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?