Revisiting the African Economic Growth Agenda: Focus on Pro-Poor Growth?  

  By  

William A. Amponsah, PhD

Fifth Annual Conference on Regional Integration in Africa (ACRIA 5), Praia, Cape Verde, July 1-3, 2014

Summary of Presentation •  Introduction and motivation •  The Concept of Pro-Poor Growth •  Regional Evidence of Growth and

Poverty Reduction •  Country Evidence of Growth and

Poverty Reduction •  Has the Recent Growth Episode in

Africa Been Pro-Poor? •  Lessons on Policies for Promoting

Shared Growth in Africa •  Conclusion

Introduction •  Idea of pro-poor growth introduced by donor groups in 1990s

•  Africa is the only developing region in which the number of people living below the international poverty level of $1.00 a day had increased for over 25 years.

•  Therefore, donors began placing the poor at center of development assistance.

•  Multilateral development agencies and UN set poverty target through MDGs by 2015 (Page, 2006; Pattillo et al, 2006; OECD, 2006).

•  Research works identified pro-poor growth as very important for sustainable poverty reduction (Ravallion, 2001; Thomas et al, 2000; UN, 2000; World Bank, 2000).

Introduction •  Poverty Reduction Strategy Paper (PSRP) initiative of World Bank and

IMF launched in 1999 requiring governments in Africa to focus on poverty reduction strategies by increasing social expenditures (Page, 2006).

•  World Bank report (2014a): Number of poor living on $1.25 a day decreased from 1981 through 2010 from 50% to 21% of developing country population.

•  SSA accounted for 1/3 of 1.2 billion living in extreme poverty => 443 million in 2010 compared to 205 million in 1981.

•  Yet, the region has been recording some of the highest growth rate accelerations in the past decade; currently around 4.5% to 5.2% (AfDB, Economic Outlook 2012)

•  Highest growth accelerators, mainly oil and mineral producers, lack inclusiveness.

Motivation •  In economic literature, economic growth is viewed as fundamental in

achieving poverty reduction;

•  Any changes in income distribution are expected to lead to improving the poverty reduction outcome stemming from growth; but

•  Initial inequality would reduce the impact of growth on poverty reduction.

Study Objectives •  Determine whether the recent growth trajectory in SSA has been pro-

poor.

•  Discuss potential policies in making growth more inclusive.

•  OECD Development Assistance Committee (DAC), Guidelines in Poverty Reduction: Poverty is multidimensional (economic, human, political, socio-cultural, security)

•  The focus of this paper is on reducing economic poverty through inclusive pro-poor growth.

The Concept of Pro-Poor Growth •  The concept of pro-poor growth has its genesis in the 1990s when there

was growing clamor to explain the relationship among economic growth, poverty, and income inequality.

•  Definition of pro-poor growth: economic growth that leads to significant reductions in poverty (OECD, 2001, UN, 2000, World Bank, 2000).

•  The concept is based on two conventional definitions in the literature. •  First strand: growth is pro-poor when the poor benefit disproportionately

from it => distributional shifts accompanying growth must favor the poor. •  Second strand: growth is pro-poor if it absolutely reduces poverty. •  Neither is a perfect measure but they attempt to address public policy

objective of reducing poverty.

The Concept of Pro-Poor Growth •  Stylized Facts: •  Incomes of the poor appear to rise proportionately with rise in average

income (Dollar and Kraay, 2002). •  The variation in short-run changes in poverty can be explained by growth in

average incomes (Kraay, 2004). •  Low or declining economic growth also leads to increasing incidence of

poverty (Chen and Ravallion, 2000; Lopez, 2004). •  The precise effect of growth on poverty depends on the initial level of

income inequality in a country or region and how it changes during an economic growth period (Lopez, 2004).

•  Persistent efforts at sustaining economic growth may help in reducing poverty (Ravallion, 2001; Kakwani and Pernia, 2000).

Regional Evidence of Growth and Poverty Reduction •  Figures reveal that the extent to which the poor benefitted from

economic growth varied over time: •  Figure 1: In developing countries, from 1970 to 1990 incomes of the lowest

quintile (YP20) grew similarly as average income (Y). However, from 1990 to 2000 average income grew while that of the poor fell/stagnant.

•  Figure 2: In East Asia, the poor grew in tandem with average growth. Poverty headcount data show that poverty fell more in the region than any other developing region (Ravallion, 2001).

•  Figure 3: In South Asia, strong pro-poor bias in growth.

•  Figure 4: In Sub-Saharan Africa, contraction in average income was accompanied by a significant decline (negative) in income distribution of the poor from 1985 to 2000 (for which data exists).

•  By 2000 the average income of an African in the lowest quintile of economic distribution was 90 percent of the income in 1985.

Country Evidence of Growth and Poverty Reduction •  Table 1: Evidence of pro-poor growth experiences of bottom quintile

along with growth in average incomes in various countries. •  Unlike many East Asian economies that recorded average income

growth along with its poorest quintile, in SSA economies even when growth in average income occurred, the incomes of the poorest Africans fell. Exceptions in Gabon and Ghana.

•  NW quadrant: countries with spells of anti-poor recessions in growth. Mainly transitional and conflict affected countries. •  Sierra Leone (1968-1989): income of lowest quintile fell by 80%

compared to 18% on average.

•  SW quadrant: countries with pro-poor recessions •  Madagascar (1960-1993): income of lowest quintile fell by 40%

compared to 50% on average.

Country Evidence of Growth and Poverty Reduction •  Table 1: Evidence of pro-poor growth experiences of bottom quintile

along with growth in average incomes in various countries.

•  NE quadrant: countries with positive income growth and regressive income redistribution. Two subgroups: •  Shared growth or growth benefit the poor: mainly SE Asian

economies •  Inequality rises with positive growth. Not pro-poor by any means:

Tanzania (1964-1991). In Nigeria, Senegal and Ethiopia tiny growth, negative poor

•  SE quadrant: countries with positive growth and inequality falls •  Gabon (1960-1975) – high growth (7%) and even higher growth rate

for the poor (9%) •  Ghana – modest 10-year growth (2.4%) and even higher growth for

the poor (4.3%).

Has Recent Growth Episode in Africa Been Pro-Poor? •  All available data point to a continent that has experienced

accelerated growth in past decade despite global recession. •  Growth expected to continue: 4% (2013), 4.7% (2014), 5%

(2015); UN (2014) •  West Africa fares best: 6.7% (2013), 6.9% (2014) •  Led by natural resources: oil and minerals in Burkina Faso,

Ghana, Guinea, Liberia, Niger, Nigeria and Sierra Leone •  Top performers in SSA: Mauritius, S. Africa, Ghana, Rwanda,

Angola, Botswana, Nigeria, Zambia, Mozambique, Namibia, Tanzania, Ethiopia, Cape Verde, Gambia and the Seychelles

•  FDI inflows near-record $43 billion (2013)

Has Recent Growth Episode in Africa Been Pro-Poor? •  All available data point to a continent that has experienced accelerated

growth in past decade despite global recession. BUT •  Expected population growth (half of global increase) because of

longer life expectancy. •  High poverty and rising inequality rates in many countries. •  Pressure due to inadequate jobs creation and youth bulge. •  Limited opportunities for youth •  Large informal sectors •  Gender disparities in earnings continue

How Has Africa Fared in Reducing Poverty? •  Method of Analysis

•  Descriptive using World Bank Data •  Figure 5: Evolution of Extreme Poverty Rates (people living on less than

$1.25 a day) •  Figure 6: Number of Extremely Poor by Region (millions) •  Figure 7: Regional Shares of World’s Extremely Poor •  Figure 8: Evolution of Average Per Capita Income of Extremely Poor •  Extremely poor rose from 205 mill. (1981) to 414 mill. (2010) •  In 2010 average gap of extremely poor (global) is 38 cents per day or $169

billion in 2005 PPP compared to $362 billion in 2005 PPP. •  In 2010 average gap of extremely poor (SSA) is 54 cents per day or $81.6

billion in 2005 PPP compared to $40 billion in 2005 PPP. •  Recent growth has not narrowed poverty gap but doubled. •  Growth has not been generally pro-poor. •  Growth must increase to 7.5% per year to meet poverty MDG (World Bank

and IMF, 2005) •  Has not happened. SSA must sustain growth with pro-poor policies.

How Has Africa Fared in Reducing Poverty? •  Results of Descriptive Analysis

•  Like the rest of the world’s developing regions, after rising poverty rates from 1981 to 1999, SSA saw steady decline in extreme poverty rate by 10 percent from 1999 through 2010.

•  However, it is the only region where the extremely poor rose from 205 mill. (1981) to 414 mill. (2010).

•  In 2010 average gap of extremely poor (global) was 38 cents per day or $169 billion in 2005 PPP compared to $362 billion in 2005 PPP in 1981.

•  In 2010 average gap of extremely poor (SSA) is 54 cents per day or $81.6 billion in 2005 PPP compared to $40 billion in 2005 PPP in 1981.

•  Recent growth in SSA has not narrowed poverty gap but doubled it. •  Growth has not been generally pro-poor. •  Growth must increase to 7.5% per year to meet poverty MDG (World Bank

and IMF, 2005) •  Growth target has not occurred. SSA must sustain growth with pro-poor

policies. Adopt inclusive or shared growth.

Lessons on Policies for Promoting Shared Growth •  World Bank (2000) and OECD (2006) multidimensional approach

for poverty reduction •  Empowering the poor: address interconnected (economic, social

and institutional) inequalities, that disadvantage the poor with good public policies and investment

•  Security for the poor: reduce risk and vulnerability at all levels (micro and macro) that trap the poor

•  Opportunity for the poor: sustainable economic expansion and human development in what the poor participate

•  Attack poverty at the local, national and regional levels. •  Remember the poor are not homogeneous

•  Understand characteristics of poor (who they are and how they earn a living)

Lessons on Policies for Promoting Shared Growth •  East Asian examples (Hong Kong, Indonesia, S. Korea, Malaysia,

Singapore, Thailand, Taiwan): •  Shared (inclusive) growth strategies by building trust •  Pro-growth policies by promoting high savings, long-term

investments, upgrading business organizations with technology and managerial know-how; and

•  Pro-poor wealth sharing mechanisms such as universal education, land reform, and free basic health care to induce greater productivity.

•  From examples, economists agree that growth reduces poverty and vice versa (Clements et al, 2011). Unleash productive potential of the poor to contribute to growth.

Lessons on Policies for Promoting Shared Growth •  African examples: •  Garcia-Verdu et al (2011) studied household data for six SSA

countries: •  In high-growth countries (Ghana, Tanzania, Uganda) the

poorest quintile experienced annual per capita consumption growth.

•  Low-growth countries experienced low (Cameroon) or negative (Zambia) changes in consumption.

•  Mixed results in Mozambique. •  Study of equitable access to economic and social opportunities

(education and health care access) by Adedeji et al (2011): •  Periods of growth coincided with inclusive access to education

and health care across all six countries.

Lessons on Policies for Promoting Shared Growth •  Development literature reveals:

•  The poor have limited access to financial services, infrastructure (roads, water, electrical power, and telecommunication), education and health services – these are typical constraints in SSA.

•  Listed factors conspire to ensure growth by attracting firms to locations where they exist; in SSA this occurs typically in the urban sector not rural with highest concentration of poor.

•  Policymakers must coordinate policies to grow both sectors. •  African Union’s Agenda 2063 – goal of positive and sustained

growth trajectory with inclusive growth. •  Africa stands ready to harness opportunities.

Lessons on Policies for Promoting Shared Growth •  Africa stands ready to harness opportunities.

•  Unprecedented GDP growth rates •  Sound macroeconomic policies •  Significant reduction in violent conflicts •  Increased peace and stability •  Advances in democratic governance •  Rising middle class •  Youth bulge can act as catalyst for further growth •  Changes in international financial architecture (BRICS are

increasing source of FDI)

Lessons on Policies for Promoting Shared Growth •  Investing in the poor calls for innovative inclusive growth strategies

•  Governments must align budget allocations with wealth sharing priorities and seek donor support

•  Three potential building blocks – strategies for managing natural resource revenues, create an export push, and strengthen sub-regional integration.

•  Nations facing natural resource booms must use revenues to invest in growth promoting assets (infrastructure, education, health care, etc.) to improve capacity of poor to participate in growth.

•  Focus more on industrialization push (UNECA, 2013). •  Poverty reduction is responsive to agricultural sector growth in Ghana

(Aryeteey & McKay, 2004); increase in agricultural incomes accounted for 44% reduction in poverty (1991-99).

•  Similar results found by Okidi et al (2005) in Uganda; agric sector growth resulted in 50% poverty reduction (1992-2003).

•  In both cases, government budgets were increased by 2.5% and 1.5%, respectively.

Lessons on Policies for Promoting Shared Growth •  Proposed vision to transform and modernize African agriculture

(Juma, 2011) •  Rejuvenate and commercialize agriculture to create jobs in the

rural sector. •  Borrow global advances in science, technology and engineering

to promote sustainable agriculture •  Create regional markets to provide incentives for agriculture

production and trade •  New African entrepreneurial leaders must help generate value

creation •  Innovative business ventures must be encouraged. •  Emerging initiatives such as the Agriculture Fast Track Fund

(AFTF)

Conclusions •  Determining growth acceleration and distribution to the poor

•  Depends on initial levels of income and inequality. •  Important in accelerating inclusive pro-poor growth process in

SSA to achieve poverty dimension of MDG. •  Paper shows recent growth trajectory in SSA has not been

inclusive nor pro-poor. •  Calls for more inclusive pro-poor policies with intensified

growth to reach even higher growth targets for all nations. •  Boost infrastructure, education and skills, health and nutrition,

technological adoption, industrial growth, and agricultural sector investment (especially in rural sector) to target poverty reduction.

•  Speed up regional integration process and use protocols to induce greater intra- and inter-regional trade in SSA.