Understanding Dimensions of Poverty – The Missing Link

Arindam Banik

In the Indian context, most government interventions on poverty are really alleviation programmes rather than real poverty reduction ones. The recent programme of National Rural Employment Guarantee Act (NREGA) is no different and it is only a short time solution without taking the broad perspective at all.
Let’s talk of an individual’s poverty in this context. An individual is poor due to factors such as lack of skill, lack of assets, lack of credit and information, obsolete skill and old age, non-existence of market and other infrastructure. This may lead to distinguishing people with skill from people with non-skill in order to evaluate a specific transfer, or in tracking its impact over time, or in devising policies to reduce poverty. Skill-less people are candidates for chronic poverty because of their inability to face the challenges. Transient poverty on the other hand is caused by lack of market driven skills at individual level, and is also a product of wrong macroeconomic policy.
Thus it appears that there are different dimensions of poverty. Dimensions such as aging, single motherhood, women and minorities, lack of market-linked skill are ignored in the policy issues. In the process billions are spent without any result. Interestingly, this has created wealth for individuals to market poverty.
Poverty reduction – or any change in the poverty profile of an economy – requires movement of the poor individuals or poor households. Since the consumption levels of all members of a household are often considered as similar, households are usually taken as economic units for poverty analysis. A below poverty level (BPL) household in India is poor not only relative to other households but also because they have very low levels of household income, household consumption and household wealth. The definition of the poverty line may have varied between censuses (these are held every five years and the last BPL census was conducted in 2002 with the next one due in 2007) and also from state to state to reflect differences in costs of living, but there is usually no doubt that an Indian BPL household has low absolute levels of household income, consumption and wealth and are chronically poor. Such chronic poverty has many possible causes some of which may be reinforcing each other and an understanding of the causes is a must for designing programmes of sustainable poverty reduction.
In case of an economic intervention by the government or a change in the economic environment, the behaviour of an economic unit is affected by its own characteristics as well as by the vagaries of the environment. Consequently, the economic mobility of the households is affected by the rigidities inherent in the household and its members on one hand and the rigidities in the environment on the other. We refer to the former as conditional rigidities as they emanate from the current condition of the households. Many of these are demographic in nature – e.g. the age of the individual. The conditional rigidities change with simple passage of time – for example an individual may exhibit a higher resistance to change as (s)he becomes older. Conditional rigidities affect the inertia of the economic unit and so its economic mobility.
The rigidities in the socio-economic structure and in other elements of the economic environment have been referred to as structural rigidities. As opposed to conditional rigidities, these are external to the economic unit and show little change with simple passage of time. Just as higher conditional rigidities create greater inertia, higher structural rigidities create greater friction and so decrease economic mobility.
Unlike the alleviation programmes, success of poverty reduction programmes requires the active participation of the poor beneficiaries. Consequently, poverty reduction programmes also need to motivate the recipients of benefits to actively participate in economic activities at higher levels.
Technology and social capital are powerful ingredients in understanding economic development. Some theories stress the importance of social cohesion for societies to prosper economically and also for sustainable development. There are number of possible benefits of skill development and the level of poverty in developing countries. One can find incentives that are built into the institutional framework and accordingly play a decisive role in shaping the kinds of skills and knowledge that pay off.
In the East Asian context it is the egalitarian education policies, which have played a pivotal role in growth as well as in poverty reduction. It is further argued that the increased equality has led to enhanced political and social stability, thereby creating a better investment environment
The cognitive skills, in addition to increase in literacy rate may be considered as a precondition of economic development. It is to be mentioned here that the seeming failure of capital to flow to the capital-poor countries due to marginal return to capital. Non-availability of skilled labour and other complementary factors further added to the problem.
Interestingly, the relationship between quality of education and skills are well established. In some states, schooling has been enormously effective in transmitting knowledge and skills, while in others it has been essentially worthless and has created no skills. It is important that sustainable poverty reduction or eradication cannot be achieved simply by a redistribution or transfer of funds or productive assets. It requires the beneficiary to make use of the funds or the assets and engage in some economic activity. Indeed, if the beneficiary continues to remain in an economic inactive or passive state – a simple asset or funds transfer may result in only transient consumption after liquidation of the asset or funds.
What should be the macro policy in the above context? Hardly any influential mainstream economist questioned the rosy picture of economic growth and then its relationship with poverty. It is often the case that the central bank now in developing economies takes responsibility for the national outcome through active monetary policy targeted as only inflation and exchange rate. This is something to do with the politicians because this creates short run solutions for them. All this has meant higher growth and with only skilled driven price non-sensitive product. In reality, alternates are now being observed in India. For example, the recent Rupee appreciation and its relationship with hopeless export prospects of price sensitive products from India. If this continues this could create a huge number of transient poor persons. Probably, the biggest part of the explanation lies in the Reserve Bank of India’s own extraordinary policy.
It is also possible to achieve national outcome through active monetary and fiscal policies targeted on objectives such as growth of employment and income and stability of prices and exchange rates. Indeed, the expected level of national income may not be a distant dream by combining fiscal and monetary policies that adjust or compensate for the autonomous behaviour of households, firms and government.