POVERTY REDUCTION STRATEGY TN

Bardhan (1996) emphasizes that often, in the name of the poor, excessive,
untargeted and distortionary policy intervention has been resorted to in many countries. 11
Even if all markets, including in particular, labour markets were functioning well, there
would always be some individuals who are weakly connected to the income generation
processes of the economy because of their particular circumstances such as, severe
disabilities. The functioning of the labour market is particularly important, as labour is the
main asset of the poor.
The composition of public expenditure is also quite important. Effective coverage
of poor by government programmes depends on the institutional environment including
local administrative capabilities, the incentives facing local administrators, and their
interface with the poor. Ranis and Stewart (2000) suggest decomposing public
expenditure on human development into three components:
i. Public expenditure ratio: share of public expenditure in GDP,
ii. Human development allocation ratio: share of human development expenditure in
total public expenditure, and
iii. Human development priority ratio: share of priority human development
expenditure in total human development expenditure.
They have argued that, with decentralisation, the human development allocation
and priority ratios almost always improve. Between growth and human development,
Ranis and Stewart talk about “two chains”, one running from human development to
economic growth, and the other from economic growth to human development. In the
first chain, with human development, productive capabilities of economic agents
(workers, managers, and farmers) increase, the organisational capabilities also increase,
leading to better technology and production processes. The structure of output contains
greater variety, exports increase, and overall growth increases.
11 Bardhan (2006) observes: “In the recent past and, even currently, the governments in many poor countries have
heavily interfered in the market in the name of helping the poor. They have used high tariffs, quantitative trade
restrictions and overvalued exchange rates, subsidised credit and under priced energy, water, and other publicly
provided inputs to help domestic producers. They have used price control and made restrictions on agricultural
commodities to keep food prices low for the urban poor. They have used industrial and investment licences to
keep larger producers at bay and help small-scale, sometimes inefficient, producers. They have imposed high
marginal tax rates and public sector dominance in production with the objective of reducing concentration of
income and wealth. The experience of the last four decades has shown that many of these policies have been
counterproductive from the point of view of both efficiency and equity”.
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