Dileni Gunewardena Department of Economics and Statistics
University of Peradeniya Sri Lanka
Growth and poverty dynamics
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)
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
The debate: Is growth good for the poor?
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)
… & 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
y = 1.17x - 0.00R 2 = 0.52
-20%
-10%
10%
20%
-20% -10% 10% 20%
Growth in per
capita income
Growth in per capitaincome of the poor
Source: Winters 2005, World Bank Poverty Course
Heterogeneity across countries
Heterogeneity within countries: across sectors
-30 -20 -10 0 10 20
-30 -20 -10 0 10 20
1995/6-2002
1990/1-1995/6
1985/6-1990/1
1995/6-2002
1990/1-1995/6
1985/6-1990/1
1995/6-2002
1990/1-1995/6
1985/6-1990/1
urban rural
estate
Growth Redistribution
Percentage points
Headcount • 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
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]
Peru and Guatemala: Percentage of Indigenous
25
48
65
85
39
75 74 78
0102030405060708090
NationalPopulation
Subjacent Poor Medial Poor Ultra Poor
Peru Guatemala
India: Percentage of scheduled castes and scheduled tribes
0
10
20
30
40
50
Scheduled tribes Scheduled Castes Backward Castes Other
National Population Subjacent Poor Medial Poor Ultra Poor
Source: Ahmed et al. 2007
Heterogeneity among the poor: extreme poverty
Changes in the number of poor, 1990-2004
East Asia & Pacific
-131East Asia & Pacific
-138
East Asia and Pacific
-38
South Asia -37
South Asia30
South Asia -27
Sub-Saharan Africa
14
Sub-Saharan Africa
15
Sub-Saharan Africa
29
-160
-140
-120
-100
-80
-60
-40
-20
0
20
40
Subjacent poor ($0.75 and <$1):485 million
Medial poor ($0.50 and <$0.75):323 million
Ultra poor ($<$0.50): 162 million
Cha
nge
in th
e nu
mbe
r of
peo
ple
(mill
ions
)
• 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
Heterogeneity among the poor: chronic poverty
Probability of being poor for 24 months
23
92
020406080
100
US Northern Kenya
• 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
Source: Barrett (2003)
• 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
• The evidence is of association, not causation
• Perhaps the causality runs in the opposite direction: poverty reduction led to growth?
• Or…
Correlation, not causality
The wrong debate?
Growth and poverty reduction are outcomes that may have been influenced by the same set of
policies…
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
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
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
• Country-level studies suggest that poverty was associated with low infrastructure
Public spending on infrastructure crowds private investment in
• 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
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
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
From data to policy document
Source: DCS 2006 Source: WB 2007
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?