Poverty in India: Bridging the rural-urban divide Anneleen Vandeplas LICOS - Centre for Institutions & Economic Performance KU Leuven European Institute for Asian Studies, 21/02/2013

India is changing… Traditional markets Modern markets

India is changing… Delhi tea stall Delhi Café Coffee Day

But disparities remain… Street dentist Formal dentist

In particular between urban and rural areas Rural areas (70% population) (Some) urban areas (30% population)

Growth and development Kuznet’s curve (1953)With development, labor moves out of agriculture → more output per person employed in agriculture → higher wages → India needs a move out of agriculture, into manufacturing Agriculture Manufacturing Services

Growth and Poverty in India: a Historical perspective 1950s-1960smore than 50% of population poor 1990sstill more than 30% of population poor Weak performance in poverty reduction: low growth – 1960s-1970s: 1% – 1980s:3%

The promise of liberalization 1950s-1960smore than 50% of population poor 1990sstill more than 30% of population poor 1990: The “promise” of liberalization: – Stronger growth By liberalization and increased participation in trade More investments in labor-intensive sector (manufacturing) – Faster poverty reduction Higher demand for unskilled labor Pro-poor growth

Results of liberalization Outcome: Growth accelerated to 4-5% Who benefits from this growth? – Growth was more in services than in manufacturing No expansion of formal manufacturing after liberalization (Sen, 2009) – Higher demand for skilled labor – Little move out of agriculture Farm wages have remained low (Binswanger, 2011) – Exacerbating existing inequalities Wages for skilled labor increased, while wages for unskilled labor remained low

Poverty in India, Source: Ravallion & Datt (2009)

Results of liberalization Who benefits from this growth? – Datt and Ravallion 2002: Mostly the urban poor Not so much the rural poor – too isolated from urban areas – low education and health status For rural poverty reduction: – Either agricultural productivity growth – Or human resource development (health/education – both for women and for men) “India’s poor are left behind!” Or not?

Poverty in India, Source: Ravallion & Datt (2009)

New data - new ideas… Datt and Ravallion 2009: We were wrong! – Conclusions in 2002 were based on pre-reform parameters Data until 1991, rest was a forecast – Now we have better data which show that urban growth DOES lead to rural poverty reduction Growth in trade, construction and informal manufacturing where demand for unskilled labour is high… – Informal manufacturing comprises 80% of total manufacturing (Kotwal et al, 2009) Strong growth of non-farm rural jobs (and wages) (Binswanger, 2011) Rural poverty reduction driven by rural-urban linkages with smaller towns (tier-II) (Reardon & Minten, 2011)

Tier-I and Tier-II