The Poverty Miracle: Three decades of market-based reforms have dramatically reduced poverty and expanded India's middle class. But the business climate remains uneven.

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Author: Matthew Rees
Date: Wntr 2020
From: The International Economy(Vol. 34, Issue 1)
Publisher: International Economy Publications, Inc.
Document Type: Article
Length: 4,547 words
Lexile Measure: 1360L

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What has been the most consequential change to the global economy during the past thirty years? While there are many potential candidates--such as the collapse of Communism and the growth of the capital markets--history will show that one change outflanks them all: poverty reduction. Approximately 1.5 billion people have escaped extreme poverty since 1990. The combination of the speed with which this occurred, and the number of people who benefited, is without precedent in human history.

But how did it happen?

It's standard practice for development economists to say that every country has a unique set of conditions, and thus policies that reduce poverty in one country won't necessarily do the same in another country. This idea overlooks that while the most successful anti-poverty policies have differed, the principles underpinning those policies have been remarkably similar: reduced state intervention in the economy and a greater reliance on market forces.

Consider the findings of the independent Commission on Growth and Development, chaired by Nobel laureate economist Michael Spence. In 2008, it identified five factors that had contributed to strong and prolonged growth in seventeen developing countries. Three of the factors were relatively agnostic on the scope of government: macroeconomic stability, high rates of saving and investment, and good governance. But the other two factors were decidedly not agnostic. Critical to long-term economic expansion in these countries, said the Commission, was that they "fully exploited the world economy" and "let markets allocate resources."

China was one of countries studied by Spence's commission, and the country's achievements have been breathtaking, with approximately 700 million people moving into the middle class since the country's economic reforms (many of them market-based) started in 1979. But if China was the valedictorian in the school of poverty reduction, India has been the salutatorian, with hundreds of millions of people escaping a life of penury over the past three decades. And the country's experience reinforces the central role played by markets in enabling people to realize higher living standards.

One person with an acute understanding of how economic reform leads to higher living standards is Chandrababu Naidu, who served as chief minister of Andhra Pradesh, a state in south-central India, from 1995-2004. Naidu was the architect of reforms and initiatives that transformed Hyderabad (the state's biggest city at the time) from a somewhat sleepy municipality into a dynamic metropolis that has attracted large investments from many of the world's most respected technology companies. During a November 2019 interview with me, in the city of Amaravati, Naidu was crystal clear about what's needed to help the poor: "Without private investment and without job creation, you cannot eradicate poverty."

Hyderabad (the subject of a future TIE article) is an emblem of India's economic progress over the past thirty years--a period during which India's economic growth rate dramatically increased relative to the decades following independence, resulting in a six-fold rise in incomes. Fundamental to that expansion, says Columbia University economist Arvind Panagariya, has been "removing the heavy hand of government and...

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Gale Document Number: GALE|A622370349