Global Majority E-Journal
Volume 2, Number 2
(December 2011)
Global Majority E-Journal
About the Global Majority E-Journal
The Global Majority E-Journal is published twice a year and freely available online at:
http://www.american.edu/cas/economics/ejournal/. The journal publishes articles that discuss
critical issues for the lives of the global majority. The global majority is defined as the more than
80 percent of the world‘s population living in developing countries. The topics discussed reflect
issues that characterize, determine, or influence the lives of the global majority: poverty,
population growth, youth bulge, urbanization, lack of access to safe water, climate change,
agricultural development, etc. The articles are based on research papers written by American
University (AU) undergraduate students (mostly freshmen) as one of the course requirements for
AU‘s General Education Course: Econ-110—The Global Majority.
Editor
Dr. Bernhard G. Gunter, Adjunct Associate Professor, Economics Department, American
University; Washington, DC; and President, Bangladesh Development Research Center (BDRC),
Falls Church, VA, United States. The editor can be reached at gunter@american.edu.
Cover Design
Based on an animated GIF available as Wikimedia Commons, created in 1998 by Christian
Janoff, showing the ―Globe‖ demonstration as it can be found on the Commodore REU
1700/1750 test/demo disk; please see: http://en.wikipedia.org/wiki/File:Globe.gif.
ISSN 2157-1252
Copyright © 2011 by the author(s) for the contents of the articles.
Copyright © 2011 by American University for the journal compilation.
All rights reserved. No part of this publication may be reproduced, stored or transmitted in any
form or by any means without the prior permission in writing from the copyright holder.
American University, the editor and the authors cannot be held responsible for errors or any
consequences arising from the use of information contained in this journal. The views and
opinions expressed are those of the authors and should not be associated with American
University.
61
Global Majority E-Journal
Volume 2, Number 2 (December 2011)
Contents
Impact Investing as a Supplement to Nicaragua‘s Traditional
Microfinance
Robert Book
63
Brazil‘s Economic Growth: With or Without Prosperity?
Ana Cristina Sauri Faller
73
Poverty and Fertility in India: Some Factors Contributing to
a Positive Correlation
Brittany Traeger
87
The Urban Plan for India: A Foundation for Economic Growth
Will Lawther
99
Climate Change in China: Can China Be a Model of
Sustainable Development?
Hiromi Yagi
114
62
Global Majority E-Journal, Vol. 2, No. 2 (December 2011), pp. 63-72
Impact Investing as a Supplement to
Nicaragua’s Traditional Microfinance
Robert Book
Abstract
There are too many good ideas in this world that go ignored and underfunded. By giving the less
fortunate access to credit, microfinance has allowed millions of borrowers to fund their ideas for
microenterprises. However, the impact these microenterprises have had may not extend very far
beyond the individual borrower. Studies indicate that by investing in small and medium sized
enterprises, more social impact would be generated. The purpose of this article is to suggest a
new securities exchange that would facilitate the flow of capital from individuals globally to
small and medium entrepreneurs in developing countries. In this article, this new securities
exchange is applied to the case of Nicaragua.
I.
Introduction
The world is becoming more globalized every day. However, with each step towards
globalization, there seems to be an increase in the disparity between the ―haves‖ and the ―havenots.‖ Traditional microfinance has attempted to assuage this discrepancy by making financial
services available to the poor. Yet, it is apparent that the rich are getting richer and the poor are
getting poorer. Using Nicaragua as a case study, this article conveys the need to reform
microfinance and propose a reform using impact investing that will change the vicious circle of
contemporary microfinance into a virtuous cycle of financial sustainability.
Following this introduction and a brief literature review, the article provides some background
on Nicaragua‘s economic history and the concepts of microfinance and impact investing. The
article will then address some of the flaws in Nicaragua‘s microfinance infrastructure and
propose an alternative method of debt financing that will alleviate some of the negative
symptoms without undermining microfinance entirely.
63
II.
Literature Review
While there is little literature available that quantifies the impact of microfinance on Nicaragua,
there are many publications that debate the merits of contemporary microfinance on a global
scale. The principles discussed in this literature will later be applied to Nicaragua in an effort to
demonstrate the need for an innovation in microfinance.
In a study published by Kobe University of Japan, Imai, Gaiha, Thapa and Annim (2010) discuss
the importance of microcredit. Their econometric analysis concluded that a country that has a
higher gross loan portfolio held by microfinance institutions, has lower poverty (all other things
held constant). The study found that an extremely high correlation exists between an increase in
the number of active borrowers and an increase in gross domestic product (GDP) per capita.
With regards to Latin America and the Caribbean (LAC) region, Dr. Imai and colleagues found
that despite having a relatively high concentration of MFIs the LAC region has a very low
concentration of active borrowers compared to other regions.1 This low volume of borrowers is
likely a contributing factor of LAC‘s poverty.
Richard Rosenberg (2010), who is Supervisor for the Consultative Group to Assist the Poor
(CGAP), states that while econometrics may be used to indicate the help that microfinance
provides to people living in poverty by raising their income, it still remains uncertain as to how
much microfinance actually relieves poverty. For example, if a borrower of a small loan from a
microfinance institution pays the loan back, then takes out another loan of a similar size, is
she/he really better off or is she/he just dependent on a new financial institution for his income?
To this Rosenberg (2010, p. 4) replies that the extremely low default rates on microcredit loans
suggests ―a strong presumption that microfinance is not over-indebting large proportions of its
clients.‖ Rosenberg suggests that we should instead look at some of the other impacts that
microlending has rather than just fiscal impacts.
This notion of other impacts is corroborated by another CGAP article by Christen, Rosenberg
and Jayadeva (2004), which discusses the notion of financial stability versus financial growth
and argues that the former is a better indicator of poverty relief. The problem is that the
borrowers of microfinance loans often continue to reuse microfinance after their first loan. There
is a strong argument that, due to high interest rates, the borrowers are becoming dependant on the
microfinance institution rather than becoming financially sustainable.
So how can we make microfinance more financially sustainable? In a presentation at the World
Bank Conference on “Small and Medium Enterprises: Overcoming Growth Constraints”, Allen
N. Berger and Gregory F. Udell (2004) discuss how the success of small and medium enterprises
(SMEs) has a more measurable impact on poverty. SMEs, also known as small-growth
businesses, create jobs and opportunities for more than just the entrepreneur and are much more
financially sustainable than the microenterprises traditionally financed by microloans. However,
Berger and Udell (2004) discuss numerous barriers and constraints that limit the flow of foreign
capital to these enterprises. These barriers include financial institution structure and lending
infrastructure, government regulations, and the lack of a discernable relationship between
potential investors and entrepreneurs.
1
Imai, Gaiha, Thapa and Annim (2010), p. 10.
64
III.
Background
III.1. Nicaragua’s Recent Economic History
Despite some recent progress in terms of GDP per capita, measured in purchasing power parity
(PPP) (see Figure 1), Nicaragua is the poorest country in Latin America (excluding Haiti in the
Caribbean). Unlike the Latin American and Caribbean (LAC) region‘s income per capita, which
caught up with its 1980 level by 1994, Nicaragua took 25 years to overtake its 1980 GDP per
capita level. The country has longstanding widespread underemployment and poverty.
The Dominican Republic-Central America Free Trade Agreement (DR-CAFTA), signed by the
United States on August 5, 2004, has expanded export opportunities for many of Nicaragua‘s
agricultural and manufactured goods to the United States. Textiles and apparel account for nearly
60 percent of Nicaragua‘s exports. Ortega‘s promotion of mixed business initiatives, owned by
the Nicaraguan and Venezuelan state oil firms, coupled with the weak rule of law, may
negatively affect the investment climate for domestic and international private firms in the nearterm.2 Some also fear that recent increases in Nicaragua‘s minimum wage may erode
Nicaragua‘s comparative advantage in the textile industry.
Figure 1: Per Capita GDP in PPP (in constant 2005 international dollars), 1980-2008
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on April 10, 2011).
Nicaragua literally depends on international economic assistance to meet internal and external
debt obligations. In early 2004, Nicaragua secured approximately $4.5 billion in foreign debt
reduction under the Heavily Indebted Poor Countries (HIPC) initiative, but Managua still
struggles with a high public debt burden. Most foreign donors have curtailed their funding in
response to the November 2008 electoral fraud. Nicaragua has an Extended Credit Facility
2
Adapted from CIA-The World Factbook: Nicaragua; available at: https://www.cia.gov/library/publications/theworld-factbook/geos/nu.html
65
Program with the International Monetary Fund (IMF), which is supposed to manage the
government‘s targeted fiscal deficit during the 2011 election year. Furthermore, this program
will encourage transparency in the use of Venezuelan off-budget loans and assistance. Nicaragua
is progressively recovering from the current global economic crisis as increased exports drove
positive GDP growth in 2010. The economy was expected to grow at a rate of about 3 percent in
2011.3
III.2. Background Information on Microfinance and Microcredit
Broadly speaking, microfinance is the notion of providing financial services to the poor.
Microfinance institutions (MFIs) provide services ranging from insurance to loan brokerage. The
loan brokerage aspect of microfinance is known as microcredit. Microcredit allows for lowincome individuals with little or no collateral to gain access to debt financing. If managed
correctly, microcredit can be a powerful tool for lifting people out of poverty. Originally, most
microfinance and microcredit institutions were aimed largely at helping women gain access to
capital and this trend continues today. The most famous MFI is the Grameen Bank of
Bangladesh. Like most MFIs, the Grameen Bank was initially supported by donations. However,
unlike most MFIs, the Grameen Bank‘s success has allowed it to become entirely self-sufficient
and generate profits. This is however not the case yet in most other countries, including
Nicaragua.
III.3. Background Information on Impact Investing
Impact investing can be defined as ―actively placing capital in businesses and funds that generate
social and/or environmental good and at least return nominal principal to the investor‖ (see
Freireich and Fulton (2009), p. 2). Impact investing is seen as an evolution beyond the notion of
―socially responsible investment‖ in which investors avidly avoid investments in companies
perceived as socially or environmentally harmful in an effort to encourage more ethical corporate
practices. Impact investors are actively placing capital in the hands of those who need it most in
a manner that instigates development in much more demonstrable fashion than ―socially
responsibly investment‖ or philanthropy. Some investments only expect the return of nominal
principal while others will negotiate a low interest rate or the purchase of some equity to
compensate for the opportunity costs associated with investing.
Currently, high net-worth individuals, through investment vehicles such as pension funds, hedge
funds and mutual funds, are the primary practitioners of impact investing. This article proposes
an impact investing vehicle that allows the average investor, someone not necessarily wealthy
enough to place money into an impact-focused hedge fund, to also participate in global
development. Furthermore, the way most impact-funds are currently set up, their investments go
through an intermediary, like an MFI, who then disperses the capital. The investment vehicle
proposed in this article will facilitate direct impact investment by which the capital goes directly
to the borrower without the need of an MFI.
3
Adapted from CIA-The World Factbook: Nicaragua; available at: https://www.cia.gov/library/publications/theworld-factbook/geos/nu.html
66
III.4. Microcredit and Impact Investing in Nicaragua
As of 2009, there are 32 active MFIs in Nicaragua. According to Mix Market (2010), these 32
institutions had 391,375 active borrowers in 2009. While precise historic data for the number of
active borrowers in Nicaragua is not readably available, the research by Imai, Gaiha, Thapa and
Annim (2010) indicates that the increase in GDP per capita corresponds with an increase in the
number of active Nicaraguan borrowers. The data on impact investment in Nicaragua is even
more difficult to obtain, but based on the worldwide increase in the popularity of impact
investing, it can be assumed that it has grown recently in Nicaragua.
IV.
Discussion and Proposal
IV.1. Reaction to Literature and Data
From the literature it has become evident that while there are many criticisms of microcredit, two
main problems make its impact debatable: extremely high interest rates for borrowers and the
profile of the borrowers. The high interest rates are in place to compensate for the lack of
collateral on the loan. While in theory this may seem fair, it can lead to the borrower becoming
dependent on the MFI due to a need for refinancing and continued borrowing. While Rosenberg
(2010) points out that low default rates indicate that there are only a few over-indebted
borrowers, they are still far from financially independent.
Figure 2: Portfolio Structure and Number of Loans by Credit Type of all MFIs
Source: MIX Market (2010) Microfinance in Nicaragua, Graph 1
(as posted on the MIX Market website; downloaded on April 13, 2011).
67
With regards to the profile of the borrowers, most MFIs issue loans to micro-entrepreneurs (who
only need relatively small amounts) or to commercial borrowers (who need very large amounts).
While this alone is not a detrimental matter, the allocation of nearly all capital to very small,
micro-business makes it hard, if not impossible, for entrepreneurs trying to start with small or
medium sized business to get loans. These SMEs often go underfunded because their
entrepreneurs require a loan too large for a micro-loan yet too small for a commercial loan. As
the literature indicates, these SMEs are essential in stimulating growth in a developing economy.
As impact investments become a larger proportion of available capital in developing countries, it
is imperative that these investments be funneled directly into these SMEs rather than traditional
MFIs.
Unfortunately, there is no available recent data reflecting the concentration of small and medium
enterprises within the Nicaraguan economy. However, Figure 2 and Figure 3 display where loans
from microfinance institutions are going. The figures indicate a general trend towards investing
in microenterprises and away from investments in housing, consumption and commercial loans
for all MFIs (both regulated and unregulated) in terms of number of loans issued. Contrarily, in
terms of gross loan portfolio (the left-hand side of Figures 2 and 3), only unregulated MFIs are
actually investing a growing percentage of their money in microenterprises.
Figure 3: Portfolio Structure and Number of Loans by Credit Type (Unregulated MFIs)
Source: MIX Market (2010) Microfinance in Nicaragua, Graph 2
(as posted on the MIX Market website; downloaded on April 13, 2011).
68
Regulated MFIs are largely comprised of government-backed banks and publically funded
international finance organizations. Therefore, it is reasonable that they would keep a large
percentage of their investments in less risky, commercial loans. Unregulated MFIs are privately
held institutions that range from international lending corporations to pension funds anchored in
the United States or Europe. These institutions have more freedom to lend to slightly more risky
entrepreneurs. While this data is encouraging and depicts a greater investment in Nicaraguan
entrepreneurs, impact investing is primarily aimed at SMEs and not microenterprises, because
SMEs have a greater impact on their communities and therefore have a more demonstrable social
return on the investment. As stated by the literature, a higher concentration of SMEs receiving
loans would probably benefit the economy in the long run.
Hence, Nicaragua is the perfect country to begin discussing the potential for direct impact
investing. Not only is it one of the poorest countries in the world, its lack of a middle class will
make it possible to measure the direct results of impact investments. Furthermore, Nicaraguan
entrepreneurs are faced with all of the barriers discussed by Burger and Udell (2004): (a) poor
financial institution structure and lending infrastructure, (b) inefficient government regulations,
and (c) a lack of a relationship between potential investors and entrepreneurs.
a) Poor financial institution structure and lending infrastructure
Obviously, something is wrong if the people who will help the aggregate economy the
most have the hardest time gaining access to capital.
b) Inefficient government regulations
A detailed analysis of the legal framework surrounding Nicaraguan microcredit is not
important for this article, but it should be noted that the laws are extremely convoluted.
There are five different categories that MFIs fall into and each of them has their own set
of exceedingly complicated laws (see MIX Market, 2010).
c) Lack of relationship between potential investors and entrepreneurs
This is largely a marketing problem. When people think of the Nicaraguan economy, they
think of the many problems related to Nicaragua‘s poverty rather than a place where a
difference can be made. Also, due to a lack of capital, SMEs have no way of contacting
potential investors, both domestically and abroad.
IV.2. The Proposal: Direct Impact Exchange (DIX)
To overcome these barriers, this article proposes a new kind of securities exchange that only
deals with impact investments. The exchange would be called the Direct Impact Exchange
(DIX), and would encourage facilitation of the flow of capital from developed nations to
developing or least developed countries by selling impact bonds to investors. DIX would be a
virtual exchange, meaning that it would take place entirely online.
Investors would log into the exchange and view a list of entrepreneurs in need of a small
business loan. The lender would then choose which entrepreneur she/he would like to lend to and
makes a loan in any amount. Other lenders will log in and do the same and eventually the
entrepreneur will have enough small loans to comprise the large loan she/he initially wanted.
The bonds sold by the SMEs would be valued similarly to the way bonds are currently valued for
other companies using return versus risk analysis. Global Impact Investing Rating System
(GIIRS) is an organization that uses an econometric system to calculate and quantify the
69
projected social or environmental returns of a given SME. Since the borrowers of SME loans in
developing countries usually do not contain much collateral, GIIRS meets directly with the SME
to attempt to gauge its level of sustainability. The proposition is that GIIRS‘ ratings actually
become company ratings that would behave similarly to the way companies are currently rated
on the New York Stock Exchange. However, these companies would have a quantifiable
social/environmental return in addition to a financial return.
Depending on the competency of the entrepreneur and the social value of their proposed
enterprise, the GIIRS would assign a rating that would be used to value bonds sold by that
entrepreneur. The less sustainable the SME, the more expensive the subsequent bonds would be
for the issuer. Furthermore, GIIRS currently offers nonprofit consulting to entrepreneurs to
hedge some of the risk in investing. This consulting could be expanded upon and substantially
reduce poverty in Nicaragua.
Moreover, the terms of the bonds would be highly favorable for the SME to ensure a high rate of
approval. An example of a favorable stipulation would be that the SME did not have to pay any
interest for the first two years, though interest would accrue. As with any security, there would
also be a secondary bond market for impact investments. This would allow for investors to sell
their impact bonds to other investors and would minimize the liquidity premium of the bonds.
As evidenced by recent increases in impact investing, foreign investors are indeed willing to take
a smaller financial return in exchange for a quantifiable social/environmental return. This grants
SME entrepreneurs access to capital at a cheaper rate than a commercial bank loan and allows
them to become financially self-sufficient.
The notion of taking a smaller financial return has been demonstrated by microlending websites
like Kiva where lenders make $25 loans with no interest and no collateral. However, this
exchange would be substantially more efficient than organizations like Kiva, because Kiva does
not directly give its donations to the entrepreneurs. Instead, Kiva bundles up the $25 donations
and transfers them to a MFI that in turn loans them to its constituents at a normal microloan‘s
rate. Kiva merely facilitates microfinance; it does little to improve its effectiveness. DIX
however, would cut out the middleman and the rate of return the investor receives will be nearly
identical to the rate the borrower pays (there would inherently be some flotation costs as with
any security). These rates will be far lower than normal microfinance rates because of the GIIRS
rating each entrepreneur will have.
Additionally, with a Kiva-like interface, DIX will solve the problem of only large investors being
able to partake in impact investing. By allowing for any amount to be lent, any interested
investor can participate in global development. The pension and hedge funds could still invest
through their normal channels, and with large amounts it might be more profitable for them to do
so, but impact investing would be a concept more omnipresent than derivatives or futures.
IV.3. Potential Problems
In addition to the large capital expenditure it would take to set up DIX, the largest potential
problem for the exchange is the opportunity for abuse of the GIIRS ratings. To avoid a scandal
like that of the 2008 credit-crunch caused by the exceptional overvaluing of mortgage-backed
securities, GIIRS would have to be audited by another agency. To avoid the auditor becoming
infiltrated by those who would abuse the power, the auditing agency should be comprised of an
international committee with no one country having a greater weight than another.
70
Another problem could be that competition for impact investment opportunities will dilute the
quality of the SMEs. To compensate for this potential pitfall, GIIRS‘ metrics would have to be
enumerated clearly and remain static for a long period of time. This would ensure that an ‗A‘
rating today would be equal to an ‗A‘ rating five years from now. It is improbable that there will
be fewer novel entrepreneurial ideas in the future than there are today, so there should always be
a steady flow of SMEs at all levels of the GIIRS spectrum.
IV.4. Long Term Impact
By developing Nicaragua‘s middle class, there will be increasing employment opportunities
available for the poor, and the severity of poverty will decrease. As the severity of poverty
decreases, Nicaraguans will begin to accumulate assets and before long will possess their own
collateral to offset the ridiculously high interest rates of microloans. As these Nicaraguans begin
to take out loans, loans will also become cheaper for those without collateral and microlending
will become more sustainable.
Furthermore, impact investing and GIIRS sets up the foundation for an extremely virtuous cycle.
Soon not only will SMEs have GIIRS ratings, but every company worldwide will have a GIIRS
rating of some sort. Companies that partake in more ethical practices would have higher GIIRS
ratings and will attract more investors. Eventually, companies will be competing for impact
investing opportunities. DIX combined with contemporary impact investing will quickly achieve
the reform that socially responsible investing set in motion.
V.
Conclusion
The Direct Impact Exchange (DIX) will be a revolutionary facilitator of global development.
There are many countries around the world with similar economic climates to Nicaragua that will
benefit greatly from the DIX implementation. While microfinance has helped millions, its longterm effects continue to be debated by macroeconomists. Impact investing will better allocate
capital to entrepreneurs who will have a more comprehensive effect on relieving poverty.
However, it is important to make the distinction that DIX would not replace contemporary
microfinance, but rather supplement it. Impact investing, with a focus on small and medium
enterprises, will yield immense social returns that will allow microfinance to facilitate the
poverty relief it was intended for. Impact investing is going to change the way financial
transactions occur all over the world. With the execution of the Direct Impact Exchange, people
of all means can participate in demonstrable social change.
References
Berger, Allen N. and Gregory F. Udell (2004) ―A More Complete Conceptual Framework for
SME Finance‖, Washington, DC: World Bank (October 15), available at:
http://siteresources.worldbank.org/INTFR/Resources/475459-1107891190953/6619101108584820141/Financing_Framework_berger_udell.pdf
Christen, Robert Peck; Richard Rosenberg; and Veena Jayadeva (2004) ―Financial Institutions
With a "Double Bottom Line": Implications for the Future of Microfinance‖, CGAP.org.
July; available at: http://www.cgap.org/gm/document-1.9.2701/OP8.pdf.
71
Freireich, Jessica and Katherine Fulton (2009) Investing for Social and Environmental Impact: A
Design for Catalyzing an Emerging Industry (Cambridge, Massachusetts: Monitor
Institute, January); available at:
http://www.monitorinstitute.com/impactinvesting/documents/InvestingforSocialandEnvI
mpact_FullReport_004.pdf.
Global Impact Investing Rating System (GIIRS) (2010) ―About GIIRS‖, Berwyn, PA: Global
Impact Investing Rating System (GIIRS); available at: http://www.giirs.org/aboutgiirs/about.
Imai, Katsushi S.; Ragav Gaiha; Ganesh Thapa; and Samuel Kobina Annim (2010) Analysis of
Poverty Reducing Effects of Microfinance from a Macro Perspective: Evidence from
Cross-Country Data (Kobe, Japan: Research Institute for Economics and Business
Administration (RIEB), 24 September), available at: http://www.rieb.kobeu.ac.jp/academic/ra/dp/English/DP2010-25.pdf.
Microfinance Information Exchange (MIX) (2010) Microfinance in Nicaragua (Washington,
DC: Microfinance Information Exchange, MIX Market, November); available at:
http://www.mixmarket.org/mfi/country/Nicaragua/report?print=1.
Rosenberg, Richard (2010) ―Does Microcredit Really Help Poor People?‖, Washington, DC:
Consultative Group to Assist the Poor (CGAP), Focus Note, No. 59 (January); available
at: http://www.cgap.org/gm/document-1.9.41443/FN59.pdf.
U.S. Central Intelligence Agency (CIA) (2011) The World Factbook: Nicaragua (Washington,
DC: Central Intelligence Agency); available at:
https://www.cia.gov/library/publications/the-world-factbook/geos/nu.html.
World Bank (2010) World Development Indicators (Washington, DC: The World Bank); as
posted on the World Bank website (downloaded on May 5, 2010).
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Global Majority E-Journal, Vol. 2, No. 2 (December 2011), pp. 73-86
Brazil’s Economic Growth:
With or Without Prosperity?
Ana Cristina Sauri Faller
Abstract
Currently, about 20 million people live in poverty (below US$2-a-day) in Brazil. The gap
between the highest and the lowest social levels is high. A considerable part of Brazil’s
population does not have access to basic services such as clean water, food and education. This
situation prevails despite the progress made since the mid-1990s, when Fernando Enrique
Cardoso became president, followed by various social programs implemented by the government
of Luiz Inacio Lula da Silva, which lowered the percentage of people living below the poverty
line considerably. Today, the biggest social challenge facing the Brazilian government and
society remains to be a lack of education, housing, health care, and nutrition, especially for
Brazil’s poor children. Close to one million of such children live in favelas or in the streets
confronting miserable living conditions and even starvation.
I.
Introduction
Today, as a result of globalization, we have witnessed countless scientific and technological
advances in terms of communications and modes of production. However, this progress has not
always been directed towards meeting the needs of the socially marginalized and the poor. Brazil
is no exception. Despite its economic growth, the Latin American country has made little
progress with solving the problem of poverty and inequality. Most of the social programs
implemented in recent decades have been based on the idea of economic growth and spillover,
meaning that prosperity will expand to all places and all people. Many initiatives have been
designed to include certain sacrifices to achieve macroeconomic goals, with the belief that the
benefits of economic progress will reach the whole population, including the underprivileged
sectors.
Unfortunately, neo-liberalism has not fulfilled its expectations. Brazil is proof of this. The
country is now an emerging power that stands out in Latin America due to its size and stable
economic growth. Regardless of economic growth, there is a marked social polarity that has
73
hindered the achievement of social development in Brazil. Consequently, it is necessary to
excavate the social costs that poverty and other related phenomena such as unemployment have.
A clear example is the boost of crime, which is related to the misdistribution of wealth. Poverty
also affects vulnerable groups such as women and children, who are left behind because of
lacking education and lacking employment opportunities.
All of the above constitutes a vicious cycle that creates social division and encourages increasing
social marginalization among the poorest sectors of the country. Nowadays capital is no longer
considered only a financial asset, but also a human and social asset that is closely related to
economic growth. Human capital refers to human resources, which requires paying special
attention to key issues like health and education, while social capital includes shared values and
culture within a society. Economic and social development based on knowledge has become
increasingly important in recent years.
Given the complex nature of poverty,1 various measures need to be taken in order to reduce
poverty. For example, the World Development Report 2000/2001 has outlined a plan to
accomplish this objective based on: promoting opportunity, facilitating empowerment and
enhancing security.2 It is clear that these actions require both global cooperation and developing
countries putting together their own mix of policies to attack poverty, reflecting national
priorities and local truths. In all of this, governments play a major role. Government must
redesign itself. Today, there is a demand for government to redefine its organizational structures,
to promote the creation of support programs and be more efficient in achieving its goals by
developing a new institutional system that seeks to strengthen human and social capital. While
economic growth is crucial for generating opportunities, reducing poverty is not that simple.
This article reviews Brazil‘s progress with reducing poverty over the last few decades. The aim
is to highlight the actions taken by the past administration on issues such as education and urban
marginalization and to evaluate the results and effectiveness of those actions. The article is
structured as follows. The next section briefly reviews the relatively large literature on poverty in
Brazil. Section III provides some empirical background related to the subject in terms of Brazil‘s
political, economic and social history as well as the localization of poor in Brazil. The fourth
section reviews key aspects of some poverty reduction plans, including issues such as
marginality, health, education, hunger. The fifth section summarizes the main ideas of this
article.
II.
Brief Literature Review
There have been numerous investigations of poverty and inequality in Brazil. The following are
some of the more influential studies within the last 15 years.
1
There are various definitions of poverty. Some like Lakshman Yapa (1996, p. 707) state that ―people are
considered poor when they are unable to satisfy their basic needs for food, clothing, shelter and health‖. On the other
hand, the United Nations Economic and Social Council (ECOSOC) (1998) used a broader approach, defining
poverty as ―a denial of choices and opportunities, a violation of human dignity. It means lack of basic capacity to
participate effectively in society. It means not having enough to feed and clothe a family, not having a school or
clinic to go to, not having the land on which to grow one‘s food or a job to earn one‘s living, not having access to
credit. It means insecurity, powerlessness and exclusion of individuals, households and communities. It means
susceptibility to violence, and it often implies living in marginal or fragile environments, without access to clean
water or sanitation‖.
2
See World Bank (2001).
74

According to Verner (2004), the story of poverty in Brazil is a distinctive case in the
matter because of the elevated rates of inequality and the heterogeneity of the poor‘s level
of income, human resources, and physical resources. A number of different aspects
influencing poverty in Brazil can be mentioned. However, from Verner‘s point of view,
there are two crucial demographic characteristics that may affect the degree of poverty in
a society: (a) the volume and distribution of resources and (b) the distribution of the
population in the households. The first factor has direct implications on the endowments
available to a particular group. In the particular case of Brazil, this factor may help to
explain the widespread poverty amongst the rural citizens. The second one affects the
labor market by determining the distribution of the population and family consumption
variables.

Fiess and Verner (2004) affirm that the main characteristics affecting poverty in Brazil
are changes in economic activity and macroeconomic stability, reduction in the fertility
rate and increased urbanization rate.

Barros and Mendonça (1997) have analyzed the relations between economic growth,
inequality and poverty in Brazil. They came to the conclusion that an improvement and
progress in the distribution of income would be more effective for poverty reduction than
economic growth alone, if growth maintained the current pattern of inequality. They
affirm that because of the very high level of income inequality in the country, it is
possible to dramatically reduce poverty among the Brazilians even without economic
growth, just by reducing the level of inequality in Brazil close to the average of Latin
America.

Sonia Rocha (1997) comes to the conclusion that a reduction in Brazil‘s high inequality
would require the reallocation of industrial activity to the peripheral regions. He comes to
this conclusion based on the observation that concentrations of poverty are closely related
to what occurs in Sao Paulo and the North East region.

Similarly, Barros et al. (2006) estimated that about half of the decline in inequality
(between 2001 and 2005) stemmed from improvements in the distribution of non-labor
income, associated primarily with larger and better-targeted social transfers.
III.
Empirical Background
Brazil‘s history is full of contrasts. Different schemes have dominated the political and economic
life of the country from monarchies to populist governments and even military dictatorships.
Since 1985, it has maintained a federal republican system, or as called among the Brazilians, the
New Republic, characterized by a multi-party democracy. To understand Brazil‘s current
situation regarding poverty and development, it is necessary to understand Brazil‘s political,
economic and social background as well as the locality of Brazil‘s poor.
III.1. Recent Political History
For more than 30 years, Brazil‘s political history has been dominated by a transition to
democracy and economic stability. After years of military dictatorship, in 1984 the ―Já Diretas"
movement mobilized millions of Brazilians who demanded direct elections for the president.
Four years later, a new constitution was promulgated, reestablishing a democratic state and a
75
presidential republic. In 1989, Fernando Collor de Melo won the first elections for president held
since the military coup in 1964.
Table 1: Brazil’s Economic Plans
Plan
Main Measures






Change currency: from Cruzeiro to cruzado.
Wage and price freeze.
Termination of the restatement.
Creation of unemployment insurance.
Automatic adjustment of wages, with certain level of inflation.
A moratorium was decreed and the payment of external debt was
suspended.
Bresser (1987)



Maintenance of price and wage freeze and moratorium.
Increase in public tariffs.
End to the automatic salary adjustment.
Verão (1989)




Control of the public deficit to tame inflation.
Privatization of state enterprises.
Freeze on prices.
De-indexation of the economy







Forfeiture of 80 percent of bank deposits and financial applications.
The Cruzeiro returns as currency.
Price freeze.
Dismissal of officials.
Privatization of state enterprises.
Closure of public bodies.
Opening of the economy to international competition.








New currency: The Real.
Exchange rate parity 1 real = 1 dollar.
Acceleration of privatization.
Interests increase.
Facilities for imports.
Control of public spending.
Open economy
Measures are sought to support the modernization of enterprises.


Free exchange rate fluctuation.
Reducing interest rates on loans to individuals.
Cruzado (1986)
Collor (1990)
Real (1994)
Real (1999)
Source: Translated by author based on a table provided by João Sayad (undated), Panorama de
la economía brasileña contemporánea, available at:
http://www.tecsi.fea.usp.br/eventos/Contecsi2004/BrasilEmFoco/espanhol/economia/panorama/apresent/q-plano.htm.
76
Collor, a senator from the province of Alagoas, won the election with a campaign based on
promises to fight corruption, as well as by promoting an image of a young and dynamic leader.
However, after two years in office, the president‘s own brother made public allegations of
corruption. Subsequently, Brazil‘s Congress created the Parliamentary Investigation Commission
(CPI) to conduct research on issues of corruption and fraud.
Collor resigned and Vice President Itamar Franco assumed the presidency of Brazil. Under his
presidency, the ―Real Plan (Plano Real—a successful economic stabilization plan with a new
currency: the Real)‖ was adopted. The plan was implemented by the minister of economy at the
time, Fernando Henrique Cardoso. Given the success of the plan, providing stability to the
Brazilian economy, Cardoso was elected to be president in 1994 and reelected in 1998. In 2002,
Luíz Inácio Lula da Silva was elected to be president, and given the success of his social
programs, he also was re-elected four years later. In 2011, Lula was succeeded by the current
president, Ms. Dilma Rousseff.
III.2. Recent Economic Stabilization Plans
In the economic sphere, the period of the New Republic is marked by a number of different
economic situations and complications. Following the debt crisis of the early 1980s, the country
carried out various economic stabilization plans. Table 1 below shows the main features of the
economic plans established during the New Republic. The first plan of 1986 was the Cruzado
Plan (named after changing Brazil‘s currency from the Cruzeiro to the Cruzado) ended a general
price freeze, but was not successful in stabilizing Brazil‘s economy. Hence, it was followed by
several other stabilization plans: the Bresser Plan (1987), the Verão Plan (1988) and the Collor
Plan (1990). The latter was marked by the seizure of 80 percent of financial assets, plunging the
economy into a recession. In July 1994, the successful Real Plan was launched.
Figure 1: Real Annual GDP Growth (percent), 1981-2008
Source: Created by author based on World Bank (2010) World Development Indicators (as
posted on the World Bank website; downloaded on May 5, 2010).
With the Real Plan of 1994, the exchange rate was fixed, which brought down inflation, reduced
commercial interest rates, and finally stabilized Brazil‘s economy. The plan also came with a
wave of privatizations. The domestic steel, petrochemical and fertilizer industries were
privatized, as well as the electric and the communications sectors. In January 1999 the Central
77
Bank abandoned the system of fixed exchange rates. As shown in Figure 1, during the last
decade (1999-2008), Brazil‘s economy has fully stabilized, growing at an average annual real
GDP growth rate of 3.3 percent.
III.3. Recent Social Background
With a Gross National Income (GNI) per capita of US$ 10,607 in purchasing power parity
(PPP), Brazil is today the 70th richest country in the world (see United Nations Development
Program, 2010). The same source shows that Brazil ranked 73rd in terms of human development.
However, average numbers can be deceiving due to several reasons; one of the most important:
unequal distribution. Figure 2 shows the percentages of people living below US$1.25-a-day and
below US$2.00 from 1991 to 2007. Furthermore, despite economic growth, Figure 3 shows that
unemployment rates have increased mostly in the 1990s and remain (with about 10 percent)
high.
Figure 2: Poverty Headcount of Brazil, 1991-2007 (in percent)
Source: Created by author based on World Bank (2010) World Development Indicators (as
posted on the World Bank website; downloaded on May 5, 2011; data for 1990, 1994 and 2000
are estimates based on existing data for other years).
Figure 3: Total Unemployment (percent of total labor force)
Source: Created by author based on World Bank (2010) World Development Indicators (as
posted on the World Bank website; downloaded on March 31, 2011).
78
Despite some progress, inequality and poverty remain serious problems in Brazil. Poverty
becomes more relevant today, given the economic expansion and positioning of Brazil as an
emerging power on the international arena. As will be shown in more details in Section IV
below, the administration of President Luiz Inacio Lula da Silva had implemented various
programs to fight poverty; all of them directed at key factors of social development such as
providing access to food, health and education. There is broad agreement that the country must
continue to invest heavily in these social areas to reduce poverty and inequality.
III.4. Location of the Poor: Favelas
Large cities in Latin America are generally characterized by a significant proportion of their
population living in slums. In Brazil, it has been estimated that over 6.5 million people (3.6
percent of the total population) live in precarious conditions in slums. In Sao Paulo (Brazil‘s
largest city), there are about two million people living in slums, while there are about 1.4 million
slum dwellers in Rio de Janeiro (Brazil‘s second largest city). In the past decade, the population
living in favelas grew 39 percent.3 Informal cities are a challenge for the promotion of cities
mainly because the characteristics of the urban informal sector are numerous and rapidly
changing.4
In the world of urban poverty, the traditional relationship between residential location and
workplace location (or locations of potential income) is one of the key elements to explain the
spatial distribution of poor households. In addition, other variables such as the spatial
segmentation network of services and public facilities play a major role regarding this matter. In
the past, favelas were surrounded by factories and people settled there to find a job and save on
transportation. By now, many of those factories closed, largely due to crime and insecurity, and
people have realized that living in safe neighborhoods is perhaps more important than living
close to sources of work.
Most favelas were settled a long time ago. Poor workers used to live there in very precarious
conditions without water, electricity, sanitation, healthcare or education. According to Vera
Malaguti (a professor of criminology and general secretary of the Institute of Carioca
Criminology), 20 people are killed each day in Rio de Janeiro as the city became ―a laboratory of
genocidal techniques‖.5 Rio‘s police is the one who kills the most in the world, but they don‘t do
it on a whim: Brazil is a paradise of wild capitalism, the most unequal country in the world and
Rio de Janeiro is a strong area of real estate speculation that intensifies as the big events
approach.‖6
The Batalhão of Policiais Operações Especiais (BOPE), was created during the military
dictatorship in 1978, but only received its current name in 1991 to meet the challenges to public
safety. The BOPE was conceived as a war machine: ―It does not receive training in how to
interact with civilians or how to control those who break the law: its sole purpose is to invade
enemy territory.‖7 According to Zibechi (2010, paragraph 9), the hymn chanted by the BOPE in
3
According to the Brazilian Institute of Geography and Statistics (IBGE), as reported by the newspaper O Estado de
Sao Paulo, and referred to in Perlman (2009). The favelas included for this statistic are those of Brazilian regional
capitals.
4
See Perlman (2009).
5
Vera Malaguti, as quoted in Zibechi (2010), see paragraph 4.
6
Zibechi (2010), paragraph 4.
7
Luiz Eduardo Soares, André Batista and Rodrigo Pimentel (2005) Tropa de Elite, as quoted in Zibechi (2010).
79
training states that the mission is to ―invade the favela and crush everybody.‖ The emblem of the
body is a knife in the skull and its color is black. For years it had only 150 members which now
number almost 400. Shortly before the Pan American Games in July 2007 in Rio de Janeiro, the
military police invaded the Complexo do Alemão, one of the poorest neighborhoods, with 1, 300
troops and killed 30 people. According to the Ministry of Human Rights, many of these deaths
were ―summary executions‖.8
Now a wall is being built around thirteen favelas with the excuse of protecting nature. This is just
an example of what could happen in the coming years to provide security for the World Cup and
the Olympics. BOPE is renewing its supply of arms with the addition of new machine guns,
explosives detection equipment and special tactical missions. According to Vera Malaguti, the
government considers the presence of the poor to be damaging to big business and real estate
speculation. Therefore, they must be exterminated. The walls in construction around the favelas
are defined by her as a fascist fence for the poor. 9
IV.
Key Aspects of Some Recent Poverty Reduction Plans
Recent studies analyzing poverty and economic growth in Brazil have concluded that the lack of
investment in human capital is a central element in explaining the large difference between
economic growth rates and social inequality. It can be said that the biggest social problem in the
country, is the marginalization of some of Brazil‘s population. Today, the inability of large parts
of Brazil‘s society to access the most basic utilities such as water, food and education, represents
an increasingly common reality. The origin of this marginality is deeply associated with the
nature and characteristics of the country‘s economic structure. Like in most underdeveloped
countries, especially in Latin America, serious damage was done by the lack of competitiveness
and the dependence on industrialized economies.
The former Brazilian government acknowledged and understood that overcoming poverty
required a shift in the policies implemented. Some of which are (a) the adoption of structural and
global policies in order to achieve the goal, (b) build a quality education system, which ensures
for the population, without exclusions, adequate training, as well as solid life values, (c) urban
planning in general, preventing the growth of the marginal sectors in the cities, and (d) invest in
education, health and general social security systems that are efficient and have in fact an impact
on improving the quality of life of the majority of the population.
IV.1. Programs in the Health Sector
According to the website of the Brazilian Health Ministry, the government facilitated the
population access to health services, seeking to be more preventive and educational. Good
examples are the efficient fight against dengue, the increase in immunization rates (shown in
Figure 4 below) and the following three programs:
a) The Family Health Program has created 3,200 new groups, adding up to 19,943
volunteers serving 65 million people. At the same time, they hired 13, 040 new
community health workers, totaling 201, 543 volunteers serving 96 million
people at home.
8
9
See Zibechi (2010).
See Zibechi (2010).
80
b) The ―Smiling Brazil‖ program aimed to improve the oral health of Brazilians.
Important strides were made in preventing caries in children. This program has
benefited 39.2 million people.
c) Through the Health Care Emergency System (SAMU), one hundred popular
pharmacies have been installed with the goal of free distribution of medicines.
In addition, 132 medical units were constructed in 1,200 municipalities and 252
ambulances were delivered of a total reach 1,080 units.
Figure 4: Immunization Rates for DPT (percentage of children ages 12-23 months)
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded May 5, 2010).
IV.2. Brazil’s Zero Hunger Program
Brazil‘s ―Zero Hunger‖ program (see the widely advertised logo in Figure 5), initially formulated
and popularized in 2001, and then adopted as a governmental priority beginning in 2003 (see
Belik and Del Grossi, 2003, p. 4), included sixty public programs to fight poverty, with the
participation of civil society, ranging from land reform, job training, cooperatives, family farms,
to complex and diverse programs that created the conditions for people to escape poverty.
Popular education was key component of this plan. The government began affirming that it was
not enough to give people material things. It was also necessary to produce a new class of
political activists of political actors.10
10
For further details, see Betto (undated).
81
Figure 5: Brazil’s Zero Hunger Logo
Source: https://ead.serpro.gov.br/cursos/catalogoUniserpro/imagens/t3/fome_zero0.jpg
IV.3. Brazil’s Education System
The consideration of human development as the starting point of any growth process has made it
clear that education and development are closely related. For over forty years the term human
capital was coined as the productive capacity of a person enhanced by agents such as education.
During the World Conference on Education in 1990, it was noted that education was a vital
factor to achieve economic, social and cultural development. Thus, a proper education policy
could become a force for economic and social development. The Brazilian government
acknowledged this by stressing that it is the government‘s obligation to provide education at all
levels, as well as moving steadily to increase the years of schooling of the entire population.11
A program called ―Literate Brazil‖ was implemented, seeking to increase the schooling of
children and adults, promoting access to education as a right of everyone at all times of life,
emphasizing quality education and a better utilization of public resources. The school program
served 37.5 million students and for the first time the government distributed aid to 881,000
children in nurseries. Similarly, the government proposed the establishment of vacancies for
public school students, especially blacks and Indians and the granting of scholarships for poor
students in private universities. Other innovations were implemented like the distribution of free
textbooks for students in public schools.
While literacy rates have increased (see Figure 6), Brazil‘s school enrollment ratio for primary
education has gone down since 2004 (see Figure 7). The causes for this striking phenomenon
(especially as school enrollment ratios have increased in most other Latin American countries)
will have to be studied further in the future.
11
In accordance with Article 21 of Law Nº 9.394 of 1996, which implements the guidelines and bases of the
national education system, education in Brazil consists of the following levels: (a) basic education, covering primary
education, basic education and secondary education, and (b) higher education. The educational system of the nation
includes public institutions (which are free at all levels) and private institutions. The highest authority in this matter
would be the Ministry of Education, primarily through the Federal Council of Education. As an interesting fact, the
Federal Government handles at least one public university in each state of the Federation. Access to these
institutions is known as "vestibular", and is key because compared to the high demand for higher education in the
country, there are only a very few university places.
82
Figure 6: Literacy Rates, ages 15 and above (percent)
Source: Created by author based on World Bank (2010) World Development Indicators (as
posted on the World Bank website; downloaded in March 31, 2011).
Figure 7: Net Primary School Enrollment (percent)
Source: Created by author based on World Bank (2010) World Development Indicators (as
posted on the World Bank website; downloaded in March 31, 2011).
IV.4. Program for Growth Acceleration
For some time now, Brazil has introduced a new model of economic and social development,
whose main characteristic is the combination of economic growth with income distribution. The
primary purpose is the reduction of poverty and the inclusion of large numbers of Brazilians to
the formal labor market. In the second half of the past decade, the government of achieved a
stable economy, a favorable environment for investors, maintained the principle of fiscal
responsibility, reducing the nation‘s dependence on foreign financing, increasing substantially
the share of Brazil in global trade, as well as achieving significant surpluses in the trade balance
is concerned. With all of the achievements above, there is the possibility of directing the State to
83
faster growth, but overall to development, expanding the benefits to the whole population and at
the same time respecting the environment.
Between 2007 and 2010, the challenge of the government‘s economic policy was to take
advantage of the favorable historical moment for Brazil stimulating the growth of gross domestic
product and employment, increasing social inclusion and progress in income distribution. Based
on the foregoing, the authorities in turn created the Growth Acceleration Program (PAC), which
has as one of its main features, the tax extension to encourage greater investment in Brazil.
Through the PAC tax reduction for semiconductors, digital television equipment, computers,
supplies and services used in infrastructure, as well as of steel were encouraged. Similarly, this
program provided long-term fiscal means, such as the modernization and upgrading of the
tendering process, a key issue to ensure the balance of public expenditure.
Although already partially mentioned, the measures for economic growth in the country were:
the stimulus to credit and financing, improvement of the investment environment, extending and
expanding tax and ultimately long-term fiscal and legal consistency. PAC entered its second
phase in March 2010, when President Lula da Silva announced $526 billion dollars in public and
private investment over 2011-2014. PAC 2, shares many characteristics with the first phase of
this project, putting emphasis on investments in the logistics area, social and energy
development, organized into six major initiatives:
a)
b)
c)
d)
e)
f)
Best Cities (urban infrastructure),
Community Citizenship (security and social inclusion),
My House, My Life (housing),
Water and Light for All (sanitation and access to electricity),
Energy (renewable energy, oil and gas), and
Transport (roads, railways, airports).
At the time, President Luiz Inacio Lula da Silva said he believed the efforts of the PAC 2 could
be viewed as a series of projects that the next administration could use as a reference point,
rather than starting from scratch, since in his opinion Brazil did not have time to waste.
V.
Conclusion
As shown through this article, one of the most striking aspects of the Brazilian economy is high
degree of income concentration. Regardless of the changes the economy has gone through in the
two decades, going from the country‘s re-democratization, trade liberalization, hyperinflation,
several currency changes, and lastly, the macroeconomic stabilization in the mid-1990s, Brazil
still presents one of the worst models of income distribution around the globe. The problem is
certainly extremely complex, and linked to numerous socio-economic factors, which makes it a
predominantly complicated analytical issue.
The effects of the programs implemented during the government of ex President Lula da Silva,
aimed at improving the living conditions of the poor in Brazil can be considered positive, as
poverty rates have dropped significantly and access to services such as health and education have
grown over the years.
Part of the success of the social programs is due to the continuity that Lula da Silva gave to
support strategies initiated by his predecessor Fernando Henrique Cardoso. In the same vein, the
tactics taken by the government, which involve assistance in terms of health and education (the
84
Zero Hunger program), are important when evaluating the real impact of programs on the quality
of life. The high levels of popularity enjoyed by Lula were the result of the effectiveness that
those approaches had.
Unfortunately, the problem of urban poverty remains to be a difficult issue for Brazilian politics
and the government‘s inability to access some of the favelas makes the problem even more
difficult. Although the number of poor people in major Brazilian cities has started to decline, due
to the high rates of violence in the favelas, the government continues to resort to controversial
measures (such as the BOPE) to exercise greater control over this population.
Finally, as Brazil will host the 2014 Soccer World Cup and Rio de Janeiro the 2016 Olympic
Games, the actions taken by the Brazilian government will be in the spotlight of the international
community. It will be interesting to see how President Dilma Rousseff is going to provide
continuity to Lula‘s efforts to provide economic growth with prosperity for all.
References
Barros, Ricardo Paes de; Ricardo Henriques; and Rosane Mendonça (2001) ―A Estabilidade
Inaceitável: Desigualdade e Pobreza no Brasil‖, Rio de Janeiro, Brazil: Instituto de
Pesquisa Econômica Aplicada (IPEA), Texto para Discussão, No. 800 (June); available
at: https://www.tce.to.gov.br/sitephp/aplic/licitacao/documentos/editais/td_0800.pdf
Barros, Ricardo Paes de and Rosane Mendonça (1997) ―O Impacto do Crescimento Econômico e
de Reduções no Grau de Desigualdade sobre a Pobreza‖, Rio de Janeiro, Brazil: Instituto
de Pesquisa Econômica Aplicada (IPEA) Texto para Discussão, No. 528; available at:
http://www.ipea.gov.br/pub/td/td0528.pdf.
Belik, Walter and Mauro Del Grossi (2003) ―Brazil‘s Zero Hunger Program in the Context of
Social Policy‖, Paper prepared for the 25th International Conference of Agricultural
Economists in Durban, South Africa (August); available at: http://www.fomezero.gov.br/.
Betto, Frei (undated) ―El programa hambre cero en Brasil‖; Website Resource; available at:
http://www.congreso.gob.gt/plumainvitada/15.pdf.
Fiess, Norbert M. and Dorte Verner (2004) ―The Dynamics of Poverty and Its Determinants: The
Case of Northeast Brazil and its States‖, World Bank Policy Research Working Paper,
No. 3259 (April); available at: http://wwwwds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2004/04/16/000012009_20040
416153112/Rendered/PDF/WPS3259.pdf.
Perlman, Janice (2009) Favela: Four Decades of Living on the Edge in Rio de Janeiro (Oxford,
UK, and New York, NY: Oxford University Press).
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Mundo O Brasil rumo aos objetivos de desenvolvimento do milenio . Consulted March
2011 Web: http://www.pnud.org.br/arquivos/50jeitos.pdf
Rocha, Sonia (1997) ―Desigualdade Regional e Pobreza no Brasil: a Evolução 1981-1995‖, Nova
Economia, Vol. 7, No. 2, pp. 85-103; available at:
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United Nations Economic and Social Council (ECOSOC) (1998) ―Statement of commitment for
action to eradicate poverty adopted by administrative committee on coordination‖, New
York: ECOSOC (May 20); available at: http://www.unsystemceb.org/statements/eco5759.
Verner, Dorte (2004) ―Making the Poor Count Takes More than Counting the Poor: A Quick
Poverty Assessment of the State of Bahai, Brazil‖, World Bank Policy Research Working
Paper, No. 3216 (February); available at: http://go.worldbank.org/PJ5D1PAV70.
Yapa, Lakshman (1996) ―What Causes Poverty? A Postmodern View‖, Annals of the Association
of American Geographers, Vol. 86, No. 4, pp. 707-728.
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86
Global Majority E-Journal, Vol. 2, No. 2 (December 2011), pp. 87-98
Poverty and Fertility in India: Some Factors
Contributing to a Positive Correlation
Brittany Traeger
Abstract
India has diminishing population growth rates and fertility rates; however, they still remain high
compared to the world average. The families living in poverty are those having the most children
because they are consistently trapped in poverty from generation to generation with little
opportunity. Poor families are typically larger because they use children as a source of
generating income via child labor. Parents also have children for insurance purposes because
they envision needing help when they get older. All children born into poverty, especially girls,
have little opportunity to escape from it in adulthood because of the lack of education and
power. Another cause for high fertility rates is the large unmet need for family planning among
the poor. Investing in family planning amongst the poor would be efficient to reduce fertility
rates and poverty. Furthermore, increases in school enrollments, (including for girls) result in
more power for females and thus decreasing fertility rates.
I.
Introduction
Currently, about one quarter of India‘s population lives in poverty, i.e., on less than one dollar-aday. 1 This is a sharp decrease from what the poverty rate was in previous decades but it remains
high. India also remains to have relatively high fertility and population growth rates. Many
consider high poverty and high fertility to be a vicious cycle poor people are caught in. The
vicious cycle is that females of poor families get married at a young age and typically have many
children. These females receive little formal education, and they lack the right of power,
especially with regards to how many children they will have.
There are many connections that can be associated between GDP growth, a decline in the
percentage of the population that are living in poverty,2 decreasing fertility rates, and hence,
1
Data based on World Bank (2010).
In India, GDP growth is negatively associated with the percentage of the population affected by poverty. As GDP
growth increases, the poverty headcount ratio decreases for both $1.25 a day and $2 a day poverty measures.
2
87
decreasing population growth rates. On the other hand, decreasing fertility rates and subsequent
decreasing population growth rates could be seen as catalysts for the decline in the percentage of
the population that are living in poverty, which in turn becomes a catalyst for GDP growth. The
following sub-sections look at some of the possible relationships between poverty and fertility in
more details.
This article focuses on the causes for high fertility and population growth rates as well as the
causes for the recent decrease in fertility and population growth rates in India. It is structured as
follows. The next section provides a brief literature review. The third section provides some
empirical background on India‘s economy, population and poverty, while the fourth section
summarizes some characteristics of poverty in India that are also related to fertility. The fifth
section discusses two key policy interventions before the last section provides some conclusions.
II.
Brief Literature Review
Overall, there is a large amount of literature on poverty and fertility, though the literature linking
the two issues specifically in India is relatively small. Many of the sources often link India‘s
progress in reducing poverty and India‘s decreasing fertility transition to an increase in
contraceptive use. However, many sources focus on the relative large unmet need for
contraception among the poor. Due to the large percentage of unmet need for contraception,
other factors such as education and the promotion of later marriages are mentioned as well for
India‘s success in reducing poverty.
After decades of debates, a World Bank Working Paper by Das Gupta, Bongaarts and Cleland
(2011) argues that there is now a broad consensus among researchers that lower fertility rates
facilitate economic growth in low-income countries. Low dependency ratios (resulting from
lower fertility rates) create a window of opportunity for savings and increase productivity and
investment — which can permanently transform living standards. The more rapid the fertility
decline in a region, the wider the window of opportunity, though its duration will be shorter,
because the population will age more rapidly.3
The studies reviewed by Das Gupta, Bongaarts and Cleland (2011) also indicate that rapid
population growth can be a constraint on economic growth, especially in poor countries with
policies that do not encourage a rapid rise in productivity. In addition, lower fertility is
associated with better child health and schooling, reduced maternal mortality and morbidity, a
higher rate of labor participation by women, and higher household earnings. Their review of the
literature also highlights the deep challenges to managing common environmental property
resources, because of diverging interests among users. But the pressure on these resources can be
mitigated by reducing the rate of population growth. Finally, they conclude that although family
planning programs are only one policy lever to help reduce fertility, most studies find them
effective.4
The following are some of the most relevant previous studies analyzing the relationship between
poverty and fertility in India, in chronological order.

Cain (1981) focuses on factors that contribute to high fertility rates in India and Bangladesh.
3
This World Bank Policy Research Working Paper was published in June 2011, which is after most of this research
paper had been completed.
4
Adapted based on by Das Gupta, Bongaarts and Cleland (2011), page ii.
88
He analyzes that poorer families tend to have more children as a form of risk insurance and
that child labor is necessary among the poor in order to be financially supported.

Narasimhan, Retherford, Mishra, Arnold and Roy (1997) compare India‘s fertility trends for
the 15-year period of 1978 to 1992 based on different sources, and also highlight some of the
problems related to measuring fertility accurately (like birth under-registration), but do not
explicitly link fertility to poverty.

Basu and Amin (2000) review the conditioning factors for the decline in fertility in
Bangladesh and the state of West Bengal in India. They expand on so-called diffusion
theories, i.e., positive attitudes toward controlled fertility and toward contraception that may
arise through means that are only tangentially related to changing economic environments or
government population policies.

Drèze and Murthi (2001) use data on Indian districts for 1981 and 1991 to examine the
determinants of fertility levels and fertility decline. They find that women‘s education and
child mortality are the most important factors explaining fertility differences across the
country and over time. They also conclude that lower levels of son preference contribute to
lower fertility. However, they do not find a significant association of fertility with general
indicators of modernization and development such as urbanization, poverty reduction, and
male literacy. A similar analysis has been provided by Deaton and Drèze (2002).

Rao (2010) has shown that India‘s caste system (which was created to divide people into
different social classes) continues to be a main reason for a high persistence of poverty.
Although the caste system is outlawed today, it still causes inequality and hinders the lower
caste, called the Dalits or the untouchables, from receiving the same opportunities that others
may have.5

Based on the fact that male children are viewed in India as a better source of insurance and
support to the family in old age, Dupta and Dubey (2011) use the gender of the first two
children as a natural experiment to estimate the causal effect of fertility on poverty of rural
nucleus households in India. Their estimation results indicate that fertility significantly
positively affects poverty, but that the effect is halved when endogeneity is allowed for. They
also find that India‘s declining fertility accounts for almost a third of the poverty reduction in
rural India between 1987/88 and 1993/1994.

Finally, Mohanty and Ram (2011) analyze the links between poverty reduction and the recent
pattern of fertility transition in India. They conclude (p. 63) that ―fertility and contraception
are important factors for poverty reduction at the national and household levels.‖ Although
there is a higher percentage of women with an unmet need for contraception among the poor,
the overall fertility decline applies to both the poor and non-poor.
III.
Empirical Background
India is gradually becoming one of the most important countries in the world market. It currently
ranks as the world‘s fourth largest economy if measuring gross domestic product (GDP) in
5
Rao‘s conclusion is consistent with that of Bruno Schoumaker (2004), who portrayed the connection between
poverty and fertility in Africa: economic status is a key determinant for high fertility rates because at lower
economic statuses.
89
purchasing parity (behind the United States, China and Japan, but before Germany, Russia and
the United Kingdom).6This is largely due to India‘s large population (amounting now to nearly
1.2 billion), making it second most populous country behind China. In terms of income per
capita, India ranks 142nd in the world when measured using market exchange rates. India‘s GDP
has progressively been increasing since the early 1960s and had a sharp increase from the mid
1980s to early 2000s (see figure 1).
Figure 1: GDP in billions of constant 2000 US$, 1960-2008 (not in PPP)
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
At least related to India‘s low GDP per capita, India‘s population continues to grow above the
world average (see figure 2). Fortunately, fertility rates have been declining sharply in India,
from an average of 5.5 children per woman in 1970 to 2.7 children per women in 2008.
Figure 2: Population Growth and Fertility, 1970-2008
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
6
See http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP).
90
Although the national average of fertility rates has been decreasing, fertility levels remain on
average higher for poor women than for women with higher incomes. However, similar to other
developing countries, in India both the poor and well-off are contributing to the decline of
fertility rates. Mohanty provides information proving ―that the poor are contributing increasingly
to fertility transition and that poverty is not necessarily a barrier in fertility reduction‖ (Mohanty,
2011, p. 68). Still, the higher fertility rates of poor women is mostly due to poor women‘s lack of
opportunity, lack of power, as well as the lack of access to modern contraceptives.
Similarly, poverty has been decreasing in India. According to Mohanty and Ram (2011, p. 63),
the percentage of India‘s population living in poverty declined from 36 percent in 1993-1994 to
22 percent by 2004-05. This is also illustrated in Figure 3, showing a sharp decline in the
percentages of the population living below $1.25 a day and $2 a day for selected years such data
is available.
Figure 3: Poverty in India
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
IV.
Some Characteristics of Poverty in India
There are many characteristics of poverty in India. In this section, we will summarize how living
in rural areas, working in agriculture, employing children, and having children for old-age
insurance are all related to why the poor in India have high fertility rates.
IV.1. Location of the Poor
As of 1970, about 80 percent of India‘s population lived in rural areas. However, given that rural
poverty is considerably higher than urban poverty, people are moving away from rural areas in
order to benefit from the opportunities that cities have to offer. The cities are becoming densely
populated. As of 2008, about 30 percent of India‘s population was living in urban settings while
the remaining 70 percent remained in rural communities (see World Bank, 2010).
91
IV.2. Working in Agriculture
India has been transformed from a mainly agriculturally based country to a mainly service based
economy. Rain, Long and Ratcliffe (2007) refer to a United Nations (2001) study that stated (p.
325) that ―[i]n India at least three fourths of the adult male population [is] employed in pursuits
other than agriculture.‖ The service sector is now the main pursuit; in 2007, it contributed 53
percent of the GDP, and the 19 percent growth in service exports exceeds that of other countries
(Kowalski, Dihel and Garcia, 2008, p. 286 and p. 291).
Although new employment opportunities have emerged in the service sector, agriculture remains
to be an important source of employment for the Indian population. ―In contrast to most other
Asian economies, almost two-thirds of India‘s people continue to depend on agriculture for a
living‖ (Kowalski, Dihel and Garcia, 2008, p. 284). Promoting agriculture is imperative for
reducing poverty in India because that is what the majority of the poor, especially the lower cast
and those disconnected from flourishing opportunities, depend on.
IV.3. Child Labor
Some of the poor people are stuck in a chain of debt that can be traced back from many
generations within their own family. This debt is called bondage where a child will work for
her/his entire life in order to receive money or food. Some children are bonded at very early ages
of life in order to care for a sick family member or were brought into it because it was passed
down from a previous generation. Some of the restrictions that apply to being bonded are that
―[m]ost often the child, once bonded, remains bonded till it is able to buy freedom by giving its
own offspring in bondage‖ (Burra, 1986, p. 249). Many of these children are forced to work at
very young ages (such as five or six) and are physically and mentally abused.
Child labor is related to high fertility rates partly because of those poor that are trapped in crossgeneration spanning of bondage. They continue to have many children in order to pay off the
bondage and aid their parents that are worn from illness or years of hard labor. The children that
are brought into this span of generations of bondage are locked out of receiving opportunities
such as education and therefore are lead into an adulthood that lacks opportunity. The bondage in
turn then becomes the offspring‘s problem. Having many children is necessary in order to have a
possibility to eventually pay of the debt that is owed to whomever they are bonded to. Children
are also needed in poor households because they are the main contributors to running a family.
Older siblings are needed in order to care for the younger ones and keeping the house in order.
There is a high percentage of child labor especially in agriculture (see figure 5). Agriculture has
the highest percentage of child labor because the poor children living in rural agriculturally based
areas are put to work in order to feed and care for the family. Urbanization and the shift from an
agriculturally based country to a service country are related to why child labor is also shifting
from agriculture to employment in services. As there has been a decrease in the percentage of
child employment in agriculture there has been an increase in child employment in services (see
figure 5). Again, there are greater opportunities for males rather than females regarding to
employment. Males are more likely to have the opportunity in service and females are needed for
agriculture. Females continue to work in agriculture because it is seen as a domestic role and
service is seen as masculine.
92
Figure 4: Child Employment in Agriculture, Manufacturing, and Services in 2000
(in percent of employed children ages 7-14)
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
Figure 5: Male and Female Child Employment in Agriculture and Services
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
93
IV.4. Lack of Old-age Security
Many poor families believe that ―the benefits of having children outweigh their costs, leading to
a high demand for children and a high fertility. Old-age security and the work of children are two
of the benefits frequently cited to explain the large families of the poor‖ (Schoumaker, 2004, p.
6). Children are thought of by parents as being insurance because the poor people lack formal
health and life insurance. They have many children so that in later years their children can
provide for them. Cain (1981, p. 466 )validates this by mentioning that ―economic aspects of
fertility in developing countries mention the value of children's labor (taken to mean the
cumulative value of their work through childhood and adolescence) and the support that children
provide parents in old age.‖
V.
Key Policy Interventions
There are various interventions that can aid a society desiring smaller family sizes. One area of
interventions is related to the provision of education, specifically to girls, the promotion of later
marriage, and giving more power to females. Another key policy intervention is to meet the
unmet need for modern contraceptives.
V.1.
Education, Poverty and Fertility in India
The poor are associated with having very few opportunities other than urbanization from
escaping poverty because they lack the skills and education needed to find jobs. Poorer families
are also associated with having larger families and putting them into child labor. As mentioned
above, child labor inhibits a child from receiving a proper education because they need to work
in order to bring money home and/or need to provide domestic duties for the household.
Mohanty and Ram (2011, p. 63) illustrate that ―[m]icro level studies establish that poor
households tend to have larger families and that their children have lower schooling and poor
health.‖ In poorer parts of India there are a lower numbers of children that go to school compared
to the amount of children that live in the area because of disease and illnesses.
Lack of access to clean water, lack of access to sanitation, poor nutrition, and not receiving
immunizations are main contributors to disease and illnesses. Unhealthy children cannot go to
school therefore causing many children to miss their opportunity in education. Both, the decrease
in the number of children out of primary school (see figure 6) and the increase in literacy and
school participation is associated with decreasing fertility rates and declining poverty. ―Higher
levels of educational attainment result in greater use of antenatal delivery, contraceptive, and
sexual health services. Apparently, increased educational attainment influences service use in
several ways, including increasing women's decision making power and awareness of health
services changing marriage patterns, and creating shifts in household dynamics.‖7 The more
people that are educated the greater the fertility rates will decline because of the negative
association between the two. When education numbers increase, the use of contraception
increases which further says that fertility rates decline. Increasing education for the poor in India
will be beneficial because then there are less children born into poverty, therefore, reducing the
percent of the population in poverty.8
7
Stephenson and Tsui, (2002), p. 310.
For probabilistic population projections for India that explicitly take the education-fertility link into account, see
Lutz and Scherbov (2004).
8
94
Figure 6: Total Number of Children Out of Primary School, 2000-2007
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
Increasing education among females is especially important because when females are educated
they have a better chance of breaking the vicious cycle of having many children. Educated
females have more power in making decisions because they feel empowered to speak up for
themselves against their mates or other men and are likelier to have later marriages (Gabrielson,
2010, p. 61). An increase in age of marriage contributes to fertility decline because there is a
later onset of child bearing (Mauldin, 1982, p. 116). A later onset of child bearing results in a
female having less children throughout her lifetime. Allowing females to speak for themselves
gives them the opportunity to desire having a smaller family size and may allow them to use
modern contraceptives.
V.2.
Unmet Need for Contraceptives in India
The increase in number of educated females is associated with the increase in use of
contraceptives; however, it is beyond a female‘s control when there is unmet need for
contraceptives. In India, ―contraceptive use is clearly related to economic status‖ (Schoumaker,
2004, p. 12). As shown in Figure 7, there has been a gradual decrease in the unmet need for
contraception in India. The catalyst for increasing use of contraceptive in India was not ―[u]ntil
the Indian government family planning programme opened clinics in the country‖ (Rajna,
Kulkarni and Thenmozhi, 2005, p. 207). There is a greater increase in contraceptive use among
the non-poor.9 ―Among the poor, the use of any method of contraception among ever-married
women has increased by 49 percent (from 30 percent to 44 percent) compared to 30 percent (43
percent to 55 percent) among the non-poor‖ (Mohaty and Ram, 2011, p. 72). As the gap between
poor and non-poor contraceptive use decreases there will be an even greater decrease in fertility
and population growth rates. National and international investment in family planning amongst
the poor is efficient for reducing poverty.
9
For a multilevel analysis for why uneducated women in India use contraception, see McNay, Arokiasamyb and
Cassen (2003).
95
Figure 7: Married Women (aged 15-49) with Unmet Need for Contraception (percent)
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
VI.
Conclusion
After researching the many different causes for the recent a) decline in fertility rates, b) decline
in population growth rates, and c) increase in GDP, conclusions can be made that there is not just
one solution or reason for India‘s transformation. There remain to be high fertility rates in India
because the poor peoples‘ livelihood thrives from agriculture. Many poor people consider it
necessary to have many children because they are considered their parents‘ insurance and the
greater number of children increases the wealth of the family due to child labor.
The recent decline in fertility rates is partially due to India‘s transformation from being an
agriculturally based economy to being more and more a service based economy, improvement on
number of children attending school, and a decreasing number of married women with an unmet
need for contraceptives. The number of children attending school is also due to the increasing
percentage of the population having access to improved water sources and sanitation. When
more females are educated it allows for them to have more power and freedom into choosing
their future, such as desiring smaller families and using contraceptives. The percentage of poor
females with an unmet need for contraceptives still remains high but the number is decreasing
because of national and international interventions. Hopefully India‘s flourishing economy will
continue to eradicate or lower poverty as well as decrease fertility and population growth rates.
References
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Bengal: History, Language Identity, and Openness to Innovations‖, Population and
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Sustainable Development: A Review of the Evidence‖, World Bank Policy Research
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Emerging Economies, Vol. 2008, No. 26, pp. 283-331 (Chapter 8).
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Overview of the Available Empirical Experience‖, International Family Planning
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57, No. 1, pp. 21-40.
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Global Majority E-Journal, Vol. 2, No. 2 (December 2011), pp. 99-113
The Urban Plan for India:
A Foundation for Economic Growth
Will Lawther
Abstract
Asia’s urban population is estimated to double between 2000 and 2030. India is the dominant
force in South Asia, and the vastly diverse country is by no means isolated from the growing
urban movement. Urban environments have statistically shown as being epicenters for economic
growth, resource development, and occupational opportunities. Urbanization has been the
fundamental factor of economic growth within the industrial age. Yet, to many public officials,
urbanization is seen as a hindrance to growth. Potential negative implications of urbanization
include an increase in the propensity of crime, poverty and insecurity. These negative
implications need to be managed in order to lift India’s developing status. The cost-benefit ratio
for India is clear, and planning, housing, infrastructure and the spreading of social services are
paramount issues on the docket of urbanization.
I.
Introduction
Urbanization is a process influenced by a myriad of social, political, and economic forces that
cumulatively have the potential to profoundly affect nations and peoples. Asia‘s urban
population is estimated to double between 2000 and 2030, and Asia is a geographic hub of a
group of developing countries whose economies are contingent on urban development. The first
half of the twentieth century is a defining era for these nations, and 2008 marked the first time in
human history that more people were living in cities than in rural areas. These two statistics point
to a forceful movement that is more or less in the hands of young people, as subsequent
generations are not going to be defined by rural environments.
India is a dominant force in South Asia, and the vastly diverse and populated country is by no
means isolated from the growing urban movement. While the majority of India‘s population does
not yet live in cities, those that live in cities and towns are cited by the World Bank as earning
the majority of the nation‘s gross domestic product (GDP) and providing 90 percent of
99
government revenues.1
This article will address the context of urbanization in India in relation to both the inherent
disadvantages and what India seeks to gain through the process. A brief literature review
documents the current academic conversation. Subsequently, some empirical background will
identify how urbanization was able to flourish and why it is imperative for India‘s development.
The subsequent three sections will analyze the duality of urbanization, focusing, respectively, on
a growing workforce, the lack of resources, and the prominence of slums. From this analysis, it is
evident that urbanization is a foundation for India‘s future, but it needs to be managed in a way
such that it can be effective and beneficial for India‘s population.
II.
Literature Review
Urbanization is a contentious topic in India because it is a process that is already happening and
yet there is a lack of planning and attention to consequences. Quite simply, it is a socio-economic
force that can bring great prosperity to the nation of India, but there has been a lack of attention
to the realities of urban life. Ranvinder Singh Sandhu (2003) has published a compilation of
collected essays regarding the sociological effects of urbanization in India.
One of the essays by Narain (2003), entitled ―Urbanization and Some Social Problems‖,
highlights historical qualities of urbanization that have applicable modern repercussions. Narain
finds that urbanization began in the nineteenth century, in which both the United States and the
countries of continental Europe experienced a shift from rural to urban growth. He explains that
this was a dramatically different transformative process than what subsequently transpired in
Asian countries, as he finds ―it is not unlikely that urbanization may gather a force that it will not
allow itself to be materially modified by the local culture and may even ultimately destroy it‖. 2
The author is pointing out the social consequence of the degradation of India‘s local culture – a
factor today that may be more or less downplayed by any technological or industrial innovations.
Narain also finds that Asia inherently lacks resources relative to its population; a problem that
was not applicable to the urbanization of the United States or European nations. In direct
correlation with the residual effects of urbanization is the rate at which the actual process is
taking place. Narain explains that urbanization has materialized rapidly in a short time period,
India being the most prominent example, which is fundamentally dissimilar to other areas of the
world. The roots of India‘s modern urbanization trace back to the beginning of the twentieth
century in which ―the large-city population of Asia [had] grown by almost 450 per cent, as
compared with only 160 per cent in Europe and America‖.3 In fact Narain explains that such a
large surge has caused many individuals to accredit Asia as being ―overurbanized‖.4 This alludes
to the great criticism that urbanization is detrimental and unstoppable. With a lack of resources
and employment opportunities, false hope and a rural push encourages migrants into urban
environments – a domain that is a breeding ground for poverty. Narain in so many words claims
that the Asian region and specifically the nation of India, is dealing with a large population
which makes the effects significantly greater.
Pranati Datta (2006) of the Indian Statistical Institute conducted a population study that
1
World Bank (2010).
Sandhu (2003) p. 75.
3
Sandhu (2003) pp. 75-76.
4
Sandhu (2003), p. 76.
2
100
illuminates many of the same concerns as stated by Narain. Datta also examines concrete and
current dynamics of urbanization. Datta shares the same opinion as Narain that mega-cities were
created to the ultimate detriment of both the people and economy of India, which led to ―virtual
collapse in urban services‖.5 The residual effects of such unregulated and expedited urbanization
are representative of problems that have plagued many urban environments – namely ―housing,
slum, water, infrastructure, [and] quality of life‖.6 This is more or less the obvious, and Datta
goes on to explain the crux of the problem.
In an attempt to categorize levels of urbanization, Datta cites three phases of urbanization: the
―initial‖ phase, the ―acceleration‖ phase, and the ―terminal‖ phase. The first is a stage in which
society is centered upon agrarian production, while the second is representative of a society
undergoing an economic restructuring highlighted by increasingly levels of urban population.
The third and final phase is characterized by an urban population of ―70 percent or more‖, in
which any overall population growth correlates with urban growth.
Datta identifies India as being in the ―acceleration‖ phase, and aptly points out that nearly all
developed countries across the globe are in the latter two stages of urbanization. This frames
urbanization as a prerequisite to stability and economic success, and he supports this claim with
the fact that in 2000 the urbanization statistic for developed countries was 76 percent, while only
40 percent for developing countries.7 Despite the relationship between development and
urbanization, Datta articulates the fundamental reality of India‘s urbanization, and that is a strong
sense of imbalance.
Urbanization has created prosperous populations within mega-cities and yet there is vast
inequity, as is evident in the proliferation of slums. Datta points out that one of the explanations
for this is that urbanization has been characterized as a ―rural push‖ as opposed to an ―urban
pull‖. Deplorable economic conditions in the agrarian sector and the glorification of mega-cities
has created a sense of false hope, and all that is waiting on the other side has been ―poverty,
unemployment, [and] exploitation‖.8 There is a strong emphasis on the unprecedented pace of
urbanization within India, which is the underlying factor that has given urbanization such a
negative connotation.
Yet, Datta explains that there is an opportunity for change, and that change is going to come in
the form of policy implication. Datta cites a ―redirection of investment‖ for cities and regions
that have been ―neglected‖ thus far. To counter the deplorable effects of mega cities including
Calcutta, Delhi, and others, Datta articulates that there needs to be a ―redirection of migration
flows‖. Finally, there is the imperative need for ―proper urban planning‖ that would tackle the
issues of infrastructure, development, and restoration. Datta does not elaborate on the feasibility
of this, but needless to say the author has identified the difficulties of urbanization and how such
adversities could be addressed.
The World Bank (2011) shares many of the same concerns as the two aforementioned authors,
yet it is an international organization that is actively attempting to curtail the negative effects of
urban growth, and sees urbanization as an ―integral part of economic growth‖. The World Bank
stresses the economic assets of Indian urbanization despite all of the criticisms. The organization
5
Datta (2006), p. 1.
Datta (2006), p. 1.
7
Datta (2006), p. 3.
8
Datta (2006), p. 12.
6
101
provides the statistic that there is less than one-third of the population in urban environments,
and yet those domains account for more than 66 percent of India‘s GDP and 90 percent of
government revenues.9
The World Bank points out the specialized problem that India has, because while this statistic
may be seen as promising, slums ―now account for 1/4 of all urban housing‖. In Mumbai for
instance there are slums in close proximity to major infrastructure and economic centers. This is
representative of great urban inequity and a housing crisis that has engulfed much of India.
In line with Datta‘s population studies report, the World Bank finds ―strategic policy‖ to be the
only solution to the quagmire. Governance, financials, inequity, public services, infrastructure,
and the environment are all broad issues that the World Bank seeks to address through the
implementation of public policy. The World Bank has engendered and endorsed several projects
to be proactive about the problem, and one of the most prominent is the Mumbai Urban
Transport Projection (MUTP). The program utilizes significant funding to bolster transportive
services, and currently is changing the urban landscape in one of the world‘s most densely
populated cities.
A recent study conducted by the McKinsey Global Institute (2010) documents the essentiality of
urbanization in India, and views it as ―the most cost-effective vehicle to expand access to basic
services‖.10 The institute notes that the productivity that can be generated from urbanization is
for a population that has grown organically within cities; meaning that migration from rural areas
has not been a strong force, as approximately ―20 percent of the increase in urban population is
driven by direct migration‖.11 This is an important point because there needs to be a strong
emphasis on the quality of services within the city limits, as this will be the environment that will
produce the subsequent generations of the Indian workforce.
An urban awakening is a poignant phrase to describe the socio-economic status of India, as the
McKinsey Global Institute‘s report cites an annual increase in rural employment of only 0.6
percent, while there is a 3.6 percent annual growth in the cities. The services sector will serve as
the occupational foundation for the Indian urban population, and thus urbanization is inextricably
linked to the regional growth of India. Despite the historically organic growth of urban centers,
cities are still seen as an escape from a poor agricultural lifestyle. While much of India remains
rural, those rural areas that are adjacent to urban centers are shown to have ―10 to 20 percent
higher incomes than the rural average‖.12
The institute‘s report stresses a higher quality of life as cities ―allow for interactions that promote
productivity‖ and ―offer the opportunity to significantly lower the cost of service delivery‖. 13
The revenue generated from cities will allow for the expansion and maintenance of urban
services, and the report identifies urbanization as a process that accompanies agricultural
productivity. This can be accomplished through a surge in occupations that are non-agricultural,
which will bring agrarian workers to the city, and consequently allow for a better balance in the
impoverished rural areas. While the institute‘s report does present a plan for the immediate
consequences of urbanization, there is overwhelming philosophy that urbanization is what will
9
World Bank (2010).
McKinsey Global Institute (2010), p. 37.
11
McKinsey Global Institute (2010), p. 40.
12
McKinsey Global Institute (2010), p. 47.
13
McKinsey Global Institute (2010), p. 40-45.
10
102
bring India success and stability.
III.
Empirical Background
After becoming an independent nation from the United Kingdom in 1947, India relied on a
socialist-based economy that has become known as an ―inward-oriented development strategy‖.
The premise of the economic policy was that India, a largely poor country, lacked foreign
currency and thus was unable to buy and invest in foreign materials. 14 In effect, though not
intended, this inward-oriented development strategy promoted an agrarian state that was
hindering economic prosperity that could be achieved through industry and urban labor.
In spite of this reality, India continued to produce all of the industrial materials within its
borders. To ensure that individuals and companies were not simply purchasing foreign industrial
goods, the Indian government established inordinately high taxes to create a monopoly of
domestically produced materials. This protectionist strategy is formally known as import
substitution industrialization (ISI), and it lends itself to a loss in productivity and competition.15
Ultimately this led to the economic crisis in 1991, which highlighted the need for greater
international resources specifically directed at the industrial sector.
The process of creating a more internationally-accepting and open economic system is known as
economic liberalization, and India has been prospering relative to the times of the inwardoriented economy. There has been a surge in the nation‘s GDP, as shown in Figure 3.
Figure 1: India’s GDP, 1960-2008 (constant 2000 US$, billion)
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
14
15
U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.
Kowalski, Dihel and Garcia (2008).
103
Needless to say, there are still a significant amount of problems that India has to face, and they
are all inherently linked to urbanization and inequality. According to the CIA (2011), India‘s
main difficulties include ―widespread poverty, inadequate physical and social infrastructure,
limited non-agricultural employment opportunities [...] and accommodating rural-to-urban
migration‖. India is indicative of urbanization on a grand scale, and the benefits of urbanization
can only materialize if this range of issues afflicting the massive population is addressed.
When evaluating the socio-economic landscape of India, the most dominant South Asian
country, it is imperative to acknowledge a fundamental characteristic – namely the nation‘s
immense population. Globally, India ranks second in national population, having approximately
1.2 billion people within the nation‘s 3.3 million square kilometers.16 India is representative of a
largely unprecedented economic challenge, due to its high and growing population. As shown in
Figure 2, while India‘s total population growth rate peaked in 1966 at 2.3 percent, the growth
rate has declined to 1.3 percent in 2005, and has since then more or less stabilized.
Figure 2: India’s Population Growth Rate, 1960-2009 (percent)
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
Currently, the urban population comprises 30 percent of the total population, and there is an
estimated annual increase of 2.4 percent over the next four years.17 Figure 3 shows the evolution
of India‘s urbanization in terms of the percentage of urban and rural population from 1960-2008.
16
17
U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.
U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.
104
Figure 3: Urbanization in India, 1960-2008
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010).
There is a clear and definite increasing trend towards the urbanization of India, in which there
will be dramatically less emphasis on rural occupations and rural productivity. This is illustrated
by the relationship between GDP by sector and the labor force. Namely, agricultural occupations
comprise 52 percent of the total workforce, and yet they only consist of 16.1 percent of India‘s
national GDP.18 This is important to understand because India‘s economy has (until recently)
been based upon the less profitable agricultural sector that has historically been composed of the
majority of India‘s people.
Yet, India has recently become world-renowned for its services sector, which now makes up 55.3
percent of the nation‘s GDP.19 Services and industry are inherently related to urbanization as an
urban environment is conducive to businesses and resources that can promote the economic
welfare of the nation.
IV.
Growing Workforce and Urban Productivity
One of the defining factors of the Indian urbanization is that India‘s workforce will be growing
rapidly in the next several decades, and that growth will be taking place mostly in cities. The
growing workforce is mostly seen positive, and occupations within the expanding services sector
can provide for many. The projected nonagricultural urban employment suggests a 3.6 percent
annual increase in both industry and services, with an estimated 158 million services jobs by
2030, as indicated in Figure 4.
18
19
U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.
U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.
105
Figure 4: Sectorial Employment Increase in India, 2008-2030 (million jobs)
Source: McKinsey Global Institute (2010), Exhibit 1.6, p. 42.
Services will be a fundamental component of India‘s growth over the next several years, and it is
critical that there be jobs in order to accommodate the increase in urban population – the
environment in which the service industry will thrive. In an analysis of urbanization at the macro
level, Sivaramakrishnan, Kundu, and Singh (2005) have identified several factors that contribute
to urban population growth. Natural increase has historically been the most effectual and it still is
today. Natural increase accounted for greater than 51 percent of the total increase in India‘s
urban population since 1961, and has averaged at approximately 60 percent through 2000.
Figure 5: Contributory Factors of Urban Growth, 1961-2001(percent)
Source: McKinsey Global Institute (2010), Exhibit 1.5, p. 41.
106
A more recent study conducted by the McKinsey Global Institute supported the same
conclusions and statistical information. This can be seen in Figure 5, which identifies the
contributory factors. Furthermore, as shown in Figure 6, it is expected that urban jobs will enjoy
a sustained productivity advantage over rural jobs for the coming decades.
Figure 6: Urban versus Rural Productivity in India, 2008-2030 (thousand rupees)
Source: McKinsey Global Institute (2010), Exhibit 1.7, p. 43.
The growing population in urban areas ultimately represents an opportunity for India, yet thus far
it has been a poorly managed process, and governmental forces have yet to exploit such an
opportunity. In fact, it is certainly possible that if the population growth rate remains in line with
economists‘ predictions and data, India will begin to decay and there will be a myriad of residual
effects. To accommodate for this, the government must consider rural to urban migratory
movement, in which there will be a high demand for jobs.
The government needs to be able to reach out to the people, and provide those kinds of
opportunities so that there is not an inundation of destitute individuals who could not make the
transition into urban life. India still has economic prosperity in the rural sector, and the transition
will enable higher profitability and greater living conditions in rural areas due to a decrease in
population. Urban researcher Pranati Datta points out that there needs to be ―agro-based‖20
industry in order to create a prosperous transition from rural to urban environments. While
services dominate the Indian economy, there is still a portion of the nation‘s GDP that solely
stems from industry. If agriculture could be incorporated into urban occupations, the negative
effects of urbanization would be somewhat stabilized.
Yet, what is critical is that both the urban and rural environment can provide opportunity and a
quality of living that meets and exceeds a minimum standard. A growing workforce in the urban
environment will place a steeper demand on inter-urban services. This should be the focal point
20
Sivaramakrishnan, Kundu and Singh (2005).
107
of the government‘s plan, because without resources and basic services, employment
opportunities and urban society will suffer as a whole. This lack of services has been made
evident in the vast disparity of wealth that exists in Mumbai and other mega-cities throughout
India. The World Bank notes that Mumbai is ―India‘s commercial and financial center‖21, and
yet there are slums within parts of the city. Due to such a high and dense population there is
going to be some level of poverty, but the current economic void needs to be addressed by
institutional and governmental initiatives.
In a population study of the urban areas within India, Pranati Datta for the Indian Statistical
Institute explains that there needs to be a reevaluation of migration. While natural growth is the
fundamental reason behind urban growth throughout India, migratory effects are still
consequential. To ease the economic disparity that exists in urban environments, Datta explains
that ―growth efforts and investments should be directed towards small cities which have been
neglected so far so that [the] functional base of [the] urban economy is strengthened‖. 22 This will
alleviate the burden of population growth in overly crowded cities such as Mumbai, Delhi, and
Bombay, and allow for greater and more equal development across a larger area of India.
Population growth is what urbanization policy should stem from, as it is representative of the
greatest number of consequences for Indian society.
V.
Lack of Basic Services
With the basic understanding of the population growth in Indian cities, the more tangible and
economic issue of resources needs to be evaluated. The immediacy of many resources is
paramount because water supply, sewage, and sanitation are essential to a minimum quality of
life. The current status of India‘s cities is not promising despite economic development, as such
basic services are below international standards and are causing urban decay. The McKinsey
Global Institute identified this issue, and shed light on how urbanization has currently been a
mismanaged process.
Figure 7 outlines the benchmarks of India in comparison to international standards, and the
nation is lacking on all accounts. It is important to keep in mind that these are basic services for
human life, and if they are neglected and under-funded, this will give way to problems of urban
health and poverty. How can individuals possibly be worried about attaining occupations with
the services sector if the most minimal standards of living are being compromised? This is a
dilemma that the government needs to address through urban planning and reform, and there
needs to be a unilateral investment in basic services that will promote economic growth and
provide opportunity for the surging population.
Since Indian cities lack services on even the most basic level, it is not surprising that secondary
services are just as dismal in relation to international standards set by the United Nations.
Examples of this include the underinvestment in transportation services, the high rate of
congestion, a lack of healthcare-related resources, and a poor national investment in urban
educational institutions. This was outlined in the McKinsey Global Institute (2010) report, which
assessed secondary concerns in urban life.
21
22
World Bank (2010).
Datta (2006), p. 14.
108
Figure 7: An Evaluation of India’s Basic Urban Services (international standards)
Source: McKinsey Global Institute (2010), Exhibit 2.2, p. 54.
Figure 8 visually displays the disparity between India‘s current standards and those of the rest of
the world. Both private and public transportation suffer in urban areas of India, which is due to
both a mismanagement of funding and a lack of urban planning in regard to an increasing
population. The former can be seen in the 10 percent decrease in investment of public
transportation between 1994 and 2010.23 This is troubling because many of these cities are
reliant on public transportation due to the highly dense population, in addition to the fact that
public transportation is more economically viable than private transportation (such as having
one‘s own car).
Private transportation suffers from the chronic underinvestment of infrastructure, which in
simple terms means a lack of efficient roadways. This has caused congestion to spike which has
had detrimental residual effects on the environment. The problem acts as a viscous circle because
one has no effective alternative to either options, and thus it is a critical issue that the Indian
government needs to address. Policy implementations would include a reevaluation of the budget
to analyze potential funding for transportive services. While this issue is secondary to basic
services, an urban environment needs effective means of transportation.
23
McKinsey Global Institute (2010), p. 55.
109
Figure 8: An Evaluation of India’s Secondary Urban Services (international standards)
Source: McKinsey Global Institute (2010), Exhibit 2.3, p. 55.
The McKinsey Global Institute identified healthcare to be a growing problem in India, and while
the benchmark analysis was only based on the number of hospital beds per 1000 people, it is
evident that health care is an issue nonetheless. This is a more complicated issue that is linked to
urbanization, as individuals will be more susceptible to hazardous conditions and environments
within urban areas, and the government needs to find a means to address this issue and work with
the medical community. In addition, education is highlighted as a concern because there is a lack
of faculty for the early educational development of India‘s urban youth. This is something that is
often glossed over in light of such imperatives of water and sanitation, and while it is indeed
secondary, education is what can bring individuals out of poverty and bring economic prosperity
to their own environment. An investment in early education will clearly benefit the entirety of
the urban population, and it is a necessity in preventing a regression back into poverty.
VI.
Prominence of Slums and the Importance of Housing
Slums, unclean and underdeveloped regions inhabited by indigents, are a reality in many of the
urban environments throughout India. These areas highlight the worst possible conditions for
individuals, as they are unsanitary and are a growing and self-perpetuating process of human
suffering and societal negligence. The emerge and growth of such slums is unequivocally a
consequence of urbanization, and while it is a problem that can be handled to some extent, there
has been a national failure on behalf of governments and programs to be proactive in finding
110
some sense of resolve. It is simply not feasible to move every individual out of poverty and
provide housing, and this is going to involve a graduated solution process that will take place
over the next several decades.
A strategy analyst Hari Sud (2006) discussed poverty and slums in India, and firstly pointed out
that ―twenty five percent of Indians live on less than a dollar a day and seventy percent live on
less than two dollars a day‖.24 With this kind of a statistic, it is not surprising that many of
India‘s citizens are forced into slums due to a lack of opportunity. This cycle is perpetuated due
to children growing up in the same environments generation after generation – youths who lack
the ability and resources to change their circumstances. This is a fundamental problem that India
has become world-renowned for, and an infrastructure and housing failure have let such an awful
reality persist.
A 2006 survey noted that ―22 percent of [the] Indian urban population lives in slums as against
32 percent for the whole world‖.25 While this may not seem that deplorable, it must be taken into
account that India has one-sixth of the world‘s entire population, and thus having nearly a quarter
of the nation‘s population living under such conditions is indicative of a major problem. Slums
are inherently attached to high crime rates and poor health and sanitary conditions, which serves
as one of the explanations for the lack of basic services in the country. Unfortunately, the
government has been taking superficial action by demolishing many of the slums, but not fixing
the issues of indigence and lack of affordable infrastructure. The government has not been able
to invest in affordable infrastructure, and they are more concerned with taking a wrecking-ball to
a slum than fostering human decency and opportunity.
A recent editorial described these circumstances in the mega-city of Mumbai: ―Many settlements
have been demolished again and again, even though they were built before 1995, which
according to the government are legal houses. In spite of many of these people having proper
documentation (ration cards, Vote ID cards) to prove their domicile legally, there has been no
respite‖.26 While these conditions are often deplorable, many individuals have been actively
pursuing this lifestyle because they have no viable alternatives.
While the government cannot simply eradicate slums and expect nearly a quarter of the Indian
population to become financially stable, there are means to improve such conditions to better the
slums. There needs to be unilateral access to the basic human services discussed earlier such as
water and sanitation, and additionally the government needs to work to ensure safe and
affordable infrastructure for housing. A World Bank initiative in 1985, called the Slum
Upgrading Program (SUP),27 only lasted nine years due to investor skepticism towards slums.
This attitude needs to be reevaluated due to the fact that such a larger population is living under
these conditions, and the government and investors should recognize the potential if basic
services were given to these people.
There has been some progress made in addressing slums over the last two decades. The United
Nations HABITAT (2010, p. 1) agency recently published slum-improvement trends and noted
that in India ―slum prevalence fell from 41.5 percent in 1990 to 28.1 percent in 2010‖. Efforts
have been made across the globe to reduce slums, as it is a problem that extends beyond India.
24
Sud (2006).
Sengupta ( 2006), p. 1.
26
Sengupta (2006), p. 2.
27
Sengupta (2006), p. 2.
25
111
Yet, it is critical that such efforts within India are not inhbited by finances, becuase it is one of
the keys to India becoming a developed country through the process of urbanization.
There is a high demand for urban housing, and if such a demand was addressed and made
affordable through governmental action, India has the potential to reap the benefits of
urbanization. If India meets the demand for affordable housing, according to the McKinsey
Global Institute, slums will become non-existent in India. This is relatively idealistic as the
demand is quoted in excess of 38 million homes,28 which will consist of a nationwide initiative
over the next several decades. This should be tackled in the mega-cities first as opposed to the
entire nation, which will make the urban reform process significantly less daunting. It is
imperative that there be a joint initiative undertaken by leaders and government institutions to
better the conditions of slums and build affordable housing across cities.
VII. Conclusion
To many public officials, urbanization is seen as a hindrance to growth, but one must consider
that urbanization has been a fundamental factor for the economic growth within industrial
countries. Regardless of policy implications and adverse attitudes towards urbanization, it is a
socio-economic process that cannot be stopped – especially in India. Job growth rate disparities
between urban and rural environments are indicative of this irrevocable process. What India
needs is a more concerned managing of the effects of urbanization, so that the nation can be
better prepared to reap the benefits in the coming decades. The cost-benefit ratio for India is
clear, and planning, housing, infrastructure, and the spreading of social services are paramount
issues.
The next steps for India are crucial and must be carefully considered by government officials,
economists, urban planners, and individuals with the insight and wherewithal to see India
succeed. Urbanization is a process that comes with some negative implications, but the benefits
are outweighing the costs. India already has a world leading services industry that can be built up
by reforming urban environments, and bolstering living conditions to an acceptable standard.
Intelligent policy and investor funds are what are going to be the deciding factors in whether or
not India will make it through urbanization, and one cannot exist without the other. The attuned
policy implementations are critical, because they will ultimately lead to standards being set and
infrastructure being built. These policies need to have attention to detail and to the real problems
that the urban environment faces. On the flip-side, there also needs to be funds from international
investors to carry out those policies. Investors should see India as a growing opportunity that
needs monetary aid to stabilize and eventually prosper. The service industry is a testament to
that, and thus the world needs to open its eyes to the potential that India has, and what
urbanization can do for the nation, South Asia, and beyond.
References
Datta, Pranati (2006) ―Urbanisation in India‖, Paper presented at the European Population
Conference, Bratislava, Slovak Republic, June 21-24; available at:
http://www.infostat.sk/vdc/epc2006/papers/epc2006s60134.pdf.
28
McKinsey Global Institute (2010), p. 67.
112
McKinsey Global Institute (2010) India’s Urban Awakening: Building Inclusive Cities,
Sustaining Economic Growth (San Francisco, CA: McKinsey Global Institute, April);
available at: http://www.mckinsey.com/mgi/publications/india_urbanization/index.asp.
Kowalski, Przemyslaw; Nora Dihel; and Martina Garcia (2008) ―India‖, in: Organisation for
Economic Co-operation and Development (OECD) (ed.) Globalisation and Emerging
Economies: Brazil, Russia, India, Indonesia, China and South Africa (Paris, France:
OECD), pp. 283-331.
Sandhu, Ranvinder Singh (ed.) (2003) Urbanization in India: Sociological Contributions (New
Delhi, India: Sage Publications).
Sengupta, Amitabh (2006) ―Urban Slums in India – the Myths and the Reality‖, Asha – Seattle's
Quarterly Newsletter, Editorial, Vol. 12, No. 2 (April), pp. 1-3.
Sivaramakrishnan, K. C.; Amitabh Kundu; and B. N. Singh (2005) A Handbook of Urbanization
in India: An Analysis of Trends and Processes (New Delhi, India: Oxford University
Press).
Sud, Hari (2006) ―Poverty and Slums in India – Impact of Changing Economic Landscape‖,
Noida, India: South Asia Analysis Group, Paper No. 1769 (April 17); available at:
http://www.southasiaanalysis.org/ percent5Cpapers18 percent5Cpaper1769.html.
UN-HABITAT (2010) ―Urban Trends: China, India, in Giant Strides to Improve Slums‖,
Nairobi, Kenya: UN-HABITAT, State of the World’s Cities 2010/2011: Bridging the
Urban Divide (March 18); available at:
http://www.unhabitat.org/documents/SOWC10/R2.pdf.
U.S. Central Intelligence Agency (CIA) (2011) World Factbook: India (Washington, DC: The
Central Intelligence Agency); available at: https://www.cia.gov/library/publications/theworld-factbook/geos/in.html.
World Bank (undated) ―South Asia - Urbanization in India: Integral Part of Economic Growth‖,
Washington, DC: The World Bank, Internet Resource; available at:
http://go.worldbank.org/1UKKDONKT0.
113
Global Majority E-Journal, Vol. 2, No. 2 (December 2011), pp. 114-124
Climate Change in China: Can China Be a
Model of Sustainable Development?
Hiromi Yagi
Abstract
China has developed dramatically in terms of Gross Domestic Product (GDP). Expressed in
market exchange rates, its GDP overtook Japan’s in 2010, making it the second largest
economic power in the world. However, it recently also became the country with the largest
amount of greenhouse gas emissions in the world. Its energy use (mostly consisting of carbon
emitting coal and gas) has contributed to climate change, which has impacted not only the
Chinese but also people all over the world. In recent years, China is changing its attitude about
global warming, and is also trying to improve its energy system. This article reviews the
empirical background of China’s large greenhouse gas emission, the impact of climate change in
China, and recent Chinese policies on global warming. It concludes that China needs strong
institutions and the involvement of not only of the central government but also local government
and citizens to effectively implement policy changes for sustainable development.
I.
Introduction
Today, climate change is regarded as one of the most serious environmental problems. The
problems caused by global warming, such as a rise in sea levels and droughts, have been
reaching an unsustainable stage and will increase further over the next few decades. According
to Intergovernmental Panel on Climatic Change (IPCC), by the year 2050, we have to reduce the
amount of carbon dioxide emission by 50-85 percent compared to the emissions of year 2000
(Nettowaku, 2009). We need to change our energy system depending on fossil fuel to an energy
system based on renewable energy.
According to the IPCC, global warming is caused by an increased concentration of greenhouse
gases, mainly carbon dioxide, in the earth‘s atmosphere. Increased greenhouse gases change
climate conditions, keep greater amounts of heat in the atmosphere, and raise the temperature
near the surface of the earth to undesirable levels. Carbon dioxide is emitted mostly by human
activities. To stabilize the concentration level as well as the earth‘s temperature in the long-run,
we need to stabilize and then reduce our carbon dioxide emissions as soon as possible.
114
Although many countries, especially industrialized countries, now have adopted various
mitigation policies, China is considered to have not yet adopted sufficient mitigation policies.
Without the commitment of China (and the United States), it is difficult to stabilize greenhouse
gas emissions even if other countries try to reduce them. Given that China has recognized that it
will suffer immensely from climate change, could China be a model of sustainable development?
This article discusses the impact of climate change in China and the reaction of China to climate
change. Following this introduction, a brief literature review and some empirical background
(constituting the first three sections of this article), the fourth section will discuss the impact of
climate change in China, focusing on agriculture, weather, society, health, and economics. The
fifth section will then examine China‘s climate change policy, positive impacts of the policy, and
challenges it is facing now, before the last section provides some conclusions.
II.
Literature Review
There has been a lot of research on the impact of climate change in China and more recently also
on Chinese policies toward climate change. The following are some interesting examples of this
growing literature.
Lewis (2009) has examined the impacts of climate change facing China and states that there is a
linkage between climate change and security.1 According to him, water scarcity resulting from
climate change can increase political instability in Tibet. Because the Tibetan plateau is the
source of most Asian major rivers, Tibet has become a more crucial strategic territory and will
have more conflicts over scarce water resources as its glaciers are melting and reduce river flow
across East and South-East Asia. This article also mentions the impact of climate change on
eastern costal economic centers around the Yangtze, Pearl and Yellow River deltas, the pressure
exercised by foreign countries to take greenhouse gas mitigation actions and China‘s reaction to
the pressure. Lewis (2009) also helps us to understand the multi-dimensional impacts of climate
change.
Xiong, Lin, Ju, and Xu (2007), who are mostly members of the Institute of Environment and
Sustainable Development in Agriculture at the Chinese Academy of Agricultural Sciences,
provide a quantitative analysis of critical thresholds in China‘s crop production by using the
IPCC‘s medium-high and medium-low greenhouse gas projections.2 This report concludes that
the yield per hectare for the three main crops, rice, wheat, and maize, would drop significantly as
temperature rises beyond 2.5 degrees Celsius, without the carbon dioxide fertilization effect.
As for Chinese policy toward climate change, Marks (2010), who is a Boren Fellow studying the
climate change policy process, evaluates the Chinese policy and explains why the government
has not been able to reach many of its targets, especially its goal of reducing energy intensity.
The author argues that the fragmented nature of China‘s authoritarian system is one of the
reasons why China has missed its targets. This essay suggests how the government can
efficiently enact and implement climate change policies and how the international community
can play a role to let the Chinese government have a greater compliance with climate change
1
Lewis is an assistant professor of Science, Technology and International Affairs at Georgetown University and
serves as an international advisor to the Energy Foundation China Sustainable Energy Program in Beijing.
2
The medium-high (A2) and medium-low (B2) greenhouse gas emission pathways are climate change scenarios
made using the Regional Climate Model PRECIS and socio-economic scenarios produced by the IPCC‘s Special
Report on Emissions Scenarios (SRES).
115
policies. For example, he states that China should strengthen the judiciary‘s capacity to oversee
environmental law.
Lo (2010), who is a Ph.D. candidate of School of Politics and International Relations at the
Australian National University, summarizes the recent overview of China‘s national position on
climate change, which includes the involvement in Copenhagen Summit, and the development of
carbon markets in China. Lo argues that most Chinese climate change policies are controlled by
the government, not by civil society, and he points out that most individual citizens do not
consider climate change as a serious environmental problem.
Ying Ma (2010), who is a visiting fellow at the Hoover Institution at Stanford University, has
written a feature on China‘s views on climate change, stressing that China‘s views on climate
change are fundamentally tied to the country‘s pressing need for continued economic
development. The article also summarizes China‘s climate change and points out that given the
recognized impact climate change will have in China, the Chinese government has actually
begun to aggressively tackle the climate change challenge at home.
III.
Empirical Background
China, once had a centrally planned economic system, but has changed its economic system
towards a more market-oriented system since 1978. The efficiency of these economic reforms
contributed to a more than tenfold increase in GDP since 1978 (U.S. Central Intelligence
Agency, 2011). Figure 1 shows China‘s annual GDP growth is generally higher than other lower
middle income countries since the economic reform in the late 1970s. Today, China is the
second-largest economy in the world in terms of purchasing power parity and became the
world‘s largest exporter in 2010 (The Central Intelligence Agency, 2011).
Figure 1: Annual GDP Growth of China and Lower Middle Income Countries (percent)
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010)
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In China, industry and construction account for about 48.6 percent of its GDP (U.S. Department
of State, 2010). Especially, mining and ore processing, which includes iron, steel, aluminum,
coal, and so on, are the main industries. Especially, use of coal has contributed to large amount
of carbon dioxide emission. Consumer products (including electronics) are also important
industries in China (U.S. Department of State, 2010).
However, the rapid economic growth came with significant environmental damages. As Figure 2
shows, China‘s carbon dioxide emission has been increasing, especially since the economic
reform of the late 1970s. Figure 2 also shows China‘s considerable increase of carbon dioxide
emissions compared with the United States. As can be seen in Figure 2, China became the
world‘s largest emitter of carbon dioxide in 2006. A World Health Organization (WHO) report
on air quality in 272 cities worldwide says that seven of the world‘s 10 most polluted cities were
in China.3 Lack of water is also a problem, especially in Northern China.
Figure 2: Carbon Dioxide (CO2) Emissions in China and the United States (megatons)
Source: Created by author based on World Bank (2010) World Development Indicators
(as posted on the World Bank website; downloaded on May 5, 2010)
With rapid economic growth, China‘s demand for energy increased dramatically because of the
massive investment in infrastructure and heavy industry (Morton, 2008). They now produce and
use more row materials than any other country, and Chinese people, whose living standard has
been raised significantly, use more energy in their daily life than any other country. China is now
the largest energy consumer and the second largest energy producer in the world. China is also
the third largest net importer of crude oil (U.S. Department of State, 2010). China‘s electricity
consumption is expected to increase by more than four percent a year through 2030 (U.S.
Department of State, 2010). As shown in Figure 3, coal accounted for 70 percent of China‘s
energy consumption in 2008. It is largely China‘s dependence on coal, which makes China the
world‘s largest emitter of greenhouse gases.
3
As stated in the report of the U.S. Department of State ( 2010).
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Figure 3: Total Energy Consumption in China, 2008
Source: Danny (2010), Figure 1, p. 974.
Although China was already one of the largest emitter of greenhouse gases when it ratified the
Kyoto Protocol, it had not committed itself to national or joint reduction targets because China
was still regard as a developing country in terms of GDP per capita. China often states continued
economic development is more important than environmental protection because approximately
150 million Chinese people still live below the poverty line and China‘s GDP per capita only
recently exceeded 3,000 dollars (Ma, 2010). Also, because of its huge population, emission of
carbon dioxide per capita in China is still much smaller than other industrial countries (see
Figure 4).
Figure 4: Energy-related CO2 emissions per capita in the European Union (EU-27), the
United States (USA), Russia, China and the World
Source: European Environment Agency (2009), Figure 7.3.
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However, under the pressure from other countries, the Chinese government is trying to change its
energy production focusing on coal and oil to alternative energy production focusing on nuclear
and renewable energy. In 2009, China invested 34.6 billion dollars in clean energy, and it has
installed renewable energy capacity of 52.5 gigawatts, which is second in the world behind the
United States (U.S. Department of State, 2010).
IV.
Impact of Climate Change in China
Without questioning the multi-dimensional impacts of climate change, this section tries to focus
on the impact of climate change on China‘s weather, agriculture, economy, health, and social
stability.
IV.1. Impact on Weather
Sea level rise stems from climate change can increase the number of more serious natural
disasters. Since the 1950s, the sea level along China‘s coastline has been raised at a rate of 1.43.2 millimeters per year (Lewis, 2009). It is estimated that the sea level along China‘s coastline
will rise between 0.01 and 0.16 meters by 2030, and between 0.4 and 1 meters by 2050 (Lewis,
2009). Higher sea levels tend to bring floods more easily and intensify storm surges. Higher sea
levels also can be a cause of aggravated coastal erosion and salt-water intrusion (Lewis, 2009).
According to Lewis (2009, p. 11), ―a 1-meter rise in sea-level would submerge an area the size of
Portugal along China‘s eastern seaboard; the majority of Shanghai- China‘s largest city- is less
than 2 meters above sea level.‖ Also, twelve coastal provinces in China account for 42 percent of
its population and 73 percent of its GDP (Lewis, 2009).
IV.2. Impact on Agriculture
Droughts and water shortage stem from climate change make a negative impact on agriculture in
China. As Xiong, Lin, Ju, and Xu (2007) state, without the carbon dioxide fertilization effect,
there is a possibility of decrease in the yield per hectare for the three main crops, rice, wheat, and
maize, would drop significantly as temperature rises beyond 2.5 degrees Celsius.
Water shortage is a big problem in China even now. The World Bank projected that China‘s
water demand would increase from 50 billion cubic meters to 80 billion, a growth of 60 percent,
when its population was projected to grow by 126 million between 2001 and 2010 (Brown,
2001). Meanwhile, industrial water demand would increase from 127 billion to 206 billion cubic
meters, an expansion of 62 percent (Brown, 2001). As Tibetan glacier save melting and river
flow is reduced, further water shortage will happen. It is estimated that the total area of China‘s
western glaciers will decrease by 27.2 percent by 2050 (Lewis, 2009). If water tables fall,
pumping costs will be raised and it will make underground water too costly for farmers for
irrigation. According to the Geological Environment Monitoring Institute, the average level of
the deep aquifer in the Hebei Province (in the heart of the North China Plain which produces
more than half of China‘s wheat and a third of its corn), decreased 2.9 meters in 2000 (Brown,
2001). Also, all of following factors, weak prices, decreasing water tables and droughts,
contributed to reduce the grain harvest in 2001 to 335 million tons although it was 392 million
tons in 1998 (Brown, 2001). Furthermore, China earned 417 million dollars and 420 million
dollars, respectively from exports of rice and maize in 2006. Poor crop stems from climate
change might reduce revenue from exports of agricultural goods.
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IV.3. Impact on Economics
Reduced crops, natural disasters, social unrest, and diseases that stem from climate change all
have negative impacts on economics. As mentioned before, China might lose its revenues from
exports of agricultural goods which accounts for about 15 percent of its GDP (Lewis, 2009).
Desertification cause already now annual direct economic losses of approximately 6.5 billion
dollars (Lewis, 2009). Therefore, rising sea levels and intensified natural disaster can cause a
serious economic damage in China. Large cities converge in the coastal areas, which concentrate
much of China‘s economic activity, and would suffer severely if they have floods. According to
Dollar (2007), the incorporated health and non-health cost of outdoor air and water pollution
accounted for approximately 5.8 percent of China‘s GDP in 2003 (or about 100 billion dollar a
year). Thus, although China has concerned negative impact of its economy when it implements
climate change policy, inaction can bring more economic loss in the future.
IV.4. Impact on Health
Climate change and abnormal weather that stems from it affects human health and can spread
diseases. Heat waves increases cardiovascular mortality and respiratory diseases, and
malnutrition is prevalent due to the lack of crop (see Li et al. 2010). According to World Health
Organization, 2.4 percent of world wide diarrhea and 6 percent of malaria are due to climate
change (Tarantola, 2009). Because vector diseases such as malaria and dengue fever and floodborne infections such as salmonella tend to be prevalent in warmer months, global warming have
a possibility to increase these infectious diseases. Even in Europe, extreme weather can be a
catastrophe. In summer of 2003, 27,000 people died because of abnormally high temperatures in
Europe (Tarantola, 2009). Also, after a flood, disease, such as cholera, dysentery, typhoid, and
paratyphoid, tend to spread easily.
IV.5. Impact on Social Stability
Climate change also can cause conflicts. According to Lewis (2009), climate change was one of
the most important factors that changed the dynastic cycle in ancient China through the period of
the late Tang to Qing dynasty. 70-80 percent of peak war activity and most dynastic transition in
China occurred during ‗cold phases‘ (Lewis, 2009). Dropped thermal energy input decreased the
productivity of land, and this had a negative impact on people‘s daily life and resulted in conflict.
As mentioned in the literature review, Lewis (2009) states that water scarcity that stems from
climate change can cause a political instability in Tibet, which is the source of most Asian major
rivers including the Yellow River, the Mekong, and the Indus. Tibet will be a more strategic
territory, and China might have tension with neighboring countries, for example, Vietnam,
Pakistan, Nepal and India over water scarcity. Lewis (2009) predicts ethnic conflicts in the
region because he assumes that many climate refugees from neighboring Asian countries, who
are affected by drought, migrate to China. We do not know whether ethnic conflicts will happen
or not, but they seem to have at least social unrest because of the water battle and massive
inflows of refugees from different ethnic groups.
V.
China’s Policy toward Climate Change
Although China had not committed any reduction targets, criticism from other countries changed
the Chinese leaders‘ attitudes toward climate change. Now, they increasingly recognize its
serious environmental problems. In 1998, China upgraded the previously-weak State
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Environmental Protection Administration from an agency to a ministry-level agency, and
renamed it as Ministry of Environmental Protection (MEP) (U.S. Department of State, 2010).
This change reflects that the Chinese Government realized its important role on environmental
protection.
Also, in the same year, the National Development and Reform Commission (NDRC) came to
have leadership responsibility for climate change instead of the socialist-led China
Meteorological Administration (Marks, 2010). NDRC creates national development strategy,
including the country‘s five-year plans. Although NDRC‘s highest priority is economic growth,
not environmental protection (Marks, 2010), they are now increasingly paying attention to
climate change as well. For example, China‘s 11th Five-Year Plan (2006-2011) calls for ―greater
energy conservation measures, including development of renewable energy and increased
attention to environmental protection‖ (U.S. Department of State, 2010). The 12th Five-Year Plan
will call for ―continued energy efficiency gains, greater use of non-fossil fuels, and increased
attention to environmental production‖ (U.S. Department of State, 2010).
China is trying to shift their energy source from coal to cleaner energy such as oil, natural gas,
renewable energy, and nuclear energy. It is estimated that nuclear energy will grow from 1
percent in 2000 to 5 percent in 2020 in the share of electricity (U.S. Department of State, 2010).
Also, China‘s renewable energy law calls that energy from non-fossil fuel sources should
account for 15 percent (U.S. Department of State, 2010).
Now, China is trying to strength ties with other countries and organizations for sustainable
development. In 2009, China and the United States decided to establish the U.S.-China Clean
Energy Research Center which will focus on ―building energy efficiency, clean coal including
carbon capture and storage, and clean vehicles‖ (U.S. Department of State, 2010). In addition,
they inaugurated the U.S. China energy Cooperation Program, which is a ―public-private
partnership focused on joint collaborative projects on renewable energy, smart grid, clean
transportation, green building, clean coal, combined heat and power, and energy efficiency ‖
(U.S. Department of State, 2010).
At the 2009 United Nations Climate Change Conference in Copenhagen, China promised to
reduce its carbon intensity, or the carbon dioxide output per unit of GDP, by 40 percent to 45
percent from 2005 through 2020 (Ma, 2010).
V.1.
Results
As mentioned, in 2009, China invested 34.6 billion dollars in clean energy, which is almost twice
as much as 18.6 billion the United States invested (Ma, 2010). As a result, it has installed
renewable energy capacity of 52.5 gigawatts, which is second in the world (U.S. Department of
State, 2010). Also, between 2003 and 2008, China planted 20 million hectares of trees, and it
now has the world largest man-made forests with 45 million hectares (Ma, 2010). Forests have
an important role to absorb carbon dioxide. According to NDRC, from 1980 to 2005, man-made
forests absorbed 3.06 billion tons of carbon dioxide (Ma, 2010). Also, China‘s climate change
white paper says, to shift its energy source from coal, China asked more than 2,000 heavily
polluting papermaking plants, chemical plants, and printing and dyeing factories, and 11,200
small coal mines to close in 2007 (Ma, 2010).
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V.2.
Challenges
Although China shifted its attitude toward climate change and it now strengthened its
environmental legislation, it is still far behind from achieving targets. For example, although the
11th Five-Year Plan (2006-2010) calls for 20 percent reduction in energy per unit of GDP and an
increase in forested land to 20 percent, China reduced its energy intensity by only 1.2 percent,
much lower than its target of 4 percent in 2006 (Marks, 2010).
Lack of a strong institute to oversee the implementation of climate change policy is another
problem. The MEP, China‘s primary state-level environmental regulator, has not worked
effectively to check the implementation of policies. For example, the amount of money for
environmental protection accounted for only 1.3 percent of GDP in the 10th Five-Year Plan
(Marks, 2010). In addition, although the U.S. Environmental Protection Agency has 17,000
employees, the MEP has less than 1,000 (Marks, 2010).
Moreover, there is a problem how to involve local government in national new course. Some
local government officials have already complained that central government‘s new policy
focusing on energy and environment interferes. Under the China‘s 11th Five-Year Plan, job
performance, including success in reducing energy intensity, heavily influence on local official‘s
job performance evaluation although its highest priority remained economic growth (Ma, 2010).
Also, Chinese citizens tend not to be involved in the process of the policymaking. There are few
Chinese non-governmental organizations (NGO) at present who can oppose national or local
government‘s limited commitments (Lo, 2010). Also, individual citizens tend not to considered
climate change as the most serious environmental problem. For example, According to the
survey of 3000 Chinese residents conducted by the Horizon Research Consultancy Group in
2009, climate change was ranked fourth among ten environmental problems and only 6 percent
of the respondents attribute climate responsibility to the citizens (Lo, 2010).
VI.
Conclusion
China has made some progress toward climate change policy. Although economic development
still has priority over climate change, China now not only creates institutions which address
climate change but also introduces many policies with numerical targets. However, these policies
are often controlled by central government, and many targets are not achieved. China have not
had strong climate change institute which can oversee policies, and many citizens do not
recognizes how climate change heavily impact on their daily life. To address these challenges,
China should undertake three actions.
First, China should strengthen its institute to oversee the implementation of climate change
policies. The government should legislate for stricter environmental law that vest institutions
more authority. Also, it should give climate change institutions more resources so that they can
expand their size and work effectively. Second, China should give incentives to local
government officials and they should work together. Finally, China should invest more on
environmental education to inform citizens the importance to address climate change. Although
the effects of climate change are multi-dimensional and the Chinese people will be affected
negatively by many factors, many people have not yet fully realized the severity of the problems
they will face. Therefore, the government should promote environmental education for citizens
to raise awareness of climate change. These educated people can then pressure local or central
government to work more effectively. Strong institutions which can implement policies
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effectively and involve not only central government but also local government and citizens are
the key for sustainable development in China.
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