A GROUP of economists, who met in Lahore last month, described two policy measures which, they said, politicians in power usually adopt to reduce poverty, as flawed. These are accelerating economic growth and raising minimum wage.

Their views contradict the need for ‘inclusive growth’ stressed by an increasing number of eminent economists and policymakers worldwide which the two measures put together represent. The authorities in Pakistan and foreign donors agree that a 7-8 per cent growth is necessary to take care of the jobless and reduce poverty. While there may be some weight in the contention of disagreeing economists, they did not suggest an alternative strategy for reducing, if not eliminating, poverty. It was argued that more than 70 per cent of the country’s workforce is employed in agriculture and informal sectors, where there are no labour laws, minimum wage, or any job security. These workers are mostly illiterate, unskilled and very poor. This, they observed, means that policymakers keep the interests of the remaining 30 per cent of the workforce, which is employed in the formal sector, while making plans.

Regarding the first measure normally suggested by IMF and the World Bank, and upheld by the political leadership, the fact remains that, when the economy achieves higher growth, workers in the informal sector are excluded from the benefits that may ensue. Their wages remain at subsistence level no matter how high is the GDP growth rate. But since the skills of the workers in the formal sector are regularly upgraded, their wages go up as the economy grows.

Those in the informal sector are least affected by any official raise in wages, for it does not apply to them. Their wages increase when it suits the market. The only ones to gain from such a government move are those who are in the formal sector. But a raise in their wages is often followed by a raise in the cost of living, which absorbs the benefits they had got.

According to a report published in this newspaper, the cost of living has almost doubled in the last five years. It means that wages, having doubled in this period, have gone back to the old level in terms of purchasing power. This means that the real income remained unchanged in this period. There was a 100 to 200 per cent hike in the prices of food items during March 2008-March 2013 period, in addition to a huge rise in utility bill charges, prices of essential goods, school fees and books.

Poverty cannot be effectively reduced, much less eliminated, unless there is a redistribution of resources in the society. However, the policy of pursuing accelerated economic growth is not always flawed. A persistently high rise in GDP growth can reduce poverty. So far, an outstanding success story in poverty alleviation has been that of China, where more than 500 million people came out of poverty during the 1990-2008 period.

The rise of China and India, who doubled their per capita economic output in about 20 years, has driven an epochal ‘global rebalancing,’ bringing about greater change and lifting far more people out of poverty than did the industrial revolution that had transformed Europe and North America in the 18th and 19th centuries, says the 2013 Human Development Report of the UNDP, which was launched on March 14. It adds “the Industrial Revolution was a story of perhaps 100 million people, but this is a story about billions of people”.

The proportion of people living under $1.25 a day is estimated to have fallen from 43 per cent in 1990 to 22 per cent in 2008, made possible in part by significant progress in China. As a result, the World Bank said last year that the Millennium Development Goal to halve the proportion of people living in extreme poverty by 2015 had been met ahead of schedule. More than 40 countries have done better than previously expected on the UN’s Human Development Index (HDI).

Another success story is that of Vietnam, which has struggled to build its economy after it was completely destroyed in wars imposed by the United States and France in the 20th century. Using a ‘basic needs’ poverty line, initially agreed upon in the early 1990s, poverty fell from 58 per cent in early 1990s to 14.5 per cent in 2008, and is estimated to have fallen below 10 per cent by 2010.

Vietnam has achieved high rates of economic growth over the last two decades as a result of a series of market-oriented reforms that were successfully launched in the late 1980s. But its historical growth pattern has been remarkably pro-poor. The per capita GDP growth averaged 6.1 per cent a year between 1993 and 2008, and poverty dropped by an average of 2.9 per cent a year. Vietnamese officials say that the goal of poverty reduction is not yet complete, and has in fact become more difficult with growing affluence and rising aspirations, as the country becomes more integrated into the global economy.

Meanwhile, microfinance, which was celebrated as a remarkable tool of bringing the poor out of poverty in the wake of success of the Grameen Bank project in Bangladesh, has become controversial. Cambridge economist Ha-Joon Chang, widely respected for his views, finds microfinance based on an attractive, but false, premise that poor people can make themselves richer provided they have access to credit. Wealth creation, outside of fairytales, is very rarely the result of individual effort. It is a collective endeavour of individuals and entities like companies and co-operatives. Microfinance has erroneously put the individual at the centre stage.

Besides, without a big injection of subsidy, he says, interest rates that microfinance institutions charge can soar to 50 per cent and even higher. That really cuts into any possibility that small businesses being able to reinvest their profits. Then, most loans are not used to create small businesses, but are used for major expenditures like weddings, funerals or for education and healthcare. This is the kind of scenario that leads to indebtedness. Chang argues that microfinance could actually inhibit poverty reduction by diverting attention and resources from the much more important state coordinated policy interventions, financial institutions and investment strategies.