Loungani: Your book suggests that we should be concerned about growth, poverty, and inequality in that order. Why?
Bhalla: Without growth, we will not get anywhere with the other two. We certainly cannot reduce poverty, in an absolute sense, without growth. And you might reduce inequality without growth, but simply by cutting the pie into thinner and thinner slices. That kind of equality in misery gets tiresome, as we learned from the experience of countries like North Korea and from the failure of the Soviet Union.
Loungani: But do we know how to get growth going in the developing world?
Bhalla: I think we do, but rather than get into that debate we should first pay attention to the facts and recognize that we have seen some phenomenal growth in the past few decades. Look at how Asia has been transformed. First, you had Japan’s miraculous catch-up with the living standards of the West. Then came the rapid growth among the Asian tigers, then among many of the ASEAN members, then China and India, and now Vietnam and Bangladesh.
Loungani: So there is hope that the Asian drama will not end in tragedy. But what about Africa?
Bhalla: Remember that in the 1960s when Gunnar Myrdal was writing Asian Drama, the average Asian was making half what an average African made, and the prospects for Asia were considered bleak. So bleak prospects for Africa today can be a completely misleading forecast of what can happen over the next couple of decades under the right conditions. And even in Africa, a few countries have grown despite the ravages of war and disease.
Loungani: What about Latin America?
Bhalla: Those countries have clearly been on a roller coaster. Growth in the 1960s and 1970s turned out not to be sustainable, and they had their “lost decade” of the 1980s when incomes declined. Over the past decade, some of these countries have managed to climb out of that hole, but it hasn’t been easy or without reversals. Still, Mexico and Chile are good examples of countries that have been subject to many a stumble and fall but that have done well in terms of average growth over the past decade. Argentina was doing well until recently, as was Brazil, until the uncertainty induced by the elections.
Loungani: Some might look at your facts about growth and dismiss them as just Asia getting lucky.
Bhalla: To say that is to dismiss casually what has happened to over 3 billion people, two-thirds of the population of the developing world. A more important point is there is nothing intrinsic in the Asian experience that would lead us to believe that growth cannot be replicated elsewhere in the developing world. In fact, as I mentioned, there are examples of growth in Africa and Latin America.
Loungani: Let’s move on to poverty. What are the facts here?
Bhalla: They follow directly from the facts on growth. No economist worth his salt would say that growth does not reduce poverty. The question is: how much poverty reduction is achieved through growth? My estimate, using commonly accepted thresholds for who’s considered poor, is that the number of poor people in the world was about 650 million in 2000. That’s still a huge number, but it represents a poverty rate of 13 percent, below the Millennium Development Goal of achieving a 15 percent rate by 2015. We’re already there if only we’d wake up and assess the facts. The reduction in the poverty rate in the past 15 years has been comparable to what was achieved over the previous 50 years.
Loungani: How do your estimates of the poverty rate differ from those of others?
Bhalla: The biggest gulf is with World Bank estimates. The Bank thinks the poverty rate is about twice as high as I think it is. In terms of the number of poor, the Bank’s estimate is that the number of poor is 1.2 billion—550 million more than my estimate.
Loungani: What accounts for this huge difference?
Bhalla: The first big mistake the Bank makes is to take Peter’s income to measure Paul’s poverty. It measures income based on the average rate of consumption (and income) growth from household survey data. But—as Angus Deaton mentioned in the interview he did with you [IMF Survey, July 8, pages 215-17]—these have considerably lagged behind the average rates of income growth from the national accounts data. By using what I and many others consider to be artificially low growth rates of average income, the Bank adds about 350 million to the ranks of the poor.
Loungani: That still leaves 200 million.
Bhalla: That is due to what I consider an inappropriate exchange rate adjustment used for South Asia. To compare poverty rates across countries, one has to convert to a common base using purchasing power parity exchange rates. To generate the poverty estimates for South Asia, the Bank has been using special estimates of purchasing power parity exchange rates that differ from those that are in common use. When the Bank’s special estimates are used, another 200 million are classified as poor.
Loungani: What are the policy implications if your poverty estimate is right rather than that of the World Bank?
Bhalla: If I’m right, growth is sufficient, period. If the Bank is right, there is a big mystery about why growth has not translated into much poverty reduction. This, in turn, justifies the entire cottage industry of getting pro-poor growth, improving the quality of growth, developing a holistic approach, and so on.
Loungani: That leaves the last of the trinity—inequality. Has growth been associated with a decline in inequality?
Bhalla: That’s difficult to answer right off the bat because, like the gods in the Hindu trinity, inequality takes many forms. So when people make a blanket statement like “the rich are getting richer, and the poor are getting poorer,” it’s clear they are being either intellectually dishonest or intellectually lazy.
Loungani: Our readers are honest, smart, and not lazy. What are the different forms of inequality?
Bhalla: First, there is inequality of incomes within a country; for the United States, this is the difference between Bill Gates and the poor people in this country. Second, there is the difference among countries. This is the difference between the average person’s income in, say, the United States and the average income in a poor nation. And, third, there is world inequality. This is where you “imagine there’s no country” and rank everyone in the world from the richest to the poorest. Using this last definition, I estimate that inequality has declined because millions of Chinese and Indians have left their place at the very bottom of the income distribution and marched up toward the middle.
Loungani: How do your estimates of world inequality differ from those of others?
Bhalla: My method gives a more accurate measure of world inequality than other estimates because it is based on using information on the percentile distribution of incomes—so that, roughly speaking, the same income is attributed to 25 million people rather than 250 million people. My estimates of world inequality were presented, as you know, in a seminar at the IMF in June 2000. Subsequent work by Columbia University’s Xavier Sala-i-Martin has also found a decline in world inequality.
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