Global Majority E-Journal

Volume 2, Number 2(December 2011)

Global Majority E-Journal

About the Global Majority E-JournalThe 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.

EditorDr. 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 DesignBased 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.

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Global Majority E-Journal

Volume 2, Number 2 (December 2011)

Contents

Impact Investing as a Supplement to Nicaragua’s Traditional MicrofinanceRobert Book 63

Brazil’s Economic Growth: With or Without Prosperity?Ana Cristina Sauri Faller 73

Poverty and Fertility in India: Some Factors Contributing toa Positive CorrelationBrittany Traeger 87

The Urban Plan for India: A Foundation for Economic GrowthWill Lawther 99

Climate Change in China: Can China Be a Model of Sustainable Development?Hiromi Yagi 114

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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

AbstractThere 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. IntroductionThe 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 “have-nots.” 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.

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II. Literature ReviewWhile 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.

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III. BackgroundIII.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 near-term.0 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 Program with the International Monetary Fund (IMF), which is supposed to manage the 0 Adapted from CIA-The World Factbook: Nicaragua; available at: https://www.cia.gov/library/publications/the-world-factbook/geos/nu.html

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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 2011.0

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 low-income 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.

0 Adapted from CIA-The World Factbook: Nicaragua; available at: https://www.cia.gov/library/publications/the-world-factbook/geos/nu.html

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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 ProposalIV.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).

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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).

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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 infrastructureObviously, 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 regulationsA 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

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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.

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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. ConclusionThe 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 long-term 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.

ReferencesBerger, 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/475459-1107891190953/661910-1108584820141/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.

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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/InvestingforSocialandEnvImpact_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/about-giirs/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.kobe-u.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

AbstractCurrently, 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

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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,0 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.0 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 ReviewThere have been numerous investigations of poverty and inequality in Brazil. The following are some of the more influential studies within the last 15 years.

0 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”.0 See World Bank (2001).

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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 BackgroundBrazil’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.

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Four years later, a new constitution was promulgated, reestablishing a democratic state and a 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

Cruzado (1986) 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

Collor (1990) 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.

Real (1994) 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.

Real (1999) Free exchange rate fluctuation. Reducing interest rates on loans to individuals.

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.

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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

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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).

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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.0 Informal cities are a challenge for the promotion of cities mainly because the characteristics of the urban informal sector are numerous and rapidly changing.0

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”.0 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.”0

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.”0 According to Zibechi (2010, paragraph 9), the hymn chanted by the BOPE in

0 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.0 See Perlman (2009).0 Vera Malaguti, as quoted in Zibechi (2010), see paragraph 4.0 Zibechi (2010), paragraph 4.0 Luiz Eduardo Soares, André Batista and Rodrigo Pimentel (2005) Tropa de Elite, as quoted in Zibechi (2010).

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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”.0

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. 0

IV. Key Aspects of Some Recent Poverty Reduction PlansRecent 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.

0 See Zibechi (2010).0 See Zibechi (2010).

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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.0

0 For further details, see Betto (undated).

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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.0

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.

0 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.

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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.

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

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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 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) Best Cities (urban infrastructure), b) Community Citizenship (security and social inclusion), c) My House, My Life (housing), d) Water and Light for All (sanitation and access to electricity), e) Energy (renewable energy, oil and gas), and f) 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. ConclusionAs 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

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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 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.

ReferencesBarros, 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://www-wds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2004/04/16/000012009_20040416153112/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).

Programa das Nações Unidas para o Desenvolvimento (2009) 50 Jeitos Brasileiros de Mudar o Mundo O Brasil rumo aos objetivos de desenvolvimento do milenio . Consulted March 2011 Web: http://www.pnud.org.br/arquivos/50jeitos.pdf

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Rocha, Sonia (1997) “Desigualdade Regional e Pobreza no Brasil: a Evolução 1981-1995”, Nova Economia, Vol. 7, No. 2, pp. 85-103; available at: http://www.face.ufmg.br/novaeconomia/sumarios/v7n2/070204.pdf

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.

Zibechi, Raúl (2010) “Rio de Janeiro: Control of the Poor Seen as Crucial for the Olympics”, Website Resource (dated January 25); available at: http://sociologias-com.blogspot.com/2010/01/rio-de-janeiro-control-of-poor-seen-as.html.

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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

AbstractIndia 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. IntroductionCurrently, about one quarter of India’s population lives in poverty, i.e., on less than one dollar-a-day. 0 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,0 decreasing fertility rates, and hence,

0 Data based on World Bank (2010).0 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.

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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 ReviewOverall, 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.0

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.0

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. He analyzes that poorer families tend to have more children as a form of risk insurance and

0 This World Bank Policy Research Working Paper was published in June 2011, which is after most of this research paper had been completed.0 Adapted based on by Das Gupta, Bongaarts and Cleland (2011), page ii.

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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.0

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 BackgroundIndia 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 purchasing parity (behind the United States, China and Japan, but before Germany, Russia and

0 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.

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the United Kingdom).0This 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).

Although the national average of fertility rates has been decreasing, fertility levels remain on 0 See http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP).

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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 IndiaThere 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).

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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 cross-generation 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.

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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).

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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 InterventionsThere 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.”0 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.0

0 Stephenson and Tsui, (2002), p. 310.0 For probabilistic population projections for India that explicitly take the education-fertility link into account, see Lutz and Scherbov (2004).

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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.0 “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.

0 For a multilevel analysis for why uneducated women in India use contraception, see McNay, Arokiasamyb and Cassen (2003).

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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. ConclusionAfter 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 Basu, Alaka Malwade and Sajeda Amin (2000) “Conditioning Factors for Fertility Decline in

Bengal: History, Language Identity, and Openness to Innovations”, Population and Development Review, Vol. 26, No. 4 (December), pp. 761-794; available at: http://www.popcouncil.org/pdfs/councilarticles/pdr/PDR264Basu.pdf.

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Burra, Neera (1986) “Child Labour in India: Poverty, Exploitation and Vested Interest.” Social Action, Vol. 36, No. 3, pp. 241-263.

Cain, Mead (1981) “Risk and Insurance”, Population and Development Review, Vol. 7, No. 3 (September), pp. 435-474.

Das Gupta, Monica; John Bongaarts and John Cleland (2011) “Population, Poverty, and Sustainable Development: A Review of the Evidence”, World Bank Policy Research Working Paper, No. WPS5719 (June); available at: http://go.worldbank.org/35Z20UAY50.

Deaton, Angus and Jean Drèze (2002) “Poverty and Inequality in India: A Re-Examination”, Economic and Political Weekly, Vol. 37, No. 36, pp. 3729-3748.

Drèze, Jean and Mamta Murthi (2001) “Fertility, Education, and Development: Evidence from India”, Population and Development Review, Vol. 27, No. 1 (March), pp. 33–63.

Dupta, Nabanita Datta and Amaresh Dubey (2011) “Poverty and Fertility: An Instrumental Variables Analysis on Indian Micro Data”, Aarhus, Denmark: Aarhus University, Aarhus School of Business, Department of Economics, Working Paper, No. 03/11; available at: http://www.hha.dk/nat/wper/03-11_ndg.pdf.

Gabrielson, Lisa (2010) “Maternal Schooling in Pakistan: The Girl Effect In Action”, Global Majority E-Journal, Vol. 1, No. 2 (December), pp. 60-72; available at: www.american.edu/cas/economics/ejournal/upload/Global_Majority_e_Journal_1-2_Gabrielson.pdf.

Kowalski, Przemyslaw; Nora Dihel; and Martina Garcia (2008) “India”, in: OECD (ed.) Emerging Economies, Vol. 2008, No. 26, pp. 283-331 (Chapter 8).

Lutz, Wolfgang and Sergei Scherbov (2004) “Probabilistic Population Projections for India with Explicit Consideration of the Education-Fertility Link”, International Statistic Review Vol. 72, No. 1 pp, 81-94.

Mauldin, W. Parker (1982) “The Determinants of Fertility Decline in Developing Countries: An Overview of the Available Empirical Experience”, International Family Planning Perspectives, Vol. 8, No. 3, pp. 116-121.

McNay, Kirsty; Perianayagam Arokiasamy; and Robert H. Cassen (2003) “Why are Uneducated Women in India Using Contraception? A Multilevel Analysis” Population Studies, Vol. 57, No. 1, pp. 21-40.

Mohanty, Sanjay and F. Ram (2011) “Spatial Pattern of Poverty Reduction and Fertility Transition in India”, Population Review, Vol. 50, pp. 62-78; available at: http://muse.jhu.edu.

Narasimhan, R. L.; Robert D. Retherford; Vinod Mishra; Fred Arnold; and T. K. Roy (1997) “Measuring the Speed of India’s Fertility Decline”, National Family Health Survey Bulletin, No. 6 (July); available at: http://scholarspace.manoa.hawaii.edu/bitstream/handle/10125/3464/NFHSbull006.pdf?sequence=1.

Rain, David; John F. Long; and Michael R. Ratcliffe (2007) “Measuring Population Pressure on the Landscape: Comparative GIS Studies in China, India, and the United States”, Population and Environment, Vol. 28, No. 6, pp. 321-336.

Rajna, P. N.; P. M. Kulkarni; and N. Thenmozhi (2005) “Fertility in Tamil Nadu: Level and

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Recent Trends”, in: Christophe Z. Guilmoto and S. Irudaya Rajan (eds.) Fertility Transition in South India (New Delhi, Thousand Oaks, and London: Sage Publications), pp. 191-223 (Chapter 6).

Rao, Jasmine (2010) “The Caste System: Effects on Poverty in India, Nepal and Sri Lanka”, Global Majority E-Journal, Vol. 1, No. 2 (December), pp. 97-106; available at: www.american.edu/cas/economics/ejournal/upload/Global_Majority_e_Journal_1-2_Rao.pdf.

Schoumaker, Bruno (2004) “Poverty and Fertility in Sub-Saharan Africa: Evidence from 25 Countries”, Paper presented at the Meeting of the Population Association of America, Boston (April 1-3); available at: http://www.brunoschoumaker.be/PAA2004schoumaker.pdf.

Stephenson, Rob and Amy Ong Tsui (2002) “Contextual Influences on Reproductive Health Service Use in Uttar Pradesh, India” Studies in Family Planning, Vol. 33, No. 4, pp. 309-320.

World Bank (2010) World Development Indicators (Washington, DC: 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. 99-113

The Urban Plan for India:

A Foundation for Economic Growth

Will Lawther

AbstractAsia’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. IntroductionUrbanization 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

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government revenues.0

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 ReviewUrbanization 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”. 0

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”.0 In fact Narain explains that such a large surge has caused many individuals to accredit Asia as being “overurbanized”.0 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

0 World Bank (2010).0 Sandhu (2003) p. 75.0 Sandhu (2003) pp. 75-76.0 Sandhu (2003), p. 76.

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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”.0 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”.0 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.0 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”.0 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

0 Datta (2006), p. 1.0 Datta (2006), p. 1.0 Datta (2006), p. 3.0 Datta (2006), p. 12.

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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.0

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”.0 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”.0 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”.0

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”.0 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 bring India success and stability. 0 World Bank (2010).0 McKinsey Global Institute (2010), p. 37.0 McKinsey Global Institute (2010), p. 40.0 McKinsey Global Institute (2010), p. 47.0 McKinsey Global Institute (2010), p. 40-45.

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III. Empirical BackgroundAfter 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.0 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.0

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 inward-oriented 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).

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

0 U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.0 Kowalski, Dihel and Garcia (2008).

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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.0 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.0 Figure 3 shows the evolution of India’s urbanization in terms of the percentage of urban and rural population from 1960-2008.

Figure 3: Urbanization in India, 1960-20080 U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.0 U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.

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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.0 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.0 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 ProductivityOne 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.

Figure 4: Sectorial Employment Increase in India, 2008-2030 (million jobs)

0 U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.0 U.S. Central Intelligence Agency (CIA) (2011) – World Factbook.

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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.

A more recent study conducted by the McKinsey Global Institute supported the same

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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”0

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 of the government’s plan, because without resources and basic services, employment

0 Sivaramakrishnan, Kundu and Singh (2005).

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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”0, 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”.0 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 ServicesWith 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.

0 World Bank (2010).0 Datta (2006), p. 14.

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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 2010.0 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.

0 McKinsey Global Institute (2010), p. 55.

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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

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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”.0 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”.0 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”.0 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),0 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.

0 Sud (2006).0 Sengupta ( 2006), p. 1.0 Sengupta (2006), p. 2.0 Sengupta (2006), p. 2.

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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,0 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. ConclusionTo 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.

ReferencesDatta, 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.

McKinsey Global Institute (2010) India’s Urban Awakening: Building Inclusive Cities, 0 McKinsey Global Institute (2010), p. 67.

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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/the-world-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.

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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

AbstractChina 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. IntroductionToday, 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

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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.

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.0 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.0 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

0 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.0 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).

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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 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 BackgroundChina, 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.0 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.

0 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 ChinaWithout 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 1.4-3.2 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 flood-borne 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 ChangeAlthough 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 11 th 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. ConclusionChina 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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