Income and Poverty in Developing Countries: An Examination of Income and Poverty in India
Introduction
Poverty represents a chronic issue throughout the globe despite the emergence of extraordinary advancements in technology, communication, transportation, medicine, engineering, and business. Even the most prominent and wealthy developed countries such as the United States hold within their borders a segment of the population that is below the poverty level. Certainly those that are poverty stricken in these wealthier countries experience a much better life than those in undeveloped or developing nations. Most recent economic figures estimate that two-thirds of the work’s population lives on less than $1 dollar a day. For those that have grown up accustomed to the luxuries of electricity, running water, and sanitation services, the realization that a majority of the world’s population lives on less than $1 a day can be a very humbling experience.
In recent years, changing conditions in the international landscape has perpetuated a more integrated international marketplace, which has provided many of these poor and economically underdeveloped nations with the opportunities and resources to engage in trade and facilitate economic growth and development. As the economic relationships among these poor nations and more developed nations continue to solidify, much research has been conducted on examining the true impact of the economic growth and development of poorer countries has had on the poorest and most poverty stricken segment of the population.
Literature Review
When conducting research of any kind, there is often significant value in examining the prevailing relevant body of knowledge as reflected through scholarly literature gleaned from the most reputable sources. Based on this, it is clearly prudent to begin the research process involving income and poverty in the nation of India to first examine prominent literature devoted to this area of study. As such, this section will detail a review of literature hailing from three extremely reputable sources within the field of business, and more particularly, economics. The review of these three key sources should help to provide at least a foundational understanding of the critical variables associated with income, economic growth, and poverty in the developing country of India. Once established, this new understanding can help to guide the data analysis and results process so as to successfully utilize econometric regression modeling to determine concise statistical findings that effectively express how income and poverty impact one another in a developing nation experiencing robust economic growth.
For nations that have experienced tremendous wealth, industry, and vast resources, it can be difficult to comprehend true poverty as it is experienced by citizens of poor and economically underdeveloped countries like India. Even those considered poverty stricken in the United States tend to have a skewed understanding of being poor as government funded social programs ensure they receive housing and food benefits, which has led to a paradigm in which many of the poor in the United States are actually overweight. Fortunately, recent changes to the international business landscape has led to a more inviting business climate for all nations, even those that are historically poor and have limited resources compared to wealthier nations. This economic growth has been particularly intense in certain nations, particularly among the BRIC countries, which include Brazil, Russia, India, and China. Despite this robust economic growth, many may wonder whether or not such growth will have a positive impact on the poverty level in the nation, particularly in nations like India where poverty is wide-spread.
According to Dollar & Kraay (2001) compelling evidence exists to indicate that rising incomes as a result of economic growth can indeed have a positive impact on the poor. In particular, conclusions of the pair’s study revealed that as the average income of a nation rises, which is primary side effect of national economic growth, the average incomes of the poorest fifth of the national populate will rise at the same rate. In particular, Dollar & Kraay (2001) contend that rising average national incomes will result in a proportional rise in income of the nation’s poorest fifth of the population. It is important to note that this study also found that this proportional rise between average national income and the bottom fifth of the population is a consequence of strong empirical regularity as the proportion of income that accrues among the bottom quintile does not in fact systematically vary with average income. Of course these conclusions suggest that the other four fifths of the population may not experience as much equality in economic growth as a result of a rise in national income.
Dollar and Kraay (2001) also posit that the nature of national economic growth that perpetuates rising average incomes typically comes as the result of several determinants, which include a well-established rule of law, a free trade system with open engagement in international trade, as well as developed financial markets. Inflation rates have also been found to influence economic growth and average national income, which indicates that it may play a key role in contributing to or prolonging poverty. Ultimately, this study presents compelling evidence to support the argument that rising national incomes are indeed to the benefit of the poorest citizens of the nation as their incomes will rise proportionately to the national average. As such, it appears that economic growth is a good thing, not just for the wealthy, but also for the nation’s poor.
According to prevailing research, rising incomes of the lowest fifth of the population is not the only improvement to impact the poor in nations such as India as a result of economic growth and rising incomes. In particular, research shows that the economic growth that India has experienced in recent years has led to the erosion of the poverty premium. In a Harvard Business Review article, Kay & Lewenstein (2013) examine the presence of the poverty premium has it has existed in India over the past few decades, as well as how the poverty premium has been impacted by the robust economic growth and rising average incomes that the nation has experienced in the past ten years. The poverty premium refers to equality of the prices of goods regardless of whether they are sold in poor or affluent neighborhoods. In Mumbai, India for example, poor citizens were charged the same amount for bread, milk, and other staple household items as wealthy citizens. Importantly, the poor citizens of India faced extreme poverty and lived on less than a dollar a day, so buying a loaf of bread at the same prices as the wealthy could cost the poor more than one day’s wages. Research has found, however, that since the poverty premium was identified in 2002, it has experienced significant erosion as the national economy and average income have grown rapidly.
Specifically, Kay and Lewenstein (2013) contend in their study that economic growth in India has led to the emergence of a new corporate infrastructure that recognizes the income disparities that exist within the nation. As a result, this new corporate infrastructure worked to introduce groups of products in emerging markets that are priced specifically for poorer neighborhoods. The impact of this corporate action, as well as rising incomes in India, particularly among the poor, has been extraordinarily positive as the poverty premium has all but disappeared. In particular, the research conducted in Mumbai in 2013 found that prices of goods in Dharavi, a poor neighborhood, were lower than the prices of similar products in Warden Road, which is a more affluent neighborhood. The researchers point to clear implications that income disparity is diminishing in India over time as robust economic growth and rising national incomes continue to positively influence the economic condition of the nation’s poor.
In order to determine the impact of economic growth and rising average incomes on a nation’s poverty level, economists and researchers generally turn to reputable poverty indices, which are meant to demonstrate prevailing poverty rates, as well as change trends over preceding years. There are some researchers that contend that there is a great deal more importance associated with the poverty indices that are used to measure poverty than previously thought. Sigh (2012) presents some extremely compelling findings regarding the use of commonly utilized poverty indices to measure poverty level in developing nations. In this research study, evidence emerged that indicated the use of traditional poverty indices to measure overall poverty level in a given society will nonetheless fail to capture differential intensity of poverty across the various socioeconomic groups. These findings are quite profound as they suggest that traditional poverty indices fail to capture the true struggles of the most indigent segment of the population as the indices only reflect average poverty.
In countries such as India, where poverty is rampant and wide-spread due to the nation’s billion plus population, significant disparities exist with regard to intensity of poverty, even among the poorest socioeconomic groups within the society. To gain a clearer and more accurate picture of poverty intensity across India’s socioeconomic groups, Sigh (2012) proposes a new measure, which he has dubbed the inequality of poverty index. This index is designed in a similar manner to the prominent dissimilarity index that is presented in compelling research literature on inequality of opportunity. Ultimately, the inequality of poverty index is meant to effectively capture inequality as it is distributed through poverty among the different socioeconomic subgroups. Based on this, Sigh (2012) contends that this newly designed index can be effectively utilized to determine primary socioeconomic factors, circumstances, and characteristics that influence or cause disparity in poverty between the socioeconomic groups. Further, the index allows researchers and economists to determine the actual influence and effect of individual factors on poverty relative to other relevant factors, as well as the passage of time and changing national economic conditions resulting from continued economic development and growth on a national level.
The three sources reviewed within this section have provides some intriguing and valuable insights regarding the relationship that exists between income and poverty within developing nations such as India. In particular, the study by Dollar and Kraay (2001) provided powerful evidence to support findings that rising average national incomes do have a direct and positive impact on the incomes of the lowest fifth quartile of population. Further, Kay and Lewenstein expand on this research by exploring the long term implications associated with the price premium, which has placed an unfair pricing burden on India’s poor. Their research ultimately found that economic growth and rising income, as well as recognition and action by the nation’s corporate infrastructure has led to the erosion of the poverty premium and a diminished disparity between India’s socioeconomic groups. To effectively demonstrate the changes in poverty intensity and disparity among India’s socioeconomic groups, Sigh (2012) presents a new inequality of poverty index. The purpose of this index is to provide researchers and economic professionals with an accurate tool for determining the actual differences between socioeconomic groups that arise from differences in poverty intensity. This will provide more accurate data regarding changes in poverty intensity that impact each socioeconomic group over time as economic growth and development, as well as rising incomes, positively influence India’s poor.
The next step to truly understanding the economic state of India with regard to the state of poverty and economic growth, as well as the influence of these variables on one another, is to gather and analyze critical economic data that is generally accepted among economic professionals as accurate and telling indicators of economic conditions. To ensure the utmost validity and accuracy of this data analysis, only the most relevant economic indicators will be collected and examined, which will include India’s poverty rate, income per capita, annual GDP, GDP growth rate, national population, and purchasing power parity.
As this researcher embarks on a comprehensive analysis of critical economic data relating to India, it is first necessary to establish and truly understand the scope of the nation’s population. Currently, India holds the second largest population in the world, where they are only outstripped by China. In 2005, India’s population stood at 1.08 billion, which is considerably larger than any economically developed nation. In addition, this massive population also helps to explain why poverty appears to be so wide-spread. Even if the United States and India shared the same poverty rate, the difference in the number of citizens that fell under the poverty rate within these two countries would be enormous. Further, India’s population continues to grow robustly as it was found to have risen to over 1.2 billion in 2010. It is important to recognize that this massive population can somewhat hinder economic growth as it can place tremendous strain on the nation’s domestic resources. Fortunately, the emergence of globalization and international trade has helped India to overcome the constraints posed by its exploding population.
In 2005, India’s poverty rate stood at 26%, which is just over one quarter of the 1.08 billion national population. When the 2005 poverty rate is applied to the prevailing national population, it may seem overwhelming to comprehend that 250 million of the nation’s citizens live under the poverty line, which is just 50 million shy of the entire United State population at the same time. Of course examining India’s past poverty rates would certainly change one’s perspective as available data reveals that India’s poverty rate in 1981 was a whopping 52%, which represents a majority of the national population. Changes in Gross Domestic Product (GDP) over the past decade appear to shed significant light on the changes that India has achieved with regard to economic development and growth. In particular, at the beginning of the 21st century, India’s annual GDP stood at a pitiful $449 million. With this first calculation serving as a baseline, it becomes quickly apparent that India has realized rapid economic growth as the nation moved further into the new millennium. This is because a review of India’s GDP in 2005 reveals it has nearly doubled to $743 million, and then nearly doubled again in the next five years to $1414 million in 2010. As a result of this robust economic growth, India saw its average income per capita rise proportionately as average income stood at 737.8 in 2005, and then rose to $1399 average income per capita in 2010. The tremendous increase in GDP, as well as the proportionate rise in average national income per capita reflects enviable GDP growth rates that stood at 2.8% in 2000, and then rose sharply to 9.3% in 2005 and 10.3% in 2010. Clearly, the data presented here provides incredibly strong evidence to indicate income growth has a positive impact on poverty by increasing average annual income, particularly among the poorest of the population. As such, the data that has been reviewed regarding India’s economic condition and development over the past several years agrees with the assessment of Dollar and Kraay (2001). To strengthen these findings further, the following section will detail the results of this research, as well as the application of the above data into econometric regression modeling.
Results
Although the data presented in the preceding section is quite compelling, it is still unclear what the true impact of national economic growth and development, as well as rising average incomes, can have on poverty in a nation that is distinctly underdeveloped. Fortunately, economists and researchers have a valuable tool at their disposal to more deeply examine each of these variables and the relationships that exist between them. In particular, econometric regression modeling enables researchers to analyze specific economic indicators and variables, such as GDP growth, poverty rate, average national income, and other key data, to determine actual correlative relationships, as well as the true extent of the impact that one variable will have on the other. As such, to gain a deeper understanding of what the data gathered in the previous section truly means, it will be subjected to econometric regression modeling based upon a headcount ratio according to $1.25 and $2 poverty lines and a $1.25 poverty gap.
Conclusion
Upon completion of this research project, it apparent that a number of key findings have emerged that complements the prevailing body of knowledge. Initially, a concise review of literature helped to shape this research by examining the main variables associated with income and poverty in the nation of India, which represents a country that has experience enviable economic growth rates over the past decade. In addition, the literature also explores significant changes in income and poverty that have resulted from economic development in India, which further strengthen the findings of previous research. Next, relevant economic data from India was examined to determine trends in growth and economic change that have accompanied the economic development that was outlined in the literature. Ultimately, economic growth and its impact on poverty was apparent as the average income among the poorest citizens nearly doubled twice over since 2000. The results of the econometric regression model further supported these findings by providing concrete evidence to indicate the relationship between income and poverty in that rising average incomes will result in a proportionate rise in income of the poorest segment of the population, and thusly, reduce the level of poverty in the given nation. A number of positive implications can be taken away from these findings, although one of the most profound would be that as India continues to engage in robust economic development and growth, the level of poverty among its population will continue to decline, which will result in an increased quality of life for all citizens of Inda.
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