverty is much more than lack of income.

Capitalism has failed the poor because it considers interests of only people with money, to the exclusion of everyone else.

“Human entrepreneurship” is the magic wand that creates prosperity. We lead a rather safe and comfortable life today because of scientific, technological and medical advances of past few centuries. Today we have much better social infrastructure and human development than some decades ago – and certainly far better than 100 years ago. It all testifies to the superb potentials of human capabilities and ingenuity. This is the reason why the UNDP declares that “People are the true wealth of a nation.”

[World would have been a far better place if nations defined “development” by keeping people at the focus and developed economies around them. Today, economy and technologies occupy the spot light and people are just the tools to achieve it! As a result, people are no longer the true wealth of nations; material possessions and technological advancements are.]

People and their capabilities are nurtured by socio-economic conditions which vary from society to society. As a result, many parts of the world are seeing unprecedented prosperity and wealth creation while others have seriously lagged behind. There are socio-political and cultural reasons why many parts of the world failed to taste the fruits of development. But that is beside the point.

Leaving aside the natural differences among societies and people, the most worrisome problem is the extremely high levels of inequality within most countries. This inequality is so striking that increasing number of people wonder if market driven economy has failed the poor – many blame the capitalistic economic model for persistence of poverty. Over 2.5 billion people (of the total 7.2 billion global population) live within less than $2-a-day income and about 1 billion survive below $1.25-a-day. Poverty related issues are still behind most major problems around the world.

The US offers a great example of inequality created by an “almost free” market economy. According to a recent report, about 49 percent Americans are receiving benefits from at least one government program and nearly 150 million citizens (of the 315 million total population) are considered to be either “poor” or “low income.” There are many other grim facts on poverty in the US – which by all means is a symbol of free-market capitalism for the whole world particularly since 1980s. The government welfare programs serve to redistribute income from the top to the bottom via the tax system. This is the only mechanism that serves to reduce inequality to some extent.

Trend of Growing Accumulation of Wealth in Few Hands

Since fall of the communist bloc in 1990 wealth has been increasingly concentrating with fewer people and global elites are becoming increasingly richer. Yet the vast majority of people around the world remain excluded from this prosperity. For instance, while stocks and corporate profits soar to new heights, wages as a percentage of gross domestic product (GDP) have stagnated.

Oxfam International’s briefing paper of Jan 20, 2014 (title: Working for the Few) highlighted the fact that the wealth of the 1% richest people in the world amounts to $110 trillion – it’s 65 times the total wealth of the bottom half. The wealth of the richest 1% increased from 44% in 2009 to 48% in 2014 while the worst-off 80% at the bottom currently own just 5.5%. If the trend continues the richest 1% would own more than 50% of the world’s wealth by 2016. In short, currently the total global wealth is almost evenly divided: around one half is with the richest 1% and the remaining half is shared by the rest 99%. Amazing, isn’t it?

Note further: 70% people live in countries where economic inequality has increased in the last 30 years; the richest 1% increased their share of income in 24 out of 26 countries between 1980 and 2012.

The financial crises of 2008-09 failed to bring any fundamental change in the working of the financial world that would change the trend. In the US 95 percent of post-crisis recovery between 2009 and 2012 was captured by the wealthiest 1%, while the bottom 90% became poorer.

To give an indication of the scale of wealth concentration: In 2013 only 85 richest people had wealth equal to the combined wealth of the poorest 50%! Currently, only 80 richest people have as much wealth as the combined total of 50% of the poorest humanity. Between 2009 and 2014, these richest 80 doubled their wealth in cash terms. The combined wealth of Europe’s 10 richest people (€217bn) exceeds the total cost of stimulus (€200bn) measures across the European Union (EU) between 2008 and 2010. Furthermore, post-recovery austerity policies made life of poor harder, while making the rich even richer. Austerity has also adversely impacted life of the middle classes. The rich elite use their money for lobbying policymakers and funding election campaigns to further their interests. This further excludes the poor from the policy making circle.

Such massive concentration of economic resources in the hands of fewer people presents a significant threat to inclusive political and economic systems. It destabilizes societies; people no more move forward together, they are increasingly separated by economic and political power, leading to increased social tensions and the risk of societal breakdown.

Moreover, it also dampens economic growth. It is, however, not inevitable and can and must be curtailed.

Yet, experience shows that capitalism is the only model that works, despite its imperfections – most notably, its exploitative character and tendency to favour the rich.

Too Narrow Focus of Capitalism – Profit Maximization For The Few

The current brand of popular “shareholder capitalism” revolves around a single theme: maximizing profits for the shareholders. It is designed to serve the interests of a very small fraction of people, investors – people with the capital. As a result, interests of all other stakeholders – employees, society and environment – become secondary and subordinate. In fact, there is a built-in conflict of interest; employees must be paid the least and all other expenses minimized so that owners’ share is maximized.

People believe that this concentrates wealth and prosperity in too few hands and creates an elite class that turns politically powerful. Then they use power to further their business interests. This sets in a vicious cycle of money and power feeding each other. Needless to say, this also undermines free and fair play of democratic norms which in the extreme case destabilize the society.

Governments run welfare programs for the poor and needy from the collected taxes which partly redistribute wealth from the rich to the poor. However, what is not passed on to the poor is the influence and power enjoyed by the elite class. As a result, people at the lower end survive but can’t change their fortune. This is also precisely what is wrong with the charity – it keeps the poor where they are, in poverty!

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Global Economics of Rich Getting Richer and Increasing Inequalities

World-Economic-ForumDangers of Rising Economic Inequality

The World Economic Forum has identified rising inequality as a major risk to progress. This was highlighted in its release of “Outlook on the Global Agenda 2014” in November 2013. It is worrisome because when wealth captures government policymaking the rules are twisted to favour the rich – it poses a serious threat to democracy and well-being of the poor. It results in the erosion of democratic governance, disruption of social cohesion, and opportunities no more remain equal for all. The US Supreme Court Judge Louis Brandeis aptly sums up, ‘We may have democracy, or we may have wealth concentrated in the hands of the few, but we cannot have both.’

Trend of Growing Accumulation of Wealth in Few Hands

Since fall of the communist bloc in 1990 wealth has been increasingly concentrating with fewer people and global elites are increasingly becoming richer. Yet the vast majority of people around the world remain excluded from this prosperity. For instance, while stocks and corporate profits soar to new heights, wages as a percentage of gross domestic product (GDP) have stagnated.

Oxfam International’s briefing paper of Jan 20, 2014 (titled Working for the Few) highlighted the fact that the wealth of the 1% richest people in the world amounts to $110 trillion – it’s 65 times the total wealth of the bottom half. The wealth of the richest 1% increased from 44% in 2009 to 48% in 2014 while the worst-off 80% at the bottom currently own just 5.5%. If the trend continues the richest 1% would own more than 50% of the world’s wealth by 2016. In short, currently the total global wealth is almost evenly divided: around one half is with the richest 1% and the remaining half is shared by the rest 99%. Note further: 70% people live in countries where economic inequality has increased in the last 30 years; the richest 1% increased their share of income in 24 out of 26 countries between 1980 and 2012. Amazing, isn’t it?

The financial crises of 2008-09 failed to bring any fundamental change in the working of the financial world that would change the trend. In the US 95 percent of post-crisis recovery between 2009 and 2012 was captured by the wealthiest 1%, while the bottom 90% became poorer.

To give an indication of the scale of wealth concentration: In 2013 only 85 richest people had wealth equal to the combined wealth of the poorest 50%! Currently, only 80 richest people have as much wealth as the combined total of 50% of the poorest humanity. Between 2009 and 2014, these richest 80 doubled their wealth in cash terms. The combined wealth of Europe’s 10 richest people (€217bn) exceeds the total cost of stimulus (€200bn) measures across the European Union (EU) between 2008 and 2010. Furthermore, post-recovery austerity policies made life of poor harder, while making the rich even richer. Austerity has also adversely impacted life of the middle classes. The rich elite use their money for lobbying policymakers and funding election campaigns to further their interests. This further excludes the poor from the policy making circle.

This massive concentration of economic resources in the hands of fewer people presents a significant threat to inclusive political and economic systems. It destabilizes societies; people no more move forward together, they are increasingly separated by economic and political power, leading to increased social tensions and the risk of societal breakdown.

Moreover, it also dampens economic growth. It is, however, not inevitable and can and must be curtailed.

Rising Inequality in the UK

Reflecting the above statistics, in May 2014 reports came out that the richest 1% of Britons own the same amount of wealth as 54% of the population. The Sunday Times in the same month reported that the 1,000 richest people in the country had doubled their wealth in five years.

Now let’s focus on the poor – those who live below the breadline. Oxfam and Church Action on Poverty calculated that food poverty in 2013/14 increased by 54% compared to 2012/13. More than half a million children in the UK currently live in families unable to provide a minimally acceptable diet.

[Numbers in above 2 paragraphs come from Below the Breadline: The Relentless Rise of Food Poverty in Britain, June 2014]

Inequality in India

In the past decade, the number of billionaires in India increased from less than 6 to 61, concentrating roughly $250bn among a few dozen people in a country of 1.26 billion. Reflecting the concentration of wealth in the elite minority, their share increased from 1.8 percent in 2003 to 26 percent in 2008. Nothing much has changed since then.

About half of India’s billionaires acquired their wealth in sectors where profits depend upon access to scarce resources, possible exclusively through government permissions; for example, real estate, construction, mining, and telecommunications. In simple language, it points to their influence in policy- and decision-making circle through lobbying and corruption – it is the typical business-politician-bureaucrat nexus. The massive corruption scandals during the UPA regime prove the point.

It is also common knowledge that property development in India is the most opaque business, where enormous sums of illegal money exchange hands. Sonia’s son-in-law Robert Vadra (“Damad Ji” in Modi’s language!) tried his elite status for land deals and made fortune in a very short time, although now his activities are being investigated.

Now the flip side. India’s vast population of poor did not see fruits of economic gains in their life, while the corporate media joined the chorus of elite class and highlighted the increasing number of millionaires and billionaires as sign of development. The government spending for the poor and vulnerable groups in society remains remarkably low – India’s public spending on healthcare is just around 1% of GDP. A recently released report of the Asian Development Bank which ranked countries for their expenditure on poor and economically vulnerable groups ranked India 23 out of 35 countries in the region. Even among the 19 low- to middle-income countries, India was placed twelfth.

Corruption and loopholes in the laws enable the powerful elite class to evade taxes. It reduces available public funds; and shows up as reduced size of welfare programs for the poor. In India, even this fund is misappropriated by the implementing government officials and political middlemen. As a result, only a tiny fraction actually reaches the target beneficiaries. In this age of globalization, the ultra rich class also evades taxes through shell companies established in foreign countries.

Indirect taxation account for over 60% tax revenues; only the rest comes from direct taxation like income, profits, and capital gains. Clearly there is plenty of scope to plug loopholes for tax evasion.

How Pakistani Elites Enjoy Power and Make Rules to Benefit Them

Pakistan’s parliament comprises nation’s wealthiest elites, who make rules to serve their narrow interests, while paying lip service to interests of common man. It has a very small tax base: Of the 10 million people who qualify, only 2.5 million are actually registered to pay tax. With this tiny base, Pakistan’s tax revenue is among the lowest in the world; its tax to GDP ratio is lower than even Sierra Leone.

Taxpaying parliamentarians and political elites are a conspicuous minority. A 2010 review found its PM and ministers among the non-taxpayers in the year they contested election. Obviously, the lawmakers create rules that leave loopholes to make their tax exemptions legal. The rich and powerful landowners who dominate Parliament also avoid tax by exempting agriculture. This is clearly a powerful driver of inequality. In the 1990s, law made it difficult for the authorities to ask questions on money transferred from abroad, facilitating a parallel black money economy. Those who pay taxes are usually from the honest middle class.

Pakistan’s financial system is described by a retired tax administrator, Riyaz Hussain Naqvi: “This is a system of the elite, by the elite and for the elite… It is a skewed system in which the poor man subsidizes the rich man.”

He succinctly summed up how unjust rules made by powerful vested interests create and perpetuate poverty. It applies to all poor countries of the world.

Oxfam’s Suggestions to Reduce Inequality

Oxfam also proposed a 7 point plan to the governments:

  1. Clamp down on tax dodging by corporations and rich individuals.
  2. Invest in universal, free public services such as health and education.
  3. Share the tax burden fairly, shifting taxation from labour and consumption towards capital and wealth.
  4. Introduce minimum wages and move towards a living wage for all workers.
  5. Introduce equal pay legislation and promote economic policies to give women a fair deal.
  6. Ensure adequate safety-nets for the poorest, including a minimum-income guarantee.
  7. Agree a global goal to tackle inequality.

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Understanding Poverty, Beyond Lack of Income

Poverty is lack of human development.

Poverty is lack of human development.

Changing World, Changing Needs

In the 21st century, rapid changes are taking place all over the world – even in the economically underdeveloped countries under the wave of globalization and revolution in IT and communication technologies. The poverty standard of income devised in the historical past is no longer relevant under new conditions. People today are no longer subject to the same laws, customs and social order of the bygone era. Globalization and easy of connectivity is exposing the ultrahigh inequalities between the rich West and the poor East as well as the unjust world-order. People no longer want mere economic growth but also aspire for social justice and political freedom to influence the direction of development. Therefore, a comprehensive viewpoint is needed in order to understand poverty properly.

Low Income – The Traditional Concept of Poverty

Poverty is traditionally associated with lack of income – you don’t expect a poor to have money. This is the traditional way to look at poverty. People are considered poor when they don’t have enough income to obtain basic necessities of life – food, shelter, drinking water, education, medicines and so on. When poverty is seen from this subsistence perspective it is absolute poverty – the poor are just struggling to survive.

According to the United Nations’ 1995 World Summit in Copenhagen, “absolute poverty is a condition characterized by severe deprivation of basic human needs, including food, safe drinking water, sanitation facilities, health, shelter, education and information. It depends not only on income but also on access to services.

This gave rise to the concept of subsistence or absolute poverty line – people with income below it are poor; in fact, they are extremely poor. India’s official poverty line is actually a subsistence poverty line.

The exploitative colonial powers have used such poverty line definitions to set bare minimum wages for their subjects so that they could get just sufficient food and replenish their energies to keep working. This is how the colonial countries like the UK laid the foundation for affluence in their own countries while leaving their subjects to bare survival and plundering their natural resources.

Today, the Word Bank uses $1.25-a-day benchmark of extreme poverty and estimated that globally around 1 billion people are extremely poor.

Basic Needs Approach

The basic needs approach evolved in the 1970s. It revolves around listing most basic needs of people like food, shelter, clothing and other essentials of a household. Then it fixes the quantum of their minimum consumption requirements. It also considered services provided by the state or community such as safe water, sanitation, public transport, medical and education facilities etc. It, thus, established a basic framework for community development.

Of course, these are defined by the ‘experts’ and the poor remain as mere passive recipients. However, it is attractive to policymakers due to ease of its implementation. It helped the international agencies make developmental plans.

While it is easier to restrict the poverty perspective to material and physical needs which can be planned easily by the government, it helps to remind that human lives can’t be simplified to the level of policies that the government can plan.

Society can also Dictate “Necessities”

Clearly, people are not robotic creatures needing only replenishment of physical energy needed to work. They also have social demands which must be met in order to live a satisfactory life.

“By necessaries I understand not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even the lowest order, to be without. . . . Custom . . . has rendered leather shoes a necessary of life in England. The poorest creditable person of either sex would be ashamed to appear in public without them.” – Adam Smith in The Wealth of Nations

After all, people are social beings and are affected by the social opinions and processes. Therefore, poverty can’t be seen in isolation and must necessarily be seen in the overall social context. It must be seen in relation with the society. This relative poverty moves in response to changing social environment and what used to be luxuries can become necessities now. Living in society demands that one has to satisfy social obligations and expectations; not having the resources to do so mean one is living in poverty.

Relative Poverty

The philosophical foundation of relative poverty is provided by Karl Marx, “Our needs and enjoyments spring from society; we measure them, therefore by society and not by the objects of their satisfaction. Because they are of a social nature, they are of a relative nature.

As Peter Townsend, a leading authority on UK poverty, puts it: People are poor if they live with resources that are so seriously below those commanded by the average individual or family that they are, in effect, excluded from ordinary living patterns, customs and activities.

People are “relatively poor” when their average resources or average living standard falls below the society average. Relative poverty is also seen as inequality. It will be always present in any society, no matter how much it progresses. Certain sections of the society will always perform less than others, so relative poverty can never be eliminated. However, if the wealth distribution becomes more even the it falls.

Moving to relative poverty is in fact a shift from the “needs” to “wants” – people are poor if they “want” to live like others but can’t. Now the measure is “the deficit in the living standard”, compared with the society average. The philosophy of relative poverty is common in the developed nations, since they have progressed beyond the point where people are no more struggling for basic survival needs.

Definition of Relative Poverty in Europe

Relative poverty is when some people’s way of life and income is so much worse than the general standard of living in the country or region in which they live that they struggle to live a normal life and to participate in ordinary economic, social and cultural activities.” – European Anti Poverty Network (EAPN)

The EU’s Relative Poverty Standard

“People falling below 60% of median income are considered to be at-risk-of poverty.”

Capability Poverty

development focus on people not economyThe capability approach of Amartya Sen expresses poverty in terms of deprivation of people’s capabilities – referring to what they can or cannot do, can or cannot be. It sees income, resources and public facilities as mere means to achieve or expand human capabilities. In laymen’s language, Sen’s development approach aims to make people more capable in terms of their skills, physical and mental abilities – it is kind of holistic approach.

Expanding capabilities increase well-being and shrinking capabilities decrease well-being. The set of capabilities needed to escape poverty is rather limited. The capability poverty is typically lack of capabilities related to satisfying basic needs of food, nutrition, health, shelter, etc. In the capability approach, expansion of people’s capabilities is the prime goal – income, resources and facilities have no meaning unless they enhance human capabilities.

Consider this simple example: Having a cell phone can enable the capability of connectivity, but only if the person uses it properly. Mere ownership of the cell phone doesn’t tell what the person can do with it; a blind and deaf person may not be able to use it. Therefore, the important point is not the possession of a commodity or its features, but the capability to use it.

As mentioned above, when Adam Smith argued that leather shoes became social necessity in order to avoid shame in the public, he was referring the capability of avoiding public shame. As societies get richer and richer, the commodities required to “avoid shame” also increase. Being poor in such societies mean lacking the capability to “avoid shame” because the poor lacks the capability to “afford” all those commodities. There is certainly a strong psychological component here because the “needs” are dictated by social customs (and people’s degree of obeisance).

This is not the case in the context of basic needs; for example, the poor lack the capability to be well nourished, or to move about freely, or to live in a good shelter, or to be free from diseases. But there are no social interactions urging people to take care of such needs.

The Human Development (HD) Approach

It was developed in the 1980s when it was noted that handing over economic growth to market forces alone (free market economy) and curtailing the role of government in the economic activities led to increased poverty. It combines the elements of the basic needs and capability approaches and defines the human development as a process of enlarging people’s choices. The most critical choices relate to leading a long and healthy life, to be educated and to enjoy a decent standard of living. Other choices include political freedom, guaranteed human rights and self-respect.

The HD idea revolves around the basic theme: “People are the real wealth of a nation.”  And the basic objective of development is to create an enabling environment for people to live long, healthy and creative life. It was stated in the first Human Development Report (HDR) published in 1990. A key aspect of HD is that it puts the focus on people and sees them as ends, not means; incomes and resources are taken as means, not ends.

In practical sense, the HD considers the basic material needs of goods and services but also give importance to other issues such as freedom, environment and society. It is open ended, and considers everything that may affect human life, so that different societies can focus on what is important for them. It sees development as widening human choices. Poverty is just the opposite – people with limited few choices.

The HD approach offers several advantages: It goes beyond the basic needs of material and physical conditions to consider institutional and political elements and simplifies the concept of capability approach to include “choices” and “freedom”. It has been attracting people who are seeking human-focused and humane alternatives to the usual “economic growth” as development. It went a step further, by offering an alternate measure of development in the form of the human development index (HDI) which combines life expectancy, literacy and adjusted income. The HDI is an important milestone in efforts to measure human well-being in terms other than per capita GDP or income.

Since the first HDR in 1990, every year a different human development theme is picked up for the report and the global scenario is presented. These reports have greatly impacted the national policies and provide fresh perspective to look at poverty. It has brought into focus the importance of issues like women empowerment and literacy, income inequalities, inclusive growth, social exclusion etc as major impediment to human development.

It paved the way to look at poverty from a multidimensional perspective. Thus, in 2010 a multidimensional poverty index (MPI) that analyses poverty through a set of 10 indicators was launched. It has been adopted as an effective policy-making tool by many countries around the world.

The Way Forward

Do we really need experts and poverty research in order to eradicate poverty? Why not ask the poor themselves. It would give perhaps the most useful perspective. They see themselves mostly as deprived, marginalized, excluded and vulnerable. They are people without much voice and choice. To be meaningful for them, the development process must help them come out of deprivation, exclusion and vulnerability by enabling and empowering them. Thus, it makes sense to understand poverty form as many perspectives as possible.

poor agents of changeAs Muhammad Yunus, the Bangladeshi Nobel laureate of 2006 and better known for the micro-credit movement, puts it “The poor themselves can create a poverty-free world… all we have to do is to free them from the chains that we have put around them.”

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