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Assessing the Poverty Impact of Economic Growth: The Case of Indonesia. B. Essama-Nssah and Peter J. Lambert World Bank Poverty Reduction Group and University of Oregon October, 2006. Introduction. Context Poverty Reduction: A fundamental objective of development (MDGs)
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Assessing the Poverty Impact of Economic Growth:The Case of Indonesia B. Essama-Nssah and Peter J. Lambert World Bank Poverty Reduction Group and University of Oregon October, 2006
Introduction • Context • Poverty Reduction: • A fundamental objective of development (MDGs) • Hence we need • a metric for assessing effectiveness in terms of this objective. • meaningful ways to assess poverty impact of shocks and policies. • Economic growth: • Potentially a powerful instrument of poverty reduction. • Yet, same rate of growth can lead to different levels of poverty reduction in different circumstances. • Issue • When to declare a growth pattern pro-poor?
General approach • Logic of social impact evaluation understood as an assessment of changes in individual and social welfare attributable to a shock or policy. • Three basic dimensions: • Identification of individual situations. • Aggregation of individual situations into an indicator of a social state. • Ranking of social states
Specification • Identification: • Individual situations represented by point elasticity of income w.r.t. a change in aggregate income. • Aggregation: • Use members of the class of additively separable poverty measures (e.g. Watts, FGT). • Ranking: • A pro-poor growth pattern achieves a reduction in poverty over and above that which is feasible in a benchmark case (either desirable or counterfactual). • We choose as benchmark the amount of poverty reduction attainable under distributional neutrality (equiproportionate growth).
Case of Indonesia • A long reputation of high achievements in growth and poverty reduction, even in the face of adverse conditions (Ravallion and Huppi 1991; World Bank 1996). • Is the observed poverty reduction more or less than we would have observed had growth been distributionally neutral? • We answer this question using 1993-2002 data. • We also unbundle the pattern of growth, to identify the contributions of income components to the overall outcome.
Focus of the rest of the presentation: • Evaluation Framework • A General Impact Indicator • Poverty Focus • Empirical Results • Data • Profile of Poverty and Inequality • Pro-Poorness • Conclusion
Evaluation Framework • Identification • Let x be an individual characteristic (e.g. income) that is responsive to growth (or policy change). • Let f(x) be the frequency density function for x among the population. • Let u(x) be any individual attribute (e.g. poverty), a function of x.
Aggregation • Average x: • Average u(x) : • Impact • Growth rate of mean of x: • Growth pattern (elasticity of individual income with respect to y): • q(x) is a normalized growth incidence curve (Ravallion & Chen, 2003).
Impact, continued • Change in average u(x) induced by change in y: • As a proportion: • As an elasticity: • Component breakdown(x=x1 +x2 xq(x)=x1 q(x1)+x2 q(x2)):
Poverty Focus • x is now income or expenditure and mx is the poverty line, call it z. • The function is an indicator of individual deprivation. • Overall poverty
Poverty Impact • Aggregate poverty elasticity: - Decomposition by income components:
Indicator of pro-poorness: • where q0 is the growth pattern associated with distribution neutrality, i.e. q0(x) = 1 for all x. - Indicator measures the difference between poverty reduction under distribution neutrality and amount produced by observed growth pattern. - Typically, the growth elasticity ΦP(q) is negative, since positive growth induces poverty reduction for all incomes below the poverty line. • If the pro-poorness indexπP(q) is positive, the observed growth pattern leads to more poverty reduction than the benchmark case
Factoring growth into scale and distribution contributions Elasticity: Pro-poorness: • growth is pro-poor if distributional component of poverty elasticity is negative.
Ratio Comparisons • Instead of an additive comparison, one can consider the ratio of the actual elasticity to the benchmark elasticity. Growth is pro-poor if this ratio is greater than 1. • Ratio comparison for Watts index leads to Ravallion and Chen’s (2003) “mean growth rate for the poor” measure • Ratio comparisons also underlie the Kakwani et al (2004) measure called “poverty equivalent growth rate”. • Decomposability not established for ratio measures
Empirical Results • Two types of datasets for Indonesia used in this study • Distribution of household expenditure per decile (in 1993 PPP dollars) from World Bank Global Poverty Monitoring database. • SUSENAS household surveys (1999, 2002) used to achieve decomposition of pro-poorness across income/expenditure components • Poverty line: about 2 dollars a day.
Poverty and Inequality in Indonesia • 1993-1996 • Poverty falls while inequality increases. • Likely outcome of successful adjustment to oil shock • 1996-1999 • Poverty increases while inequality falls • Likely outcome of the 1997 Asian financial crisis. • 1999-2002 • Poverty falls, inequality goes up. • Signs of recovery: macroeconomic stability associated with reduced vulnerability to external shocks.
Pro-Poorness in Indonesia • Additive comparisons • Ratio Comparisons
Distributional component of growth Shapley Decomposition • distributional effect alleviated some of the negative impact of the 1997 economic crisis.
Component Analysis, 1999-2002 • Outcome driven mainly by what happened to expenditure on rice, with some help from expenditure on other food items. • Rice represents 26 percent of total expenditure for the poor. • Total food expenditure including rice is about 73 percent of total household expenditure for the poor.
Winners and losers among the poor • Actual growth pattern for 1999-2002 crosses benchmark pattern twice before the headcount ratio (55 percent). • q(x) below benchmark up to 20th percentile, and between 43rd and 55th percentiles (these are the losers) • winners located between 20th and 43rd percentiles.
Appraisal of gains and losses • Pro-poorness at percentiles:
The gains versus the losses • Percentile pro-poorness curves lie below zero: economic growth not pro-poor at any percentile up to the headcount. • according to our metric, benefits enjoyed by the poor between the 20th and the 43rd percentiles not high enough to compensate for losses experienced by those who came before.
Conclusions • Pro-poor growth analysis fits nicely within the logic of social evaluation • An assessment of changes in individual and social welfare attributable to the process of economic growth. • Measurements depend critically on underlying value judgments. • Our metric for pro-poorness is defined by the following choices: • (1) individual outcomes represented by point elasticity of income; • (2)social welfare measured by poverty measures in the additively separable class; • (3) standard of comparison based on distributional neutrality.
Application of this approach to data for Indonesia reveals that: • Overall poverty reduction achieved over period 1993-2002 far below what distributionally neutral growth would have achieved. • Focusing on the 1999-2002 period: • Some poor people gained from the economic growth that occurred over that period, but these gains do not measure up to the losses suffered by the rest of the poor. • The behavior of categories of expenditures over the same period reveals that the weak performance is due mainly to changes in food expenditure.
References • Essama-Nssah, B. (2005). A unified framework for pro-poor growth analysis. Economics Letters, vol. 89, pp. 216-221. • Essama-Nssah, B. and Lambert P.J. (2006). Measuring the Pro-Poorness of Income Growth within an Elasticity Framework. World Bank Policy Working Paper No. 4035 (October) • Kakwani, N.C., S. Khandker and H.H. Son (2004). Pro-poor growth: concepts and measurement with country case studies. Working Paper Number 2004-1, International Poverty Center, Brasil. • Kraay, Art. (2006). When is growth pro-poor? Evidence from a panel of countries Journal of Development Economics 80, 198-227. • Ravallion, Martin and Huppi Monika. 1991. Measuring Changes in Poverty: A Methodological Case Study of Indonesia during an Adjustment Period. The World Bank Economic Review, Vol. 5, No. 1:57-82. • Ravallion, M. and S. Chen (2003). Measuring pro-poor growth. Economics Letters, vol. 78, pp. 93-99. • World Bank (1996). Indonesia: dimensions of growth. Report No.15383-IND. Country Department III, East Asia and Pacific Region. Washington, D.C.: The World Bank.