DOES ECONOMIC GROWTH ALWAYS REDUCE POVERTY?

1. DOES ECONOMIC GROWTH ALWAYS REDUCE POVERTY? MARC WUYTS INSTITUTE OF SOCIAL STUDIES ERASMUS UNIVERSITY OF ROTTERDAM

2. A RISING TIDE RAISES ALL BOATS THE ARGUMENT GOES AS FOLLOWS: IF (OVER A PERIOD OF TIME – SAY, 5 0R 10 YEARS), • GDP PER CAPITA GROWS SIGNIFICANTLY, • AND, INEQUALITY (USUALLY DERIVED FROM HOUSEHOLD BUDGET SURVEYS) DOES NOT BECOME (SIGNIFICANTLY) WORSE; THEN • INCOME POVERTY – USING AN ABSOLUTE POVERTY LINE – MUST FALL. NOTE: IF THIS DOES NOT HAPPEN, A PARADOX IS SAID TO EXIST OR, AS IS MOST COMMONLY ASSERTED, SOMETHING IS WRONG WITH THE DATA.

3. IMPLICIT ASSUMPTIONS AND SILENCES IT APPEARS, THEREFORE, AS IF PER CAPITA GDP GROWTH DIRECTLY TRANSLATES ITSELF INTO IMPROVED STANDARDS OF LIVING, PARTICULARLY THOSE OF THE POOR, REGARDLESS OF THE MECHANISMS THROUGH WHICH THESE TRANSMISSIONS ARE SUPPOSED TO TAKE PLACE. THIS ASSUMES THAT: • THE GROWTH IN PER CAPITA GDP IS EQUAL TO THE GROWTH IN THE AVERAGE STANDARD OF LIVING. THIS SAYS LITTLE ABOUT: • THE FACT THAT THE STANDARDS OF LIVING OF THE MAJORITY OF WORKING PEOPLE — ‘POOR’ AND ‘NON-POOR’ ALIKE — DEPEND ON HOW OUTPUT GROWTH DIVIDES BETWEEN PRODUCTIVITY GROWTH AND EMPLOYMENT GROWTH AND, IN TURN, ON HOW AND TO WHAT EXTENT PRODUCTIVITY GROWTH TRANSLATES INTO A GROWTH IN LABOUR EARNINGS.

4. MEASURING AGGREGATE OUTPUT GROWTH VERSUS MEASURING GROWTH IN THE AVERAGE STANDARD OF LIVING • GDP MEASURES AGGREGATE VALUE ADDED OF DOMESTIC PRODUCTION (CONSUMER GOODS, INVESTMENT GOODS AND EXPORTS); TO MEASURE ITS GROWTH OVER TIME, GDP IS CALCULATED AS CONSTANT PRICES TO CORRECT FOR CHANGES IN PRICES. • THE APPROPRIATE DEFLATOR IS THE IMPLICIT GDP DEFLATOR, WHICH SHOWS THE GENERAL RATE OF INFLATION (OR DEFLATION) OF DOMESTIC OUTPUT. • TO MEASURE REAL CHANGES IN STANDARDS OF LIVING IT IS THE PRICES OF CONSUMER GOODS THAT MATTER. • THE APPROPRIATE DEFLATOR IS THE CONSUMER PRICE INDEX KEY PREMISE: DO NOT ASSUME THAT THESE TWO DEFLATORS MOVE HAND IN HAND. THIS ASSUMPTION, HOWEVER, IS ROUTINELY MADE!

6. PRELIMINARY SUMMARY • GDP GREW AT 7.4% PER ANNUM AND POPULATION GROWTH WAS ± 2.4% PER ANNUM, WHICH MEANS THAT GDP PER CAPITA GREW APPROXIMATELY AT 5% PER ANNUM. • THE INFLATION RATE FOR THE IMPLICIT GDP DEFLATOR WAS 7.5% PER ANNUM AS AGAINST 9.8% FOR THE CONSUMER PRICE INDEX, A DIFFERENCE OF 2%. • THE POTENTIAL GROWTH IN THE AVERAGE STANDARD OF LIVING, THEREFORE, SHOULD BE CORRECTED FOR THIS DIFFERENTIAL BETWEEN INFLATION RATES: HENCE, AT MOST 5% - 2% = 3% PER ANNUM CAVEAT: THIS IS A VERY CRUDE MEASURE OF THE RISE IN THE AVERAGE STANDARD OF LIVING SINCE (1) IT ASSUMES THAT THE SHARE OF CONSUMPTION IN AGGREGATE REMAINED CONSTANT AND, IMPORTANTLY, (2) THAT THE GROWTH IN GDP ALSO REFLECTS THE GROWTH IN GROSS NATIONAL INCOME. IF, AS IS LIKELY IN MOZAMBIQUE, PROFITS CONSTITUTE A SIGNIFICANT SHARE OF VALUE ADDED (PARTICULARLY, IN MEGA PROJECTS) AND ARE REPATRIATED ABROAD, THE GROWTH IN GDP DOES NOT GO HAND IN HAND WITH THE GROWTH IN NATIONAL INCOME.

7. FOOD VERSUS NON-FOOD INFLATION LOOKING AT THE GENERAL RATE OF INFLATION IN CONSUMER PRICES IS UNSATISFACTORY, HOWEVER, BECAUSE OF THE FOLLOWING REASONS: • CONSUMPTION PATTERNS AMONG PEOPLE (HOUSEHOLDS) DIFFER DEPENDING ON WHETHER THEY ARE POORER OR RICHER. • MORE SPECIFICALLY, THE PROPORTION OF INCOME SPENT ON FOOD DECLINES AS INCOME INCREASES (WHICH IS KNOWN AS “ENGEL’S LAW”) • THE CONSUMER PRICE INDEX IS CALCULATED ASSUMING THAT, ON AVERAGE, 55.46% OF HOUSEHOLD EXPENSES ARE SPENT ON FOOD. • THIS PROPORTION IS TOO HIGH FOR THE RICH, BUT MUCH TO LOW FOR THE POOR. • IT IS IMPORTANT, THEREFORE, TO DECOMPOSE THE CPI INTO AT LEAST TWO COMPONENTS – FOOD AND NON-FOOD ITEMS – AND LOOK AT THE EVOLUTION OF BOTH.

9. REVISED SUMMARY • IF WE ARE CONCERNED ABOUT FOOD POVERTY (WHICH IS EXTRAORDINARY HIGH IN MOZAMBIQUE), IT IS THE INFLATION RATE OF FOOD PRICES THAT MATTERS MOST: 11.3% PER ANNUM, ON AVERAGE, AS AGAINST 7.5% FOR THE GDP DEFLATOR – A DISCREPANCY OF 3.8%. • CONSEQUENTLY, EVEN IF THE MONETARY DISTRIBUTION OF INCOME REMAINS UNCHANGED, THE DISTRIBUTION OF REAL INCOMES WILL WORSEN! TWO CONCLUSIONS • AS KALECKI POINTED OUT LONG AGO,FOR GROWTH NOT TO GO AT THE EXPENSE OF THE POOR (AS A RESULT OF FOOD PRICE INFLATION) IT IS IMPORTANT THAT FOOD BALANCE IS MAINTAINED IN THE ECONOMY THROUGH INVESTMENT IN THE PRODUCTION OF FOOD. • AS ATKINSON AND LUGO (2010) POINTED OUT, IF POVERTY IS MEASURED ON AN ABSOLUTE BASIS, THE MEASUREMENT OF INEQUALITY SHOULD ALSO BE IN ABSOLUTE TERMS, AND NOT RELATIVE TERMS (LIKE THE GINI COEFFICIENT).

10. DOMESTIC FOOD PRODUCTION APPEARS TO BE HIGHLY VARIABLE WITH LOW OVERALL GROWTHGROWTH RATES: 2002 – 2008 FOOD PRODUCTION: 2.2% PER ANNUM PRODUCTIVITY INDEX: - 2.7% PER ANNUM SOURCE: POVERTY AND WELL-BEING IN MOZAMBIQUE: THIRD NATIONAL POVERTY ASSESSMENT 2010 (OCT).

11. EMPLOYMENT AND THE COST OF WAGE GOODS TO SAFEGUARD AND IMPROVE THE REAL DISTRIBUTION OF INCOME REQUIRES A REDUCTION IN INEQUALITY AS MEASURED ON AN ABSOLUTE BASIS (AND NOT IN RELATIVE TERMS). PERHAPS THE SINGLE MOST IMPORTANT DETERMINANT OF INCLUSIVE GROWTH BY REDUCING ABSOLUTE INEQUALITY IS THE GROWTH IN EMPLOYMENT AT REAL WAGES THAT SECURE A DECENT STANDARD OF LIVING. IN THIS RESPECT, IT IS IMPORTANT TO MAKE THE DISTINCTION BETWEEN THE REAL WAGE AND THE PRODUCT WAGE: • THE REAL WAGE IS A MEASURE OF STANDARD OF LIVING AND IS OBTAINED BY DEFLATING THE NOMINAL WAGE BY THE INDEX OF PRICES OF WAGE GOODS (= CONSUMER PRICE INDEX OF BASIC NECESSITIES). • THE PRODUCT WAGE IS A MEASURE OF PROFITABILITY (IN PARTICULAR, OF VIABILITY OF LABOUR INTENSIVE PRODUCTION) AND IS OBTAINED BY DEFLATING THE NOMINAL WAGE BY THE PRICE OF OUTPUT. • IF THE PRICE OF NECESSITIES – FOOD, IN PARTICULAR – RISES FASTER THAN GENERAL OUTPUT PRICES, EITHER REAL WAGES HAVE TO FALL OR THE VIABILITY OF LABOUR-INTENSIVE PRODUCTION IS ERODED. OFTEN, WHAT HAPPENS IS A COMBINATION OF BOTH WITH REAL WAGES BEING PARTLY PROTECTED IN THE FORMAL SECTOR (RESTRAINING ITS EMPLOYMENT EXPANSION) WHILE FALLING IN THE INFORMAL SECTOR.

12. THANK YOU FOR YOUR ATTENTION