Kuldip Maity

That industrialization is needed for a country’s prosperity is not a matter of debate. Without industrialization growth cannot happen beyond a point. Before taking up the issue of the link between industrialization and alleviation of poverty let us first tackle the issue of why is industrialization a precondition for growth.

Historically all economies started with basic activities like gathering essential needs for living from nature and hunting for food. From that came agriculture and animal rearing. This was the stage that laid the foundation for the modern economy and the concept of market and money as the medium of exchange.

But with time as the population started to grow, the need for more and more economic activities to sustain life became important. But with the scope of economic activities being totally dependent and defined by the nature, struggle for ownership of land started. War to win over land and grabbing the wealth of others became the rule. So someone’s riches were the result of someone else’s deprivation or poverty.

With industrialization and emergence of technology things started changing. It became possible to churn out more from the existing resources and economic growth or the prospect of it started getting defined by the spread of industrialization.

Growth as we understand it naturally leads to an increase in prosperity. And when the fruits of prosperity get distributed among the citizens, per capita prosperity also increases. And that in turn leads to the reduction in poverty. That in a simplistic way describes the relationship between industrialization, growth and poverty alleviation.

Now there would be questions like why in some nations despite there being growth there is no simultaneous reduction in the incidence in poverty. To understand this let us look deeper.

Let us first note that prosperity or the gains from growth doesn’t get distributed equally and automatically. It benefits by creation of employment and spread of market thereby putting money in the hands of employees and the self-employed. That money gets spent in the market, raising demand for commodities. Which leads to a growth in production and further growth.

Let us look further deep. What does industrialization do? It provides mechanical support to primary activities. For example, instead of tilling land the traditional way that takes a lot of labour, use of mechanical tiller achieves the same efficiently and faster thereby freeing up labour for other productive use. It also boosts productivity. Leading to the creation of prospects for further production.

There is a catch though. If the primary activities are affected, fulfillment of our daily needs will also be affected. That’s why over the last few decades there is a stress on sustainability along with industrialization as the precondition for poverty alleviation.

For example if the rivers and water bodies are polluted and encroached into, the fish that we eat will die, the land that is cultivated for agri products will not produce the same amount of grains as it would have in the absence of pollution. If that happens, the primary activities of the poor will not only get affected they will also undermine their basic sustenance giving a lie to the proposition that industrialization is a pre-condition for poverty alleviation. It also answers the question that why despite there being growth there is no commensurate reduction in poverty.

So yes; industrialization is a precondition for poverty alleviation but the rider is it has to be sustainable.

That globalization is good for the participating economies is not a majorly contested proposition. What however splits the deck is the way it delivers the benefit, the proportional gains among the nations, and the roadblocks in the way of reaping the full potential by a participating economy.

Why globalization is deemed good for the participating economies is the first issue that needs to be addressed. Let us start with an economy within a country. A fair market competition tends to increase all round economic efficiency by nurturing competence and its continuous improvement at a price that consumers accept. Any product that hits the market as a novelty initially gets a price that the producer demands. Soon others, sensing an opportunity, gets into the market with competing products priced lower than the pioneer to grab the market. Thus ensues a price and quality competition and once the market decides the best price, the competition for the time being stabilizes before the next round of a similar story unfolds.

This is a simplified version of how the market operates. And this mode operates in the labour and capital market as well ensuring the most efficient transactions. However, the chain breaks down when there are impediments in the cycle that prevents the cycle to play out in its full potential. This may happen due to several reasons.

For example a product may need a technology that requires highly skilled workforce with a very high degree of knowledge exposure. Which by itself cannot be replicated so easily. This creates stiff barrier for competitors to enter. There could be other barriers like proprietary technology and so on and so forth. There may also be political and regulatory barriers that prevent the market to play out in its full potential. Each such barrier tends to create inefficiencies of various hues one of which may be a severe inequality in income leading to poverty.

Now, if we scale up our analysis to global level with each participating economy operating as interacting market the same logic will hold. Studies by Bertelsmann Stiftung over a decade based on 42 countries survey read with all the studies on gains from study by the IMF and the World Bank clearly point out that globalization benefit does not accrue to the same degree to all the economies. The countries that are comparatively more affluent gain more than the poorer ones due to reasons attributed to ability to deploy greater resources to R&D and marketing among others. But it is also true that despite there being inequality in distribution of gains among nations all economies have reported gains.

However, the gains in efficiency and growth globally are negatively affected if the chain gets snapped. The current tendency of the nations to look inward and create barriers in the free movement of commodities and labour is increasingly sapping the growth in the global wellbeing. North American Free Trade agreement is lost. Other regional trade pacts are increasingly stressed to the point of turning almost defunct. Globalisation brought in local specialization. Whatever that one could do best became one’s specialization. For example, Bangladesh’s specialization in textiles or India’s expertise in leather, IT projects and other areas are all accruals from gradual opening up of foreign trade.

But if there is a reversal in the process of globalization all these gains will get reduced affecting all the players in the game by shrinking the market.

It is a general belief that if there is growth there would be prosperity for all. By extension, it is argued that if a country focuses on achieving growth this would automatically lead to reduction in poverty. Some people tend to justify this logic from the premise of free market mechanism. They argue that in a market economy the market mechanism – popularly referred to as invisible hand – would ensure that the fruits of growth would automatically get distributed across various stratum of the economy and would in the ultimate analysis lead to the alleviation of poverty.

In support of the argument various empirical findings are cited. But a closer look at any one of them would lead to the conclusion that impact of growth, unless supported by appropriate policy of distribution, tends to severely limit the distribution of income and the resultant effect on poverty alleviation.

One of the quoted studies in this regard is the survey done by the DFID in 14 countries. The study points out that if there is a 10 per cent increase in a country’s average income it would lead to a reduction in the rate of poverty by 30 per cent. This result, read in isolation, might provoke a protagonist of mere growth results automatically leads to poverty alleviation to reach his ‘eureka’ moment.

The rider in the study, however, is actually a great revelation. It says that “In countries with very low level of inequality one per cent increase in income levels could result in a decline of 4.3 per cent poverty level while the reduction would be just 0.6 per cent in highly unequal countries.”

The conclusion is inescapable. It is not that growth doesn’t benefit the poor but the degree of impact differs depending on the degree of inequality. The logic here is simple. Opportunity by itself is not enough, one needs related empowerment to benefit from the opportunity. Growth creates opportunities for employment. But if a citizen lacks the training in the field that is looking for employable people.Untrained ones won’t be able to benefit from the opening. Therefore there has to be an easy access to education and training that would lead to skilling of those looking out for job. If it is not there, no amount of growth would be enough to address the issue of poverty.

This very simplified example gives us an idea about why the rate of reduction in the level of poverty is conditioned by the degree of equality in the market. The role of government policy and its effective implementation therefore turns very vital in reducing the incidence of poverty. This is because those who are relatively better off will have relatively better access to health and education and vice versa. The empowerment, as informed by an effective policy, in providing access to education and health care would create that important mechanism that would lubricate the invisible hand in percolating the fruits of growth to all sections of the society. In the absence of such an empowerment a mere growth would tend to exacerbate inequality and incidence of poverty.