How does poverty decline? Suggestive evidence from India

The economic processes by which productivity growth in agriculture and non-agriculture matter to the poor in India are investigated here. Poverty is measured by the wage rate of agricultural labor—a variable that is highly correlated with head-count measures. The paper sets up a theoretical model to contrast the effects of productivity increase in the farm and non-farm sectors. The effects depend on whether the region under consideration is a closed or an open economy. Drawing on the theoretical model, the paper undertakes a counterfactual exercise to estimate the relative contribution of the non-farm sector to the increase in the agricultural wage earnings during the period 1983-1999. The contribution is found to be no more than a quarter of the observed wage earnings. The extension of this methodology to individual states requires the assumption that agricultural productivity growth leads to a net increase in non-farm employment. The paper presents econometric evidence in support of this assumption