INCLUSIVE GROWTH AND POLICIES:THE SOUTH ASIAN EXPERIENCE

Thangavel PalanivelChief 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 production that poor possess (e.g., unskilled labour)

• It keeps prices of food and other basics relatively low

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

Message 1:

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

South Asia East Asia Africa Latin America

-2

0

2

4

6

8

10

Per capita GDP Growth Accelerat-ing

1970s

1980s

1990s

2000s

South Asia East Asia Africa Latin America

0

2

4

6

8

10

GDP Growth Accelerating

1970s 1980s

1990s 2000s

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

South Asia East Asia Africa China India

-10

-8

-6

-4

-2

0

2

Annual rate of poverty reduction slowed down in India and South

Asia

1981-90

1990-99

1999-2005

Ch

ange

in P

over

ty r

ate

( $1

.25

a d

ay)

South Asia

East Asia

Africa China India0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

Growth elasticity of poverty declined in India and South Asia

1981-90 1990-99 1999-2005

(%)

Poverty reduction performance varied across countries and period

BGD

NEPSRL

CPRLAO

MO

NTH

A

-15

-12

-9

-6

-3

0

3

6

Change in Poverty Incidence($1.25 a day)

1980s 1990s 2000s

An

nu

al c

han

ge (

%)

BGDNEP

SRLCPR

LAOM

ONTHA

-15

-12

-9

-6

-3

0

3

6

Change in Poverty incidence (National Povertyline)

1970s 1980s 1990s 2000s

An

nu

al c

han

ge (

%)

Conflicting picture emerges between national and international poverty estimates

• 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

BGD

NEPSRL

CPRLAO

PHI

VIE

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Growth Elasticity of Poverty (based on national poverty line)

1970s 1980s 1990s

2000s

BGD

NEPSRL

CPRLAO

MO

NTH

A

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Growth Elasticity of Poverty (based on $1 a day)

1980S 1990S 2000S

Message 2:

Growth elasticity of poverty varies across countries and periods due to

1. Changes in the pattern of growth affect income distribution which in turn influence the relationship between growth and poverty

2. Initial levels of inequality also determine the strength of the nexus between growth and poverty

Growth in Certain Sectors or Areas is More Pro-Poor

Agr

Ind

Ser

Agr

Ind

Ser

Agr

Ind

Ser

Agr

Ind

Ser

Agr

Ind

Ser

Bangladesh

India Nepal Pakistan Sri Lanka

0

4

8

12

Sectoral Growth in South Asia

1970s 1980s 1990s

2000s

%

Agr Ind Ser Agr Ind SerSouth Asia East Asia

0

4

8

12

Sectoral GDP Growth

1970s 1980s 1990s 2000s

%

Agricultural growth in China and India (1980s), industrial growth in Malaysia and Thailand (1970s & 1980s), and services growth in India and Brazil (2000s)

19811984

19871990

19931996

19992002

200520

25

30

35

40

45

50Gini Index for South Asian Countries

BGD IND

SRL NEP

PAK

19811984

19871990

19931996

19992002

20052008

20

25

30

35

40

45

50Gini Index East Asian Countries

CPR INS MAL PHI

THA VIE

BGDBHU

IND

MLV

NEPPAK

SRL0

10

20

30

40

50

60

Inequality Level

Bottom 20%

Top 20%

Bottom10%

Top10%

%

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

• 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;

Horizontal inequality is also high in South Asia

% of women own land

Source: UNDP

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’

Message 3:

Many countries experienced a deceleration in employment growth

South

Asia

South

-Eas

t Asia

East A

sia

Africa

Latin

Am

erica

Wor

ld0.0

1.0

2.0

3.0

4.0

Average annual employment growth rate

1990s 2000s

ILO KILM database

%

BGDIN

DNEP

SRLPAK

CMB

CPRIN

SLAO

MAL

MON

PHITHA

VIE0.0

1.0

2.0

3.0

4.0

Annual Average Employment Growth

1991-1999 2000-2008

ILO KILM database

%

Economic growth has been less “employment-intensive”

S Asia SE Asia E Asia L America Africa0

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8

0.9

1

Employment Elasticities

1992-96

1996-00

2000-04

2004-08

BGDIN

DNEP

SRLPAK

CMB

CPRIN

SLAO

MAL

MON

PHITHA

VIE0.0

0.2

0.4

0.6

0.8

1.0

1.2

Employment Elasticity

1991-99 2000-08

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

SA EA LA SSA SA EA LA SSA SA EA LA SSALabour based Technology based Resource based

0

10

20

30

40

50

60

70

Structure of Manufacturing Output changing towards technology-intensive

1980 2000

Source: Palanivel (2005)

%

• 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

S Asia

E Asia

SE Asia

L Am

erica

SS Afr

ica

World

0

5000

10000

15000

20000

25000

labour productivity in 2009

S Asia

E Asia

SE Asia

L Am

e...

SS Af..

.

World

0

2

4

6

8

Annual growth of labour productivity in South Asia is relatively high

1991–2000 2000–09%

BGDIN

DPAK

SRLCM

BCPR

INS

MAL

PHITHA

VIE02468

1012

Average annual labour produc-tivity growth rate

1991-00 2000-08

Source: ILO

%

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

Working poor rates are high in Bangladesh, Nepal and India compared to Pakistan and Sri Lanka

Due to large scale underemployment and low productivity 45% of the global working poor live in South Asia.

1999 2003 2008 20090

200

400

600

800

1000

Working Poor ($1.25 a day) by Regions

Others

Africa

Latin Amer-ica

South-East Asia

East Asia

South Asia

Source: ILO Global Employment Trends 2011

Mil

lion

South

Asia

East A

sia

South-

East...

Latin A

me...

Africa

0

20

40

60

80Share in Total Employment

1999 2009

Source: ILO Global Employment Trends 2011

%

2005 2005 2003 2004 2007BGD IND NEP PAK SRL

0

20

40

60

80

Working Poverty Rates$1.25 working poor $2.00 working poor

% o

f tot

al e

mpl

oym

ent

Agri Indu Serv Agri Indu Serv Agri Indu Serv Agri Indu Serv Agri Indu ServBGD IND NEP PAK SRL

0

20

40

60

80

100

Structural Changes in Employment and Output in South Asia

EMP-1980S GDP-1980S EMP-2000S GDP-2000S

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

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

Message 4:

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%.

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

Message 5:

Coverage of Social Protection is low (%)

0 20 40 60 80 100

BangladeshBhutan

CambodiaChina

FijiIndia

IndonesiaLao PDRMalaysiaMaldivesMongolia

NepalPakistan

PhilippinesPNG

Sri LankaViet Nam

Unem/under employedElderlyHealth Care

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

Public spending on education (% of GDP)Health expenditure in 2007 (% of GDP)

1990 2008 Total Public Private

East Asia & Pacific 2.5 2.7 4.1 1.9 2.2

Latin America & Caribbean 2.8 3.9 7.1 3.4 3.7South Asia 2.6 2.9 4.0 1.1 2.9Sub-Saharan Africa 3.2 4.1 6.4 2.6 3.8World 3.8 4.6 9.7 5.8 3.9

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

Agricultural Public Investment as % of Total Government Expenditure by Regions

0

2

4

6

8

10

12

14

16

AFRICA ASIA LAC Developing countries

1980 1990 2002

Invest more to improve Agricultural Productivity

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