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

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

3. Part-I
Introduction

4. 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)

5. 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

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

7. 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.

8. 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

9. 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

10. 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

11. Economic growth and poverty
Part-III
Economic growth and poverty

12. 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

13. 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

14. 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

15. 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.

16. 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)

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

18. 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

19. 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

20. 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).

21. Part-V
Conclusions

22. 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.