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This dissertation attempts to contribute to the literature by providing the sub- national picture of poverty reduction, inequality, and educational ...
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Kafeel Sarwar
I accumulated various debts, both personal and academic, over the course of writing this dissertation. Above all, I am grateful to my supervisor, Stefan Klonner, for his constant support and guidance. I likewise remain grateful to Axel Dreher for his willingness to act as the second supervisor of this dissertation. The feedback of my colleagues Paula von Haaren, Sumantra Pal, Christian Scherf, Michael Schleicher, Christian Oldigies and Min Xie on the versions of the dissertation drafts was extremely helpful. It is a matter of luck to work with such a team, and I consider myself fortunate enough to have worked in such a supportive environment. I could not accommodate their criticism and feedback as best I could. None of them is responsible for what I say here. A special thanks is due to Christina Bommas, whose emotional and administra- tive support eased this journey. I am also very grateful to the Pakistani Students’ Association Heidelberg, whose personal support allowed me to live a home in Hei- delberg away from my home in Lahore. My doctoral work was financially supported by the Higher Education Commis- sion, Pakistan, and DAAD. I am thankful to the efforts of the staff working in both organizations, whose availability I could count on, and did count on, over the course of writing this dissertation. A very special thanks are due to my parents, brothers and wife, who are always with me whether things go wrong or right. Without their constant moral and financial support even cannot reach this stage. Thank you for your love, patience, kindness and affection.
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Over the last century, the world has accomplished a tremendous achievement in reaching higher economic growth rates. A cross-country comparison shows that most countries are better off than previously. The world’s GDP per capita improved to 14,574 USD in 2016 from 3,300 USD in 1950, which is almost 4.4 times as rich as in 1950 (Inklaar et al. 2018). However, some regions report higher gains in terms of output and productivity than others. During this phase of development, the first stylized fact of economic development emerges, that is initially poor and backward countries grow more quickly than their counterparts. This is what we call the advantages of backwardness. The process of economic growth in less developed countries has rebounded since 1990, following slow progress during the 1980s (Bluedorn et al. 2013). A key question needs to be addressed here whether this stronger takeoff of growth has distributed its fruits to the poor people or not. The higher pace of economic growth has translated into a faster rate of poverty reduction in the developing world. This fact provides the basis for the second stylized fact, the advantages of growth. This has found considerable support in the literature.^1 The less developed countries that enjoyed a higher economic growth rate have made marvelous improvements in poverty reduction. The incidence of poverty across the world reduced to 10.7 percent in 2016 when compared to 35 percent in 1990 (World Bank 2016). Based on this significant reduction in poverty and the afore- mentioned two stylized facts of economic development, Ravallion (2012) proposed (^1) Ravallion and Chen (1999); Ravallion et al. (1999); World Bank (2000); Dollar and Kraay (2002); Bourguignon (2003); Ravallion (2012); Klasen and Misselhorn (2008).
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developed countries in addition to both persisting and new development challenges. Besides a strong performance on poverty reduction, income inequality has increased in some parts of the world.^5 Persistent and high inequalities have hampered growth progress in some parts of the world (Ravallion 2016; Kanbur et al. 2014), especially in the Asian region (Balakrishnan et al. 2013). Moreover, inequality can slow down the effect of growth on poverty reduction. This effect is less fruitful in those countries where the distributional pattern of growth favors the non-poor (Bourguignon 2004) and in those countries who have a high level of initial inequality (Ravallion 1997, 2005). Inequalities in income and wealth can also affect poverty through the misalloca- tion of human capital resources. In the lower part of income distribution, households are not able to invest in human capital and will remain poor. A poor household has little incentive to invest in human capital because of low returns to education (Goenka and Henley 2013). This process creates a vicious circle, in which a house- hold remains poor because it is poor. The widening gap between the lower and higher ends of income distribution may lead to a political backlash. This gap cre- ates a pressure on governments to initiate policies which favors the bottom end of the income distribution in the short run and sustains the efficiency and growth in the long run (Alesina and Rodrik 1994). In view of these issues, the focus of political systems deviates from the economy. This is a widespread concern in less developed and developed countries alike (Kanbur et al. 2014). A body of theoretical and empirical work has suggested that the initial condi- tions of a country matter for its growth prospects. The first strand of the literature demonstrates how initial inequality affects an economy’s aggregate efficiency and output through restricting efficiency-enhancing cooperation and credit-market fail- ures (Galor and Zeira 1993; Alesina and Rodrik 1994; Persson and Tabellini 1994; Birdsall et al. 1995; Clarke 1995; Perotti 1996; Benabou 1996; Perotti 1996; Aghion and Bolton 1997; Deininger and Squire 1998; Ravallion 1998; Bardhan et al. 2000; Knowles 2005).^6 The second strand of the literature explains that the size of the mid- (^5) The World Bank (2016) document that global income inequality slightly decreased from 40. to 39.3 between 1993 to 2008. It increased in East Asia and the Pacific, Industrialized countries, and South Asia. At the same time, it decreased in Sub-Saharan Africa, Latin America and the Caribbean, and Eastern Europe and Central Asia. 6 Some literature did not support this fact, such as Li and Zou (1998); Barro (2000) and Forbes
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dle class affects the growth process through fostering entrepreneurship, demanding high-quality goods, and institutional reforms (Acemoglu and Zilibotti 1997; Murphy et al. 1989; Birdsall et al. 2000; Easterly 2009; Sridharan 2004). The third strand of the literature supports the opinion that it is the initial poverty that hampers the growth process in developing countries (Ravallion 2012). Ravallion explained that due to two distinct poverty effects, less developed countries do not experience such a quick and proportionate rate of poverty reduction. First, high initial poverty, at a given initial mean income, hampers subsequent growth rate, which is a direct effect of initial poverty. This poverty effect works against the mean convergence effect, such that a country with a higher level of initial poverty rate tends to experience a lower subsequent growth rate. Second, a higher incidence of poverty, at a given subsequent growth rate, is a handicap for the poverty-reducing effect of growth, which is an indirect effect of poverty. The size of the growth elasticity of poverty is lower in the country which has a higher initial incidence of poverty. Due to the higher initial incidence of poverty, the advantages of growth starting with a country’s low initial mean income is lost in less developed countries.^7 The literature has established strong links between poverty, inequality, and ed- ucation. A high level of poverty and inequality is tied to low levels of educational outcomes and higher gender gaps in education in less developed countries (Filmer 2000). The education achievement gap is well recognized between poor and non-poor children. Children belonging to low-income families fall behind in test scores, en- rolment and attendance rate and other measures of academic success (Carey 2002). Sen (2002) argues that insufficient education itself is a form of poverty. The accu- mulation of human capital in the form of education is not only a goal of its own, but is also a vital source to reduce future poverty (Dercon et al. 2007; Haughton and Khandker 2009). Levitan et al. (2003) argue that, among many other factors, poverty reduction is highly dependent on education. Inadequate financial resources reduce children’s enrollment and attendance among the absolute poor in less devel- oped countries. Investment in education is considered a vital indicator of reducing poverty and inequalities and promoting growth and prosperity, among many other (2000). 7 Ravallion (2009) and Lopez and Servén (2009) also explain how a country’s growth path can rely on initial/current levels of poverty.
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education. However, secondary and tertiary education have also seen impressive growth. Despite all the improvements, some countries/regions are still lagging in educational outcomes (Roser and Ortiz-Ospina 2016). If we take a look at the South Asian region, the educational achievements differ across the goals and targets as well as across and within countries. The net secondary enrolment of South Asia is 59 percent in 2014, which lags behind the world average of 65 percent. In Pakistan, girls and students from lower social-economic backgrounds have lower access to primary education (Kumar et al. 2016). The quality of education is often poor, especially in rural and remote areas. The low educational achievements in South Asia are explained by low public education expenditure as a percentage of GDP. For example, the share of education expenditure as a percentage of GDP ranges from 2.0 percent in Bangladesh to 3.9 percent in India, 2.5 percent in Pakistan, and 1.7 percent in Sri Lanka. All countries of South Asia are spending well below the threshold of 6 percent of GDP.^10 Moreover, it is recommended that Pakistan should spend at least 7 percent of its GDP on education (Government of Pakistan 2009). If we take an in-depth look at these expenditures, we find that the share of the non-salary budget is only 12 percent in Pakistan’s total education budget. The sit- uation is even worse in Punjab-Pakistan, where the share of non-salary expenditure is only 3 percent in comparison with 86 percent and 11 percent of salary and the developmental education budget (I-SAPS 2015). The South Asian region embarked on the path of economic development around the middle of the 20th^ century. All countries in South Asia shared some common initial conditions and economic fundamentals and a historical legacy of British colo- nial rule for nearly two hundred years. Given the economic progress and poverty reduction which has taken place during the last two decades, the South Asian re- gion constitutes an important case study to analyze poverty reduction and income inequality. The focus of this dissertation is at the subnational level of the two most populous countries in South Asia, namely India and Pakistan. The first two es- says are based on Indian and Pakistani data, while the third essay considers only Pakistan’s subnational level. A subnational analysis is needed for the following reasons. First, there is a grow- (^10) See the Oslo Declaration: https://en.unesco.org/themes/education/.
ing interest in analyzing subnational poverty and inequality for development plan- ning. A subnational analysis of poverty convergence and inequality convergence is helpful for understanding the associations between changes in poverty and inequal- ities with their respective initial conditions. In the absence of poverty convergence across the globe, there are more chances to observe it at the subnational level. The reason for this is that national governments are more familiar with their poor and lagging regions, and governments can start targeted anti-poverty programs. India and Pakistan have both started targeted anti-poverty programs so that one can ex- pect a faster pace of poverty reduction.^11 Second, the subnational analysis provides a set of guidelines for the development policymakers and national governments to ascertain whether this region is on track to reduce the regional imbalance (by reduc- ing poverty and inequality). This dissertation also highlights the progress towards SDGs. This dissertation attempts to contribute to the literature by providing the sub- national picture of poverty reduction, inequality, and educational decentralization in India and Pakistan. The main ideas, arguments, and implications of each of the essays are summarized below. A subnational analysis of poverty convergence: Evidence from India and Pakistan The world reduced levels of poverty to 10.7 percent in 2013 compared to 35 per- cent in 1990 (World Bank 2016). South Asia decreased poverty from 44.6 percent in 1990 to 15.1 percent in 2013. The regional average of poverty rates in South Asia was 40.7 percent in the late nineties. India and Pakistan introduced some anti-poverty programs for lagging regions/districts, whose objective may imply regional poverty convergence in two countries. In the first essay, entitled “A subnational analysis of poverty convergence: Evidence from India and Pakistan”, I analyze the subnational patterns of changes in poverty within the framework of poverty convergence pio- neered by Ravallion (2012). I also analyze the two distinct effects of poverty at the subnational level in India and Pakistan, e.g., direct and the indirect poverty effects. Since the earlier literature on poverty convergence does not consider the rural (^11) For example, Rashtriya Sam Vikas Yojana (RSVY), National Food for Work Programme (NFFWP), Backward Regions Grand Fund (BRGF), Pakistan Poverty Alleviation Fund (PPAF), Punjab Economic Opportunities Program (PEOP), Benazir income support program (BISP).
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convergence in the case of Punjab-Pakistan. The magnitude of mean consumption convergence and poverty convergence are the same, in accordance with the frame- work of Ravallion (2012). Third, in India, the significance of proportionate mean consumption convergence is changing when one takes into account measurement error. In Punjab-Pakistan, the convergence magnitudes are more modest after ac- counting for the measurement error. Fourth, I do not find any direct adverse effects of poverty on the subsequent growth rate in the two countries. Fifth, I find evidence of indirect poverty effect in the overall districts of India. I interpret that the two distinct poverty effects do not neutralize the advantages of backwardness and ad- vantages of growth. The patterns of results are different from the pioneering work of Ravallion (2012). In both countries, the absolute poverty convergence shows that the poverty rate in poor areas decreases more quickly in absolute terms than in affluent areas. The speed of poverty convergence is higher in Punjab-Pakistan when compared to India. This may be due to the fact that Punjab-Pakistan is a small and homogeneous region, and that it is not as diverse as India. The contribution of this study is as follows. First, this essay initiates an aca- demic debate that, to the best of my knowledge, it is necessary to analyze poverty convergence within a country, rather than between countries. Second, this essay contributes to the discussion of poverty convergence clubs. Third, I think that the strengths of my analysis are to take the issue of measurement error with a novel approach seriously. Fourth, this study initiates a policy debate regarding whether these countries are presently on track to reduce poverty and their regional imbal- ance. The absolute poverty convergence shows that both countries are on track to reduce poverty. However, the pace is slow to meet the SDGs. A subnational analysis of inequality convergence: Evidence from India and Pakistan While the first essay analyzes the poverty convergence at the subnational level, in the second essay, entitled “A subnational analysis of inequality convergence: ev- idence from India and Pakistan,” I investigate whether the income inequalities are persistent overtime at the subnational level in India and Pakistan. Growing inequal- ities are not helpful for any country or region as they create sociopolitical instability and conflict. The social and economic pitfalls of inequalities are harsher in develop-
ing countries than in developed countries (Hirschman and Rothschild 1973; Easterly 2007; Wei and Kim 2002; Thorbecke and Charumilind 2002; Gruen and Klasen 2008; Østby et al. 2011; Fjelde and Østby 2014; Ostry et al. 2014; Dabla-Norris et al. 2015). Based on this discussion, in this paper I seek an answer to the question whether income inequalities are persistent over time or whether they converge at the subnational level in India and Pakistan. To examine inequality convergence, the focus of this essay is to use the consistent adjusted least squares estimation for accounting the measurement error. While measuring and analyzing inequality, the previous literature highlights the issue of measurement error in cross-sectional data. Besides the consistent adjusted least squares regressions, I also report the ordinary least square results to highlight the difference between magnitudes and as a robustness check. For this purpose, I used two household surveys. In the case of India, I use the 61st^ and 68th^ rounds of NSS data. I only consider the districts of 17 major states of India. These states cover 88% of the total population of India, and they are both politically and economically more stable compared to the rest of the country. In the case of Pakistan, I use the first and third rounds of MICS data. I consider only the Punjab province instead of the whole of Pakistan. The results of this chapter are as follows. I find that inequality increased in two countries based on the Theil index and the Gini coefficient. Second, I find evidence of inequality convergence (proportionate convergence and absolute convergence) in two countries. Third, the significance of the convergence coefficient does not change much by accounting the measurement error. The measurement error can be a serious threat to the validity of convergence if the convergence coefficient is near zero. I find that, by accounting for the measurement error, the convergence coefficient goes down in the range of 17–38 percentage points in different specifications. Moreover, these findings are not sensitive to other measures of inequality (mean logarithmic deviation and coefficient of variation). Being the two most populous countries in the South Asian region, this essay will provide a guideline for devel- opment policymakers to ascertain whether this region is on track to reduce income inequalities. By considering the current speed of absolute inequality convergence, both countries will significantly improve the gap between poor and rich by the end
