Friday, May 09, 2008

Reducing Poverty or Creating Wealth?

Yesterday's Daily Mirror FT had an article by Anila Dias tittled Reducing Poverty - What lessons can we learn?. Overall the article does a decent job of summarizing the recent report on poverty indicators (pdf link). It also correctly identifies the fact that whatever reduction there has been in poverty has little to do with the Government's handout scheme (the Samurdhi programme) and even points out a startling hypocrisy in the program when it says,
[..]the Census of Public and Semi Government Sector Employment 2006 reports that the Ministry of Samurdhi and Poverty Alleviation employed around 24,000 persons. This translated to one Samurdhi official for around 117 poor persons whose monthly benefits would have totalled around Rs.12,000. It is likely that the administrative costs of maintaining such a large contingent of staff would have exceeded total welfare payments to beneficiaries! [link]
Hypocrisy isn't a new word for governance, particularly in Sri Lanka. I (somewhat) agree with the article in general, but I think the problem of "poverty reduction" need to be thought differently. Poverty after all, is the natural state of the world. We don't create poverty, poverty just is, poverty is what you get if you don't do anything. Wealth is the unusual thing, so the question to ask is not "How do we reduce poverty?" but "How do we create wealth?"

The moment you frame the question this way, you will stop thinking about subsidies, charity, handouts and free milk and start thinking about enterprise, microfinance, education, infrastructure and markets. That's the kind of thing that will get people out of poverty even faster.

If ever there is one mechanism which stops wealth creation and sustained poverty, that's bad economic policy, and we have an abundance of that in Sri Lanka. History stands testament to the fact - and I know of no exception - that the simplest mechanism for creating wealth is economic freedom - that's free markets, rule of law and property rights. These are the institutions we need to be promoting.

In fact, Sri Lanka's own situation with poverty rates - with the Western Province almost eliminated abject poverty, is a test-case for this hypothesis. As Shjanta Devrajan, the World Bank's South Asian chief notes,
The reason the Western Province grew so fast is that it benefited the most from economic reforms. Trade liberalization and industrial de-regulation led to a boom in manufactured exports such as garments and electronics. These factories were concentrated in the Western Province, which halved its poverty rate.

Meanwhile, the rest of the country is heavily dependent on agriculture, which has seen very little growth. The reason is that there has been very little reform in agriculture. Owing to land regulations, farmers in Sri Lanka are forced to grow paddy, even though they can earn much more from growing fruits and vegetables. Fertilizer and other subsidies are also geared towards paddy farmers. Attempts to reform land regulations, or transform subsidies to across-the-board support for any crop, have been unsuccessful.

In short, Sri Lanka is a textbook case of how globalization works. Where there is liberalization, the economy booms; where there is no reform, the economy stagnates.

Do read the whole thing and resulting comments from his blog.

That kind of sums it up.

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Pink Mist said...

That makes so much sense, looking at it from the wealth angle! With cultivation in Sri Lanka, one major problem is the land disputes that prevent fertile ground from being actually used. We could easily be producing enough food to import at a rate.

Salty said...

To say poverty is the natural way of things is like saying that sickness is natural and good-health is abnormal. Altering perpspectives of looking at the issue of poverty & wealth does not eliminate poverty. Historically bad economic policies also create unemployment and subsequently poverty (example India during the regulation raj).

If "incentives" for wealth creation can be argued and accepted (for example : tax cuts in SEZs, sales tax holiday etc.) then intervention through "subsidies" to reduce historic poverty should be acceptable too.

After all one requires medical intervention to eliminate sickness. What do you think?

Deane said...

Not Really Salty. Unless you want to argue that we are born sick and we remain sick unless we take medicine which is not true.

Bad economic policy can indeed (and so often does) prevent creation of wealth, leaving people in poverty. But it's not really creating poverty. that's sort of like saying a shadow of a big building is creating darkness at 12 noon, where as it's really blocking light. Poverty is simply absence of wealth.

and Tax is simply legalized robbery, so are subsidies except someone else is being robbed for someone else to benefit. Principally both should be wrong. The comparison with SEZ,tax holiday with subsidies is like saying that "hey, I'm not robbing you, so I'm doing you a favor" so let me rob you again and so I can do else a favor.

but forget principles, empirically, has subsidies really reduced poverty?

Also cutting Taxes aren't intervening in the market,it's intervening less.

Anirudh Bhati said...

This is beautiful!


[...]so the question to ask is not "How do we reduce poverty?" but "How do we create wealth?"

Simply sublime! :)

Deane said...

cheers :)