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The poor half billion: What is holding back lagging

regions in South Asia?
Ejaz Ghani 28 October 2010

South Asia’s economy is one of the fastest growing in the world, yet it is also home to the largest concentration Ejaz Ghani
of people living in debilitating poverty. How do the two co-exist? This column says that South Asia’s division Lead Economist in Economic
into leading and lagging regions means that stupendous growth hides deep pockets of poverty. Policy and Debt, PREM Network,
World Bank

11 A A Don't Miss
The stubbornly high cost of
remittances
Cecchetti, Schoenholtz
South Asia presents a depressing paradox. It is among the fastest growing regions in the world. But
it is also home to the largest concentration of people living in poverty on earth. While South Asia is Putting the Greek debt
at a far more advanced stage of development than Sub-Saharan Africa, it has many more poor problem to rest
Eichengreen, Avgouleas,
people.
Poiares Maduro, Panizza,
Figure 1. Number of poor people has increased in South Asia Portes, Weder di Mauro,
Wyplosz, Zettelmeyer

Financial engineering will

not stabilise an unstable
euro area
De Grauwe, Ji

Sovereign GDP-Linked
Bonds: Rationale and
Design
Shiller, Ostry, Benford

Trade cold wars and the

value of agreements during
crises
Carballo, Handley, Limão

Sovereign GDP-linked
bonds: Rationale and design
Shiller, Ostry, Benford, Joy

Reconciliation and reform:

Risk-sharing and market
discipline in the Euro Area
Zettelmeyer

Rising house prices and

inequality
Miles, Taylor, Steger, Chadha

Source: World Development Indicators, World Bank 2009. Note: Number of people living on less
than US$1.25 a day at 2005 international prices. South Asia includes Afghanistan, Bangladesh, Events
Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka. East Asia Pacific includes China. Spring Meeting of Young
Economists 2018
Increasing number of poor people 30 May - 1 June 2018 / Palma
de Mallorca (Mallorca) - Spain /
EAYE (European Association of
Though economic growth has reduced the poverty rate in South Asia, its total number of poor Young Economists) - University
people has increased. The number of poor people living on less than $1.25 a day increased from of the Balearic Islands
549 million in 1981 to 595 million in 2005. In India, where almost three-quarters of these poor live, 10th ECB Workshop on
the number increased from 420 million in 1981 to 455 million in 2005 (Ravallion et al. 2009). Forecasting Techniques:
Economic Forecasting with
Large Datasets
Moreover, human development has not kept up with the pace of income growth. Children and 18 - 19 June 2018 / European
women appear to suffer more than others. More than 250 million children are undernourished and Central Bank, Frankfurt am
Main, Germany / European
more than 30 million children do not go to school in South Asia. More than one-third of adult women Central Bank
ICSD 2018
are anaemic. The share of female employment in total employment is among the lowest in the 12 - 13 September 2018 /
Rome, Italy / European Center
world. of Sustainable Development ,
CIT University
South Asia is a land of sharp contrasts and mind-boggling disparities (Devarajan 2006). It has more 7th MoFiR Workshop on
pronounced regional disparities than the rest of the world and is in fact divided into two Asias. A lot Banking
of attention has been given to “Asia Shining”. But there is another Asia that exists in parallel, “Asia 14 - 15 June 2018 / Ancona,
Italy / Money and Finance
Suffering”. The distinction between the two is so sharp that they seem to be anchored in two Research Group (MoFiR),
different centuries. And the gap is increasing. together with the Joint
Research Centre of the
European Commission and the
Spatial disparities Università Politecnica delle
Marche
The leading sub-sections of South Asia are the envy of the rest of the world. These shining lights ESCoE Conference on
are the gateways connecting South Asia with the developed economies. The city of Bangalore in Economic Measurement 2018
16 - 17 May 2018 / London /
India is an example of this, and it is riding the wave of globalisation in services. Growth has The Economic Statistics Centre
benefitted from technological externalities (self discovery, demonstration effects, learning by doing), of Excellence, the Office for
pecuniary externalities (thick labour markets that promote better matching), and agglomeration National Statistics and the
Bank of England
(Krugman 1999). The city of Bangalore has acted like a hub of schools and universities that
promote face-to-face learning and entrepreneurship (Glaeser 2010). The transformation that is
taking place in the leading areas of South Asia seems to have become a virtuous circle, where an CEPR Policy Research
initial advantage has spiralled into greater growth, leading to even more growth, and so on. Indeed, Discussion Papers Insights
rapid growth can eliminate poverty in the leading regions in a generation.
Homeownership of
immigrants in France:
But the story is wildly different for the lagging sub-sections of South Asia. “Asia Suffering” is doing selection effects related to
no better than many Sub-Saharan African countries. international migration flows
Gobillon, Solignac
The problems of South Asia – poverty, conflict, hunger, and gender disparities – are concentrated in Climate Change and Long-
these lagging areas (Ghani 2010). There are limits to growth in lagging regions, since economic Run Discount Rates:
Evidence from Real Estate
geography, institutions, and globalisation will continue to favour increased concentration of Giglio, Maggiori, Stroebel,
economic activity in the leading regions. Because the migration rates are low, poor people do not Weber
move from lagging to leading regions. The lagging regions seem to be trapped by the dual failure of The Permanent Effects of
the market and the state. Fiscal Consolidations
Summers, Fatás
What can be done? Demographics and the
Secular Stagnation
Hypothesis in Europe
While economic growth is critical for poverty reduction, reviving growth in lagging regions will take Favero, Galasso
time. Given that growth has its limits, growth should not be the sole solution. Policymakers should
QE and the Bank Lending
consider direct policy interventions to reduce poverty (Banerjee and Duflo 2007). Direct Channel in the United
interventions can have a double dividend – they will reduce human misery, which could spark Kingdom
Butt, Churm, McMahon,
growth. Morotz, Schanz

A high priority should be given to increasing the pro-poor fiscal transfers.

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Poor regions have a low base of economic activity to tax, and typically these regions have lower
revenues. This revenue constraint prevents governments from expanding safety nets, investing in @VoxEU
human and physical capital, and adequately delivering government services.
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Achieving equity through fiscal transfers can ensure a level playing field.
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This equity is particularly important if the government services are important inputs into future
growth potential, such as in developing a healthy and educated workforce.

Simply directing financial resources to lagging regions, however, may not be sufficient. It will
need to be complemented with an improvement in capacity, accountability, and participation at
the local level.

Reduced migration rates for the poor

Migration rates are low in South Asia for its stage of development. Frictions and imperfections in the
labour market seem to be hampering less skilled workers more than skilled workers. This is
reflected in lower migration rates for uneducated than educated migrants (Caglar 2010).

In India, the mobility rate increases with the education level. The mobility of university graduates is
much higher than the mobility of unskilled workers. Removing barriers to human mobility – such as
labour laws, state-specific social welfare programs, and housing market distortions – should be an
integral part of development. Human mobility allows poor people to move to geographic areas and
economic sectors where the demand and the returns are higher. By pulling up wages in lagging
regions, migration benefits non-migrants in these regions. Migration also empowers the traditionally
disadvantaged groups, in particular women.
Poor growth in the agricultural sector

Slow agricultural growth has constrained economic opportunities for the vast majority of poor people
in lagging regions. Policymakers should recast agriculture in the new environment of globalisation,
supply chains, and growing domestic demand. The food price crisis has served as a “wake up call”
for policymakers and has created an opportunity to revisit existing agricultural policies.

Regional development policies aimed at promoting equitable growth are not a solution for two
simple reasons.

First, empirical evidence shows that convergence of per capita income between lagging and
leading regions is neither a necessary nor a sufficient condition for achieving poverty and
social convergence.

Poverty and social convergence can co-exist with (widening or reducing) income divergence.

Second, regional policies that promote balanced growth could lower the overall growth rate
itself and, therefore, slow down the pace of poverty reduction.

Regional development policies lower growth when they target the creators of wealth and the
concentration of economic activity. South Asia has numerous examples of such failed regional
policies (Panagariya 2009).

The escape from human misery need not be a slow process. Not so long ago, Bihar, the poorest
state in India, was known for law-and-order problems, extortion, carjacking, kidnapping, and low
growth. However, with the restoration of law and order, improved governance, increased use of
fiscal transfers, and greater market integration and human mobility, Bihar has started to turn a
corner. So can others.

South Asia is at a critical stage of historical transformation. Time is of the essence. There is no
room for complacency. Growing disparities could stifle growth itself. If not handled well, they could
undermine the security of development.

References

Banerjee, A and E Duflo (2007), “The Economic Lives of the Poor”, Journal of Economic
Perspectives, 21(1):141-167.

Caglar, O and M Sewadeh (2010), “How important is migration?”, in E Ghani (ed.), The Poor Half
Billion in South Asia, Oxford University Press

Devarajan, Shanta, 2006, “Can South Asia Eliminate Poverty in a Generation?” World Bank,
Washington DC, World Bank.

Ghani, Ejaz (2010), The Poor Half Billion in South Asia – What is holding back lagging regions?,
Oxford University Press

Glaeser, Edward (2010), “Making Sense of Bangalore”, Legatum Institute, London

Krugman, Paul (1999), “The Role of Geography in Development”, International Regional Science
Review, 22(2):142-161.

Panagariya, Arvind (2009), India: The Emerging Giant, Oxford University Press.

Ravallion, Martin, S Chen, and P Sangraula (2009), “Dollar a Day Revisited”, Policy Research
Working Paper No 4620, World Bank, Washington DC.

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Topics: Development Poverty and income inequality

Tags: Inequality, India, South Asia, extreme poverty

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