Growth and poverty dynamics

1. Growth and poverty dynamics Dileni Gunewardena  Department of Economics and Statistics University of Peradeniya  Sri Lanka

2. The mechanics of poverty dynamics • Poverty depends on mean income and distribution • Holding inequality constant, growth must reduce poverty (and contraction increase it) • Holding per capita income constant, an increase in inequality can increase poverty (and a more equal distribution can reduce poverty)

3. Can poverty reduction be achieved without growth? • Theoretically, yes, except in very poor countries, where there is no one to distribute from. • Arithmetically impossible to reduce poverty through redistribution in countries where the average income is below 700 dollars a day • - Commission on Growth and Development 2008

4. The debate: Is growth good for the poor?

5. On average, growth is not associated with inequality… • For growth not to lead to lower poverty, inequality must rise significantly during growth • Incomes of the poorest quintile moved almost one-for-one with average incomes overall • Dollar and Kraay (2002) • No association between growth and inequality • WDR 2000/01, Barro (1999), Banerjee and Duflo (2003) • Source: Dollar and Kraay (2002)

6. … & poverty falls • Per capita consumption growth is associated with falling poverty • WDR 2000/01 • Growth elasticity of poverty—2.5 [0.6, 3.5] • Ravallion 2001 • Countries with high sustained growth have reduced their absolute poverty levels

7. Growth in per capita income of the poor 20% 10% Growth in per capita income -20% -10% 10% 20% -10% y = 1.17x - 0.00 2 R = 0.52 -20% Heterogeneity across countries Source: Winters 2005, World Bank Poverty Course

8. Heterogeneity within countries: across sectors • The effect of inequality on poverty reduction can vary by sector (and across time) • Last period—growth with inequality—but impact varies by sector Source: Gunewardena 2007

9. Heterogeneity within countries: across ethnic groups • Minorities are considerably poorer than others [Ahmed et al. 2007] • Poverty decompositions—poor because of disadvantage in endowments, or poor because of lower returns (Vietnam) or both (India) [Gaiha et al. 2007, Imai and Gaiha 2007] Source: Ahmed et al. 2007

10. Heterogeneity among the poor: extreme poverty • Poverty reduction lower for the extremely poor • East Asia and the Pacific: rapid economic growth benefited all groups • Sub-Saharan Africa : extreme poor were mostly left behind Source: Ahmed et al., IFPRI, 2007

11. Heterogeneity among the poor: chronic poverty • In the Fianarantsoa province in Madagascar’s southern highlands, the probability of remaining poor for five years is nearly 82 percent. • Barrett (2003) • Chronically poor live in remote, agriculturally fragile regions • Chronic Poverty Report 2008-09 • Studying poverty duration, movements in and out of poverty, transitory vs. chronic or persistent poverty. • Poverty duration surely as important as magnitude • Poverty traps at the household and individual level • Little is known • because majority of developing countries do not have any panel data, especially not nationally representative data. • No countries have comparable panels over 20 years or more Source: Barrett (2003)

12. Correlation, not causality • The evidence is of association, not causation • Perhaps the causality runs in the opposite direction: poverty reduction led to growth? • Or…

13. The wrong debate? Growth and poverty reduction are outcomes that may have been influenced by the same set of policies…

14. The poor remain poor because… • They cannot borrow • against future earnings to invest in education, skills, new crops, and entrepreneurial activities. • They are cut off • from economic activity because many collective goods (such as property rights, public safety, and infrastructure) are under-provided. • They lack information • about market opportunities • Rodrik 2000

15. Growth requires… • Interventions targeted at closing gaps between private and social costs. • There will be a preponderance of such opportunities where there is a preponderance of poverty. • Rodrik, 2000

16. Policies to reduce poverty will also lead to growth • Policies that are effective in increasing the incomes of the poor—primary education, rural infrastructure, health and nutrition—are also policies that enhance the productive capacity of the economy in aggregate • Rodrik 2000

17. Country-level studies suggest that poverty was associated with low infrastructure In fast-growing Asia, public investment in infrastructure accounts for 5–7 percent of GDP or more. In China, Thailand, and Vietnam, total infrastructure investment exceeds 7 percent of GDP the right order of magnitude for high and sustained growth — The Growth Report, 2008 Public spending on infrastructure crowds private investment in

18. Education: Quality matters Labour market reform Strategic urbanization • At independence, in 1957, only ¼ of Malaysia’s population lived in cities. In 2005, 63% did. • High growth and industrialization processes—labor and capital move across sectors and geographically • The Growth Report 2008

19. How do ‘good’ policies and institutions come to be adopted? • Rational choice political economy provides insight into • How reform may be resisted because of uncertainty of outcomes or distributional consequence—where losses are concentrated among a few and gains are widely diffused • But not why similar cases had different outcomes • Little explored areas: • Issues of leadership, ideology, use of state power, tipping points between support for institutions and withdrawal of this support • Kanbur 2004

20. From data to policy document Source: DCS 2006 Source: WB 2007

21. Summary • Debate—is growth good for the poor? • On average growth resulted in poverty reduction because inequality remained constant • Problem 1: Heterogeneity among and within countries • Problem 2: Reverse causality—maybe poverty reduction led to growth • Possibility: Policies/institutions that reduce poverty also increase growth • What are these policies/institutions? • How do they come to be adopted?