All wrong on poverty & aid

March 28, 2012

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IT is our claim that the debates on poverty and aid have gone off the rails. On poverty, it is too narrow, quibbling about a few percentage points above or below some historical number.

On aid, it is too broad, arguing whether it is helpful or harmful in its totality. These are important issues and we need to get the big picture right if the public discourse is to make any sense.

Let us start with poverty. We are hobbled by the fact that our understanding of poverty alleviation is borrowed from elsewhere without much adaptation to our context. This has led us down unrewarding paths much like prescriptions based on flawed diagnoses.

An example should make this clear. Imagine a community of 100 people in which 10 are homeless. Many ways can be found to house the homeless in such a situation. These can include borrowing by the state, progressive taxation of the better off, charitable social action by the affluent, or assistance by an external donor.

Now imagine another community of 100 in which 90 are homeless. None of the above mechanisms are likely to work. Some other recourse would need to be found that would focus on generating the wealth to be allocated to housing the homeless.

On poverty, our models are derived from societies where only small minorities are deemed poor in an absolute sense. We are copying solutions that work in such societies and applying them to situations where the majority is blighted with absolute poverty. No amount of alleviation funds or income-support programmes can cope with situations in which the majority is poor no matter how well-off the non-poor may be. Simple arithmetic can reveal how financially absurd such approaches are.

The only solution in such situations is to generate wealth to raise the living standards of the economically marginalised. An essential aspect of this is employment creation that yields higher incomes for marginalised families. Not any form of employment would yield the desired results in our context.

We can see in India that even extended periods of wealth generation concentrated in high-tech services yield very slow gains in poverty alleviation. In contrast, the town and village enterprises favoured by China in the 1980s were much more effective in reducing poverty.

This brings us to aid. We know from East Asia that aid has been an effective ingredient in recipes yielding rapid growth. In contrast, it has been much less effective in South Asia. Why doesn’t aid work here?

First, as mentioned above, the use of aid for direct poverty alleviation and income support is a fool’s errand. Its persistence is a comment on the intellectual bankruptcy of our intelligentsia.

Second, the use of aid for service delivery is equally misguided. Any aid that has to be siphoned through long bureaucratic chains would leak away without robust mechanisms of accountability. The continued deterioration of our public education and health systems, the recipients of huge amounts of aid, should have told us that long ago.

Third, the use of aid for improving governance and capacity building in institutions where incentives are hopelessly skewed is like praying for rain. The persistence of these misallocations points to the strong incentives for arrangements that yield windfall gains to many of the non-poor in the name of the poor.

Grants and concessional loans can benefit Pakistan provided they are directed to wealth generation and employment creation for the poor. In terms of design, in a system riddled with corruption and lack of accountability, aid has to avoid programmes and projects dependent on long and diffused bureaucratic chains.

It has to be focused on discrete, perhaps turn-key, investments critical to spurring the wealth-generation dynamic. These could include dams, power-generation plants, irrigation channels, farm-to-market roads, and the like.

Some mention of the kind of wealth generation appropriate for Pakistan at present can be initiated here although it needs a fuller discussion. Given that half its labour force is still in agriculture which has been a major source of resilience in difficult economic conditions, the sector should be the obvious focus of attention.

Even otherwise, there is little chance that Pakistani manufacturing can become internationally competitive quickly in the prevailing global and domestic environment. And with half the population functionally illiterate, there is little that growth in high-end services, useful as it is in its own right, can do to yield a significant contribution to employment generation.

Trickle-down, if it ever happens, would take too long; the more likely outcome is what Arundhati Roy has famously termed “gush-up.”

An analysis and adaptation of the early Chinese experience is warranted. It was focused squarely on rural growth, the reform of incentives to farmers, modernisation of agriculture, and facilitation of town and village enterprises servicing agriculture and manufacturing goods for the poor with rising incomes. This triggered the upward spiral that strengthened demand for investments in human and physical capital providing the foundation for subsequent urban industrial development.

Given that a huge pool of capital-seeking productive investments exists in our immediate neighbourhood in the food-deficit Gulf states, the conditions are ripe for a win-win partnership that could modernise Pakistani agriculture, use aid effectively, and help the country grow its way out of poverty.

If we get this big picture right, subject it to critical analysis, and rally public support round its implications, we can break the logjam of the present and launch the dynamic that could carry us to a more prosperous future.

Anjum Altaf is dean of the School of Humanities, Social Sciences and Law at the Lahore University of Management Sciences. Samia Altaf is the author of So Much Aid, So Little Development: Stories from Pakistan.