INCLUSIVE GROWTH AND POLICIES: THE SOUTH ASIAN EXPERIENCE

INCLUSIVE GROWTH AND POLICIES:THE SOUTH ASIAN EXPERIENCE Thangavel Palanivel Chief Economist for Asia-Pacific UNDP, New York

Growth is Inclusive When… • It takes place in sectors in which the poor work (e.g., agriculture) • It occurs in relatively backward areas • It uses the factors of productionthat poor possess (e.g., unskilled labour) • It keeps prices of food and other basics relatively low

Message 1: Growth is accelerating, but it is concentrated in certain sectors and areas. Consequently inequality has increased and poverty reduction slowed down

South Asia’s growth is not only high, but also accelerating over the period

Despite accelerated economic growth, there is a slowdown in poverty reduction

Conflicting picture emerges between national and international poverty estimates Poverty reduction performance varied across countries and period

There is a huge variation in the relationship between growth and poverty (growth elasticity of poverty) across countries and time period • Growth patterns and policies matter; not just growth

Growth elasticity of poverty varies across countries and periods due to Changes in the pattern of growth affect income distribution which in turn influence the relationship between growth and poverty Initial levels of inequality also determine the strength of the nexus between growth and poverty Message 2:

Growth in Certain Sectors or Areas is More Pro-Poor Agricultural growth in China and India (1980s), industrial growth in Malaysia and Thailand (1970s & 1980s), and services growth in India and Brazil (2000s)

Inequality in South Asian countries increased substantially since 1990. In East Asia, there is a mixed picture. Inequality declined in Malaysia, Thailand and Philippines, while it increased in China, Indonesia and Vietnam.

Inequalities increased in South Asia but there is a need to distinguish between good and bad inequalities

Horizontal inequality is also high in South Asia % of women own land • South Asia’s Gini coefficients are not high compared to other regions, yet there are huge social disparities in health and education indicators • Regional inequalities also high • Inequality within urban areas is higher than that of rural areas • Women own only 7% of farms in Asia versus 18% in Africa; Source: UNDP

Message 3: Employment is growing but low labour productivity gains limit the creation of decent employment opportunities; almost half the workers in South Asia are ‘working poor’

Many countries experienced a deceleration in employment growth

Economic growth has been less “employment-intensive” Inverse relation between employment growth and productivity growth -hence the possibility of trade-off; an ideal employment elasticity will be about 0.7- 0.8

Employment elasticities declined due to shift from labour-intensive to technology and capital-intensive industries

Economic reforms and transition (e.g., China) Incentive structure favour capital-intensive production (e.g., tax holidays to promote FDI, cheap credits) Capital deepening in the face of labour shortage (example: Malaysia since the 1990s) Difficulties faced by labour intensive industries (e.g., rigid labour laws, lack of access to credit by SMEs) Economic Reforms and Policy Environment favour Capital & Technology Intensive Growth

South Asia needs to accelerate labour productivity growth Labour productivity level is low in South Asia compared to other regions, which limits the creation of decent employment opportunities

Due to large scale underemployment and low productivity 45% of the global working poor live in South Asia. Working poor rates are high in Bangladesh, Nepal and India compared to Pakistan and Sri Lanka

Agriculture contributes less than 20% of GDP in South Asia, but the sector still employs around 50% of the working population

Message 4: High food and fuel prices reduce purchasing power of the poor more severely than the rich

High food prices reduce purchasing power of the poor more than the rich Higher food prices decreased poor households’ purchasing power by 24 % in Asia, while for rich households this decline was just 4%.

Message 5: Given the diverse impacts of growth on poverty, it is clear that growth alone won’t reduce poverty. Growth and pro-poor social policies will accelerate poverty reduction

Coverage of Social Protection is low (%) • South Asia is moving, albeit slowly, to strengthen social protection e.g., India’s MGNREGS; Bangladesh’s CCT for girl’s education and Pakistan’s Benazir Income Support Programme

Poverty & hunger are still high, share of elderly is increasing rapidly, disintegration of family & community networks, increased frequency of economic shocks/natural calamities or health crises /pandemics Poor have high vulnerability to risks and lack access to instruments to mitigate and cope with them Current social assistance programmes are fragmented and not well targeted Why does South Asia Need Stronger Social Protection?

Investing More in Basic Services • Public Spending on education and health is low in South Asia compared to other regions • For health services, a very high proportion of private expenditure is ‘out-of-pocket’ Source: World Bank

Invest more to improve Agricultural Productivity • Government Support to agriculture declined; level & share of ODA to agriculture also declined – from $8 to $3.4 billion; 18% to 3.5% • Good rural infrastructure, • modern seeds, fertilizer, irrigation, R & D and farmer training are necessary for robust agricultural productivity & growth Source: UNDP

Conclusions • High economic growth alone does not ensure rapid poverty reduction. • Sound economic and social policies help achieve inclusive growth • Develop human and physical assets of poor people • Foster a inclusive financial system • Promote growth in key sectors (agriculture and rural development) • Provide an effective safety net and strengthen social protection

INCLUSIVE GROWTH AND POLICIES: THE SOUTH ASIAN EXPERIENCE