1

Achieving Inclusive Growth: Policy Challenges for Emerging Economies

OECD/EU High-Level Conference

Ana Revenga

May 19, 2010

www.oecd.org/els/social/inequality/emergingeconomies

Context: Poverty has fallen but remains widespread…

Last 2 decades marked by unprecedented reduction in poverty: Poverty declined 1% annually:

from 52.2% in 1981 to 25.7% in 2005 ($1.25/day)

In China alone, poverty declined by 475 million

….but poverty remains

widespread and non-income poverty is sticky: 1.4 billion people live below

$1.25/day; 2.5 billion below $2/day.

880 million people are malnourished; 2.5 billion people lack improved sanitation

0

10

20

30

40

50

60

70

80

1981 1984 1987 1990 1993 1996 1999 2002 2005

%

Poverty Rates in the World Different Poverty Lines

$ 1.25 a day

$ 2 a day

2

… and vulnerability is high and rising

There is rising inequality between regions and within fast-growing countries: Rapid poverty reduction in

East Asia since 1990; near-stagnation in Africa; rising vulnerability in ECA

Rising inequality in Vietnam, China, India, Bangladesh and other rapid growers.

and vulnerability is high and growing: Food/financial crises pushed

many into poverty; highlighted the fragility of development gains

0

200

400

600

800

1000

1200

1400

1600

1800

2000

1981 1984 1987 1990 1993 1996 1999 2002 2005

Number of vulnerable people in the World

Between $2 and $5 a day

Mixed picture on global inequality – driven by China and India

International Inequality

Global Gini 1988-2002

Concept 1: inter-country unweighted Concept 2: Inter-country weighted by pop

3

Key questions: How does growth translate into employment and

earnings opportunities?

Jobs and „quality‟ of jobs

How fragile are development gains?

Vulnerability to shocks

Role for “Smart” safety nets

What role for the state in determining opportunities and outcomes?

Ensuring equality of opportunity

Capacity and willingness to redistribute

Quantity of jobs vs. quality of jobs Poor households depend on work but earn little

Employment rates are highest in poor countries

Poverty rates are higher for the employed than the unemployed

4

Quality of jobs may matter more than quantity:

Country % change per year Employment

Elasticity

% change in poverty headcount index per year

Poverty elasticity1 Period

International $1.15/day $2/day National GDP Employment

Albania 3.1 1.8 0.6 -10.1 -3.3 2002-2005

Vietnam 8.3 2.6 0.3 -8.4 -1.0 1993-1998

Pakistan 4.7 3.6 0.8 -9.0 -4.0 -0.9 1999-2005

Bangladesh 5.1 2.1 0.4 -3.5 -0.7 2000-2005

Sri Lanka 4.0 2.3 0.6 -2.6 -2.6 -0.7 1996-2002

Nepal 4.0 2.6 0.7 -2.7 -1.6 -0.4 1996-2004

Rwanda 6.3 2.5 0.4 -1.0 -0.2 2000-2006

India 6.5 1.8 0.3 -1.5 -0.7 -0.1 1994-2005

Madagascar 1.3 2.8 2.2 -0.5 -0.4 2001-2005

Nicaragua 3.4 3.9 1.1 0.2 0.1 2001-2005

This crisis: Considerable fall in GDP growth in developing countries

9

-11.8

-6.8

-5.6

-2.8

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

ECA LAC EAP MEA/SSA

Perc

en

tag

e p

oin

ts

Difference between pre-crisis and post-crisis average GDP growth, by region

5

Commensurate fall in wage bill Difference pre-post crisis

10

But adjustment through earnings growth rather than job creation

,2.0 ,2.1

,0.0

-,2.1

6.4

5.4

1.1

-5.4 -6

-4

-2

0

2

4

6

8

2 Year Pre Crisis

Average

One year before crisis Post-crisis Difference between Post

and Pre Crisis

Percent employment growth

Percent change in earnings

11

6

Distributional implications 1: simulated changes in household income

12

-10.0

-9.0

-8.0

-7.0

-6.0

-5.0

-4.0

-3.0

-2.0

-1.0

0.0

Total HH Income HH Labor Income HH Remittances

% change in household income between benchmark and crisis

Philippines Mexico Bangladesh Poland

Distributional implications 2: simulated impacts on poverty and inequality

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Poverty Headcount Poverty Gap Gini

% change in poverty/inequality indicators between crisis and

benchmark (numbers in parentheses represent pct. point change)

Philippines Mexico Bangladesh Poland

7

Distributional implications 3: who are the crisis vulnerable?

0

20

40

60

80

100

120

Philippines Mexico Bangladesh Poland

% of crisis-vulnerable household heads who are low-skilled

(0-9 yrs of education)

Crisis-vulnerable Structurally poor Entire population

-

,10.0

,20.0

,30.0

,40.0

,50.0

,60.0

,70.0

,80.0

,90.0

,100.0

1 2 3 4 5 6 7 8 9 10

Distributional implications 4: Transition Matrices

15

Philippines Bangladesh

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

1 2 3 4 5 6 7 8 9 10 Mexico

-

,10.0

,20.0

,30.0

,40.0

,50.0

,60.0

,70.0

,80.0

,90.0

,100.0

1 2 3 4 5 6 7 8 9 10

-

,10.0

,20.0

,30.0

,40.0

,50.0

,60.0

,70.0

,80.0

,90.0

,100.0

1 2 3 4 5 6 7 8 9 10 Poland

Most people remain within decile but

Important movements up and esp. down – particularly in middle of distribution MX: Largest

impact on poor PO: Largest

movements “up” at bottom due to UI

8

Menu of options for dealing with labor market–related risks

Income Support

• Public works; public investment program

• Wage subsidies (for new entrants) / social security tax reductions

• Start up support; business tax reduction

• More flexible labor regulations

Job Protection

• Unemployment insurance

• Training allowances

• Public works

• Last resort social assistance

Job Creation

• Job search assistance

• Training/retraining (w or w/o stipends)

• Apprenticeship, internships

• Income tax reduction, work credit, restructuring unemployment benefit

• Mobility allowances

Enhance employability

•Wage subsidies, social security tax reduction •On the job retraining, preventative training

Important, Customize

Handle w/care

Handle w/care

Important for HK dev, growth

16

“Smart” Safety Net programs-1 Programs that can be easily scaled-up in

response to many different kinds of shocks, such as Natural disasters Extreme weather events Food and/or Fuel price increases Policy Reforms Financial crises

Programs that play a stronger insurance role Many existing safety net (SN) programs serve primarily as

instruments of income redistribution in the short-run and in the long-run (e.g. CCT programs)

The insurance role of SN requires a flexible budget that can be scaled up rapidly to meet unanticipated circumstances and easily scaled down as economic conditions improve

18

9

“Smart” Safety Net programs-2

Programs that are targeted to the vulnerable households (not just the chronic poor)

Programs that exploit synergies across sectors e.g. CCT intervene in health, education, and nutrition

simultaneously.

Programs that provide incentives for adaptation, increased agricultural productivity, and resiliency to climatic shocks Ethiopia‟s Productive Safety Net Program (PSNP)

19

What role for State in determining opportunities and outcomes?

Delivering services and ensuring equality of opportunity

Circumstances of birth should not determine a person‟s future well-being

Willingness and capacity to redistribute

Human Opportunities Index (Latin America)

Completing 6th grade on time

School enrollment at a specific age

Infrastucture

Clean Water

Electricity

Sanitation

10

0.0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1.0

Brasil

Nicaragua

Guatemala

PerúColombia

R. Dominicana

Costa Rica Ecuador

Honduras

Uruguay

Paraguay

Bolivia

PanamáVenezuela

El Salvador

Chile

MéxicoArgentina

Jamaica

Two Latin American children: Probability of completing 6th grade on time

Child with 4 siblings in single-parent rural household, household head without formal education and per capita income of 1 US$ (PPP)

Child with 1 sibling, in urban two-parent household, household head with secondary education and per capita income of 25 US$ (PPP)

Human Opportunity Index (HOI)

0 10 20 30 40 50 60 70 80 90 100

Nicaragua

Guatemala

Honduras

El Salvador

Bolivia

Peru

Paraguay

Panama

Rep. Dominicana

Brazil

Jamaica

Colombia

Ecuador

Mexico

Uruguay

Venezuela, R.B.

Costa Rica

Argentina

Chile

Circa 2005 %

11

0 10 20 30 40 50 60 70 80 90 100

Piauí

Alagoas

Sergipe

Maranhão

Bahia

Pernambuco

Paraíba

Ceará

Rio de Janeiro

Rio Grande do Norte

Goiás

Mato Grosso

Minas Gerais

Mato Grosso do Sul

Distrito Federal

Espírito Santo

Rio Grande do Sul

Paraná

São Paulo

Santa Catarina

Human Opportunity Index (percent)

ChileBrazilGuatemala

IndiceIndice de de OportunidadesOportunidades de de completarcompletar 6to 6to gradogrado a a tiempotiempo (c. 2005)(c. 2005)

0 10 20 30 40 50 60 70 80 90 100

Piauí

Alagoas

Sergipe

Maranhão

Bahia

Pernambuco

Paraíba

Ceará

Rio de Janeiro

Rio Grande do Norte

Goiás

Mato Grosso

Minas Gerais

Mato Grosso do Sul

Distrito Federal

Espírito Santo

Rio Grande do Sul

Paraná

São Paulo

Santa Catarina

Human Opportunity Index (percent)

ChileBrazilGuatemala

IndiceIndice de de OportunidadesOportunidades de de completarcompletar 6to 6to gradogrado a a tiempotiempo (c. 2005)(c. 2005)

No state in Brazil has an Opportunity Index similar to Chile. Several states have an index inferior to Guatemala

The Human Opportunity Index can vary inside a country

Uruguay

Opportunity Index of completing 6th grade on time

Fiscal policy influences the income distribution

0.20

0.25

0.30

0.35

0.40

0.45

0.50

0.55

0.60

LAC

Irla

nd

a

Re

ino

Un

ido

Can

adá

Po

rtu

gal

Fin

lan

dia

Din

amar

ca

Ital

ia

Gre

cia

Euro

Zo

na

(15

)

Esta

do

s U

nid

os

Esp

aña

Bé

lgic

a

Sue

cia

Ale

man

ia

Fran

cia

Luxe

mb

urg

o

Paí

ses

Baj

os

Au

stri

a

Income inequality before tax

Disposable Income inequality

(after tax)

Coe

ficie

nte

de

Gin

i

Am

eri

ca

La

tin

a

Gin

i co

effic

ien

t

12

Little capacity to redistribute in many emerging economies

Low tax collection Low coverage of Social Protection

Central government Tax Revenue vs per capita GDP

5

10

15

20

25

30

35

6 7 8 9 10 11

Selected countries throughout the world Selected countries - LAC

To

tal ta

x r

ev

en

ue

(%

of

GD

P)

Per capita GDP (log)

0

10

20

30

40

50

60

70

80

BO PY PE NI GU CO EC MX SA VE AR BR UY CL CR

1990s 2000s

Additional slides

13

29

2010

New poor relatively more likely to reside in urban areas than chronic poor…

… but less likely to reside in urban areas than the average household

Similar pattern across countries, but differences more acute in Philippines and MX (higher level of urbanization? higher rate of poverty reduction in urban areas in recent years?) and no differences in Poland (higher level of penetration of off-farm activities in rural areas)

Characteristics of the crisis-vulnerable (II)

0

10

20

30

40

50

60

70

80

90

Philippines Mexico Bangladesh Poland

% of crisis-vulnerable living in rural areas

Crisis-vulnerable Structurally poor Entire population

30

Mexico Important

differences across groups within country

Crisis more likely to affect/increase numbers of “working poor” New poor

more likely to be economically active than chronic poor

Among employed,

higher risk in services and manufacturing

Characteristics of the crisis-vulnerable (III)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

New Poor Structurally Poor Entire Population

% crisis vulnerable individuals by labor market status at

benchmark * (ages 15-64)

Agriculture Manufacturing/Industry Services Non-employed

14

(,50.00)

(,40.00)

(,30.00)

(,20.00)

(,10.00)

-

,10.00

,20.00

Philippines Mexico Bangladesh Poland

Labor Income Non-Labor Income 31

Characteristics of the crisis-vulnerable (IV)

Significant losses in household income among new poor in crisis, compared to average household

Changes driven primarily by labor income in PH, MX, and Poland and non-labor income in BD (remittances)

Off-setting impact of UI in Poland

% change in household income

Entire population

New Poor Philippines Mexico Bangladesh Poland