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Raghav Gaiha:From workfare to poverty alleviation

Raghav Gaiha  |  New Delhi 

The self-selection principle of the NREG breaks down once you statutorily fix minimum wages in excess of the prevailing wages in most parts of the country.
Samuel Johnson's oft-quoted dictum "A decent provision for the poor is a true test of civilisation" (James Boswell's Life of Samuel Johnson, 1781) remains a distant dream judging by India's record in poverty alleviation during the 1990s despite a rapid growth of income.
In fact, the headcount ratio declined but at most by 3 percentage points and the absolute number of the poor did not decline over 1993-99 ("Poverty and inequality in India ""1 and 2" by A Sen and Himansu, Economic and Political Weekly, September 18 and 25, 2004).
As a result, over a quarter of the population remained poor in 1999. Both inter-state and within-state inequality rose sharply during the 1990s, the latter being the larger component of total inequality in India.
Within-state urban inequality grew in the 1990s, while a declining phase of within-state rural inequality was reversed during this period. Hence poverty reduction was muted. Characterising the 1990s as a (relatively) lost decade for poverty reduction is thus not an exaggeration.
From this perspective, the (amended) National Rural Employment Guarantee (NREG) Bill, approved in the Lok Sabha on August 23, is a bold and imaginative initiative. Some of the provisions are, however, contentious.
Work-requirement as a feature of poverty alleviation measures has a long and chequered history, perhaps the most notorious example being the Poor Law of 1834 in England, in which poor relief was granted through residence in a workhouse.
Workfare was also common in ancien regime France where relief was granted in "charity workshops". But workfare schemes are not just historic relics. They are extensively used in both developed and developing countries to reduce poverty.
One of the most innovative examples is the Employment Guarantee Scheme (EGS) in Maharashtra, which is now proposed to be extended to the poorest 200 districts in the initial phase of the NREG programme.
The case for workfare rests on the screening and deterrent arguments. Work requirement self-selects the poor as also deters those who participate in it from neglecting job-search and investing in human capital.
Contrary to assertions, in view of these arguments, there is no justification for restricting the employment guarantee to BPL households. If the work-requirement is sufficiently stringent (say, 8 hours of unskilled work) at a wage rate lower than the prevailing agricultural wage rate, the scheme would be self-targeting and is unlikely to make the participants dependent on it.
So allowing anyone to participate in it in the (amended) NREG Bill is consistent with the rationale of workfare. What is, however, not consistent with it is the provision of statutory minimum wages for each of the 100 days of guaranteed employment to a household member.
The minimum wages are far in excess of the prevailing agricultural wage rates in slack agricultural periods in large parts of rural India. In fact, the self-selection mechanism weakens with higher wages, as illustrated below.
An analysis of the International Crops Research Institute for the Semi-Arid Tropics (ICRISAT) sample points to a sharp decline in EGS participation in 1989, following the wage hike in 1988. Well over half of the reduction in EGS attendance between 1988 and 1989 was due to rationing.
In fact, the poor bore the brunt of it. Since even the relatively affluent found it attractive to participate in it at much higher wages, many of the poor were "crowded out".
Besides, the rationing mechanisms used disadvantaged the poor. These involved longer delays in responding to the demand for work, and restrictions on opening of new work sites.
Not surprisingly, targeting accuracy fell sharply, with the percentage of poor participants declining from 48 in 1979 to barely 27 in 1989 ("Does the Employment Guarantee Scheme Benefit the Rural Poor in India? Some Recent Evidence" by R Gaiha, Asian Survey, 2005, forthcoming).
Another analysis with the ICRISAT sample focuses on the switches that occur between the EGS, with fixed wages, and farm activities, with market determined wages. This shifts the emphasis to employment options in terms of their discounted cash flows.
So not just wages in different activities but also entry and exit costs matter in labour supply decisions in the option value framework. Switches into the EGS are positively linked to the ratio of EGS/farm wage.
Besides, switches are linked to variables that proxy the entry and exit costs. Greater participation of the top 5 per cent of agricultural wage earners, as also of those who had participated in the EGS in the previous year, for example, reflects their ability to better afford these costs ("Option values, switches and wages "" An analysis of the Employment Guarantee Scheme in India" by P Scandizzo, R Gaiha and K Imai, University of Rome "Tor Vergata", 2005).
An assessment of the protective and promotional roles of the EGS yields useful insights ("Rural public works and poverty alleviation "" The case of the Employment Guarantee Scheme in Maharashtra" by Gaiha R and K Imai, International Review of Applied Economics, 2002, vol 16).
The first role focuses on whether the vulnerable are protected from slipping into poverty, and the second on whether the poor are enabled to move out of poverty. Substantially larger EGS outlays combined with maximum participation of the poorest in a Rawlsian variant yield much stronger protective and promotional effects. These results imply that the proposed scheme must be confined to the most backward regions; a (relatively) low wage must be maintained to attract only the poorest; and the scheme should operate only during seasonal slacks.
In conclusion, whether workfare, along the lines proposed in the NREG Bill, will substantially alleviate poverty is likely to depend largely on whether the poorest households and regions are targeted better through much larger outlays at relatively low wages.
The author is visiting professor of economics, University of Rome "Tor Vergata".

First Published: Sat, August 27 2005. 00:00 IST