Returns to public investments in the less-favored areas of India and China

Public investment affects poverty through many channels. These include the direct benefits that the poor receive from spending on rural development programs, such as employment programs that are targeted directly to them. It also includes the indirect effects that arise when government investments in rural infrastructure, agricultural research, and the health and education of rural people stimulate both agricultural and nonagricultural growth, leading to greater employment and income-earning opportunities for the poor and to less costly food. Therefore, the methodology to be used must have the ability to capture all these direct and indirect effects. But targeting government expenditures simply to reduce poverty is not enough. To provide a permanent solution to the poverty problem and to increase the overall welfare of all rural people, government spending must stimulate economic growth as well. Thus, the methodology to be used must also have the ability to measure the agricultural growth stimulated by different items of government expenditure. In the two case studies, a multiequation system was constructed and estimated. In the system, rural poverty is modeled as a function of growth in agricultural production, changes in rural wages, growth in rural nonfarm employment, and changes in agricultural prices. Increases in agricultural production or wages should reduce poverty.