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

Source: Winters 2005, World Bank Poverty Course Heterogeneity across countries

Heterogeneity within countries: across sectors 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] Source: Ahmed et al. 2007

Heterogeneity among the poor: extreme poverty 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 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 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?