Environment, Economic Growth, and Poverty March. 2012 Yong-seong KIM Research Fellow Korea Development Institute (KDI)

Introduction Environment and economic growth, and poverty Economic growth and poverty Policies for Pro-poor growth Conclusions

Part-I Introduction

I. Introduction: Pro-poor growth “Pro-poor growth” as a goal for twenty-first century. MDG (the Millennium Development Goals) proposed the reduction of poverty through a sustainable growth Environmental issues as a key ingredient of a sustainable growth in G20 meeting in Toronto (2010) The concept of “Pro-poor growth” Rate of income growth of the poor > Rate of GDP growth (A and E) Rate of income of the poor > 0 (A, B, C, and D)

The Concept of “Pro-poor growth” I. Introduction: Pro-poor growth The Concept of “Pro-poor growth” 45 E A B D C rate of income growth of the poor rate of GDP Growth

Environment, economic growth and poverty Part-II Environment, economic growth and poverty

II. Environment, economic growth and poverty Environmental impacts on economic growth and poverty are controversial. Environmental awareness can bring welfare gains and new innovative technologies: high growth rate and low poverty rate Concerns that drastic measures for environmental protections might cause economic distortions and instability: low growth rate and high poverty rate Focus on the impact of environmental issues on economic growth and poverty from a macro economic perspective. Examine the relationship between economic growth and poverty. Investigate how environmental issues affect economic growth.

Environment and economic growth: EKC II. Environment, economic growth and poverty Environment and economic growth: empirical perspective Inverse U-shaped relationship between environment and economic growth(Environmental Kuznets Curve, EKC) Results of empirical analyses are mixed and the relationship is ambiguous Environment and economic growth: EKC Economic development Environmental pollution

Economic growth and income distribution: KC II. Environment, economic growth and poverty Economic growth and income distribution Inverse U-shaped relationship between income inequality and economic development(Kuznets Curve) Results of empirical analyses are mixed and the relationship is ambiguous Stylized fact is “Economic growth is distribution neutral on average” Economic growth and income distribution: KC Economic development income inequality

II. Environment, economic growth and poverty Environment and economic growth: theoretical perspective Conventional approach predicts that measures for environmental protection make an economy to operate below its production possibility frontier, causing a decline in economic growth A few theoretical model shows the possibility that environmentally oriented economy can not necessarily experience a slowdown in economic growth Overlapping generation model shows that introduction of environment measures may not necessarily decrease economic growth

Economic growth and poverty Part-III Economic growth and poverty

III. Economic growth and poverty Economic growth and poverty: Empirically stylized facts Economic growth tends to reduce poverty rate in the long-run. Policy attempts to lower inequality reduce poverty rate in the short-run Economic growth together with appropriate efforts to reduce income inequality is necessary for poverty reduction and sustainable growth

III. Economic growth and poverty: Korean case Dramatic reduction in the absolute poverty rate: 82%(1982) → 9.2%(2007) Rapid economic growth during those periods is a main determinant in the reduction of the poverty rate

Absolute poverty: Korea 1982~2007 III. Economic growth and poverty: Korean case Absolute poverty: Korea 1982~2007 Source: National Statistical Office, Family Income and Expenditure Survey, various years

III. Economic growth and poverty: Korean case Decomposition of growth and distributional effect: Korean Case ‘Pure growth effect’ is dominant in reducing poverty over time in Korea. Currently, the ‘distributional effect’ operates in a direction to raise poverty rate.

III. Economic growth and poverty: Korean case Decomposition of Growth impacts on the poverty rate: Korean Case Year Elasticity of poverty rate Pure growth effect Distributional effect 82/83 -0.55 -0.54 -0.01 83/84 -0.66 -0.67 0.01 84/85 -0.76 0.10 85/86 -0.97 -0.94 -0.03 86/87 -1.17 -1.19 0.02 87/88 -1.46 -1.55 0.09 88/89 -2.16 -1.98 -0.18 89/90 -3.31 -2.50 90/91 -2.92 -2.65 -0.28 91/92 -3.46 -3.12 -0.33 92/93 0.94 -2.99 3.93 93/94 -3.26 -2.67 -0.58 94/95 -1.87 -2.63 0.75 95/96 -3.32 -2.77 96/97 3.04 -3.24 6.27 97/98 -4.11 -2.52 -1.59 98/99 0.36 -2.10 2.46 99/00 -5.48 -2.49 00/01 -1.27 -2.61 1.35 01/02 -3.38 -2.87 -0.51 02/03 -6.99 -1.50 -5.49 03/04 -1.15 -1.79 0.63 04/05 3.70 -1.80 5.50 05/06 -1.02 -2.18 1.16 06/07 -0.96 -1.64 0.68 Source: Yoo (2008)

Policies for Pro-poor growth Part-IV Policies for Pro-poor growth

IV. Policies for Pro-poor growth Economic growth and income inequality Positive relationship between income inequality and growth: For investment to happen, someone need to be rich and redistribution policy generally discourages economic Incentive Negative relationship between income inequality and growth: In an unequal society, majority favors progressive tax, reducing growth Policy choice for sustainable economic growth Unequal distribution is detrimental to economic growth and capital accumulation. Human capital investment is a useful policy tool for sustainable economic growth

Determinants of growth and investment IV. Policies for Pro-poor growth Determinants of growth and investment (1) INEQ on GR, INV (2) DEM on GR, INV (3) HUMCAP on GR, INV (4) INEQ on INSTAB (5) INSTAB on GR, INV 1. Alesina-Rodrik (94)   2. Alesina-Perotti (96)  3. Alesina et al (96) - 4. Barro (96) M= F= 5. Benhabib-Spiegel (96) (-) 6. Bourguignon (94) 7. Brandolini-Rossi (95) 8. Clarke (92) 9. Deininger-Squire (95) (±) + 10. Easterly-Rebello (93) 11. Keefer-Knack (95) 12. Levine-Rebello (93) 13. Lindert (96) 14. Perotti (92) 15. Perotti (94) 16. Perotti (96) 17. Persson-Tabellini (92) 18. Persson-Tabellini (94) 19. Svensson (93) 20. Venieris-Gupta (86) Note: Symbols: , : consistent, sign and generally significant; +, -: consistent sign, sometimes significant; (+), (-): consistent sign but generally not significant, (±): inconsistent sign with significant coefficient; ; inconsistent sign or close to zero, and not significant; : inverse U-shaped, significant. INEQ: Measures of inequality DEM: Measures of political rights and degree of democracy HUMCAP: initial stock of human capital INSTAB: socio-political instability Source: Benabou(1996), NBER Working Paper No. 5658.

Policies, economic growth and income distribution IV. Policies for Pro-poor growth Socio-economic policies for sustainable growth: OECD case Tax policy appears to be ineffective Unemployment benefits and public health policy improve income distribution without causing negative effects on economic growth Policies, economic growth and income distribution Growth Inequality Social Expenditures Old age cash benefits -2056*** -0.463 Family cash benefits -0.292 -0.513** Active labor market -0.419 -1.439 Unemp benefits 1.625*** -1.648*** Health 1.524** 0.237 Tax Income tax -0.248*** 0.087 Sales & VAT -0.802*** 0.311 R-square 0.770 0.495 Note: *** = 99%, ** = 95%. Source: Kim(2004).

Part-V Conclusions

V. Conclusions Economic growth, poverty reduction and environment Environmental regulations may not be necessarily growth-reducing. Growth is not a sufficient condition for poverty reduction due to growth and distributional effects Policy recommendations for sustainable growth Tax on capital may not be a good choice, while environmental tax may be. A government cautiously selects distributive policies : human capital investment, welfare to wotk, and public health may be desirable.