Poverty Relief

1
Poverty Relief Economic Development

• Development Economics
• HU Berlin
• 28.11.2005

2
Outline

• Introduction
• Measurement of poverty
• Millennium Development Goals
• Pro-poor Growth
• Trade and Poverty
• Conclusion Policy Implications
• Discussion

3
What is poverty?
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• In Russia people say"a life free from daily
  worries about lack of money."
• In Brazil "low salaries and lack of jobs. And
  its also not having medicine, food and clothes.
• In Ethiopia poor people say"We are skinny.
• A woman in Uganda "When one is poor, she has no
  say in public, she feels inferior. She has no
  food, so there is famine in her house no
  clothing, and no progress in her family.
• An Argentine says "You have work, and you are
  fine. If not, you starve. That's how it is.
• In Kenya a man says "Don't ask me what poverty
  is because you have met it outside my house. Look
  at the house and count the number of holes. Look
  at my utensils and the clothes. Look at
  everything and write what you see. What you see
  is poverty.

4
Poverty lines
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Cut-off points separating the poor from the
  non-poor.
• monetary (e.g. a certain level of income,
  consumption) or
• non-monetary (e.g. a certain level of literacy).
• There are two main ways of setting poverty lines
• Relative poverty lines
• defined in relation to the overall distribution
  of income or consumption for example, the
  poverty line could be set at 50 percent of the
  countrys mean income or consumption.
• Absolute poverty lines
• anchored in some absolute standard of what
  households should be able to count on in order to
  meet their basic needs for example, the poverty
  line could be set at one dollar per day.

5
Absolute poverty lines
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• The food-energy intake method
• defines the poverty line by finding the
  consumption expenditures or income level at which
  a persons typical food energy intake is just
  sufficient to meet a predetermined food energy
  requirement.
• The Cost of Basic Needs method
• values an explicit bundle of foods typically
  consumed by the poor at local prices first.
• The Less than One Dollar per Day method
• takes into account different price levels by
  measuring poverty as anyone living on less than
  1 a day in purchase power parity.
• independent of the level of national per capita
  income.

6
Poverty Measures
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• statistical function which translates the
  comparison of the indicator of well being and the
  poverty line.
• many alternative measures exist but the following
  three measures are most commonly used
• 1. Incidence of poverty
• 2. Depth of poverty
• 3. Poverty severity

7
Incidence of poverty (headcount index)
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• share of the population which is poor, i.e. the
  proportions of the population whose income Y is
  below the poverty line Z.
• suppose that we have a population size n in which
  q people are poor. Then the headcount is defined
  as

8
Depth of poverty (poverty gap)
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• provides information regarding how far off
  households are from the poverty line or the
  amount of resources necessary to eradicate
  poverty.
• represents the amount that one would have to
  transfer to the poor under perfect targeting to
  bring them all out of poverty.
• it is defined as follows

9
Poverty severity (squared poverty gap)
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• takes into account not only the distance
  separating the poor from the poverty line (the
  poverty gap), but also the square of that
  distance.
• when using the squared poverty gap, the poverty
  gap is weighted by itself and will give more
  weight to the poor taking inequality also into
  account.
• it is obtain as follows

10
Example
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty
11
Multidimensional Poverty
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Many authors have insisted on the necessity of
  defining poverty as a multidimensional concept
  rather than relying on income or consumption
  expenditures per capita.
• alternative way
• specify a poverty line for each dimension of
  poverty
• consider that a person is poor if he/she falls
  below at least one of these various lines.

12
Policy Implications
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• The well-being of a population depends on both
  monetary and non-monetary variables.
• income as the sole indicator of well-being is
  inappropriate
• Alternative indicators housing, literacy, life
  expectancy, provision of public goods.
• Advices for a sensible approach to poverty
  measurement
• Real expenditure per single adult on market goods
• Non-income indicators as access to non-market
  goods
• Indicators of intra-household distribution such
  as child nutritional status

13
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Example of multidimensional measure of
  well-being
• Human Development Index
• It aggregates, at country level, functioning
  achievements in terms of the attributes life
  expectancy, per capita real GDP and educational
  attainment rate.

14
HDI of nation-states, world 2005
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty
15
The Millennium Development Goals
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• We will have time to reach the Millennium
  Development Goals worldwide and in most, or even
  all, individual countries but only if we break
  with business as usual.
• We cannot win overnight. Success will require
  sustained action across the entire decade between
  now and the deadline. It takes time to train the
  teachers, nurses and engineers to build the
  roads, schools and hospitals to grow the small
  and large businesses able to create the jobs and
  income needed.
• So we must start now. And we must more than
  double global development assistance over the
  next few years.
• Nothing less will help to achieve the Goals."
• Kofi A. Annan, United Nations Secretary-General
• 2005 World Summit, United Nations Headquarter
  NY, 14-16 September 2005

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What are the MDGs?
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Elaborated at the Millennium Summit in 2000
• Based on the International Development Goals
• Part of the Road Map for implementing the
  Millennium Declaration
• Eight time-bound and quantified goals to reduce
  poverty and increase welfare
• Subdivided into 18 targets and over 50 indicators
• Time frame 25 years (from 1990 until 2015)
• See www.developmentgoals.org

17
The goals are
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Eradicate extreme poverty and hunger
• Achieve universal primary education
• Promote gender equality and empower women
• Reduce child mortality
• Improve maternal health
• Combat HIV/AIDS, malaria, and other diseases
• Ensure environmental sustainability
• Develop a global partnership for development

18
Example
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Goal 1 Eradicate extreme poverty and hunger
• Target 1 Halve, between 1990 and 2015, the
  proportion of people whose income is less than 1
  a day
• 1. Proportion of population below 1 (PPP) a day
• 1a. Poverty headcount ratio (percentage of
  population below national poverty line)
• 2. Poverty gap ratio (incidence x depth of
  poverty)
• 3. Share of poorest quintile in national
  consumption
• Target 2 Halve, between 1990 and 2015, the
  proportion of people who suffer from hunger
• 4. Prevalence of underweight in children (under 5
  years of age)
• 5. Proportion of population below minimum level
  of dietary energy consumption

19
Why are the goals important?
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Broadly supported, comprehensive and specific
• By the year 2015, all the 191 United Nations
  member states have pledged to reach this goals
• Development policy is based on them
• Life-and-death issue for many people who live in
  extreme poverty
• New global partnership between the developed and
  the developing countries

20
In 2015...
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• More than 300 Million people will no longer
  suffer from hunger
• 30 Million children will be saved from dying
  before their 5th birthday
• 2 million mothers lives will be saved
• Better drinking water supply and basic sanitation
• More than 500 million people will be lifted out
  of poverty

21
Remember Target 1 ...
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Halving Global Poverty, Besley Burgess,
  Journal of Economic Perspectives, Vol. 17, 2003
• Poverty trends on a global scale
• Relationship of economic growth and income
  distribution to poverty reduction
• Evidence-based agenda for poverty reduction in
  the developing world

22
Poverty trends on a global scale
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• 1990 30 of the world population lived below the
  1 poverty line 1,62 out of 5,4 billion people
• 1999 1,2 billion people below 1 a day
  (estimated)
• 2015 world population 7,1 billion people
  (forecast)
• Goal 15 below the 1 poverty line
• Still 1,07 billion people below the 1 poverty
  line

23
World Development Report 2000/01
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty
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World Development Report 2000/01
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty
91
25
Did you know that...
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• The fraction of poverty falls, but absolute
  numbers dont show big changes
• Most of the countries in the sub-saharan region
  will miss most or all of the goals
• Big winner China
• Excluding China, the number of people living on
  less than 1 a day has INCREASED from 916 million
  in 1990 to 936 million in 1999
• In 1999 2,8 billion people lived on less than 2
  a day in developing countries

26
Econ. growth income distribution
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• The main sources of economic growth are
  accumulating
• Human capital
• Physical capital
• Technological change
• Example
• Assess the antipoverty effectiveness of growth
• (estimated) elasticity of poverty with respect
  to income per capita

27
Example Elasticity of poverty
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Headcount poverty rate for country i at time t
• Country fixed effect
• Elasticity of poverty
• Real per capita national income for country i at
  time t
• Error term

28
Growth and Poverty, 1990 - 2015
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty
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Policy implications
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Finding ways to increase economic growth is
  important to reducing poverty
• Analyse the drivers of growth at a local level
  (microeconomics of growth)
• Economic growth by itself isnt enough to cut the
  poverty rate in half
• Identify policy and institutional changes that
  can directly reduce poverty (redistribution and
  reforms)
• Improve the mapping of growth onto poverty

30
Redistribution and poverty
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• income inequality for country i at
  time t
• Relation between inequality and the level of
  poverty within a country

31
Results (supplemental)
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty
32
Agenda for poverty reduction
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Priority Achieve redistribution promote
  reforms
• Strengthen and protect property rights
• Increase access to credits
• condition stable monetary sector
• Improve the delivery of public services
• Expand education (Human capital)

33
Economic science provides...
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• ... the theoretical framework to evaluate policy
  and institutional reforms
• ... the quantification of the effects of various
  measures
• ... advances that build a basis for an agenda
  with more weight on institutional change
• ... a better understanding of the microeconomic
  processes that generate income growth

34
Conclusion
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Mainstream economic thinking on how to reduce
  poverty in the world has evolved
• Neoclassical model is insufficient
• Agenda for growth still emphazizes accumulation
  of physical and human capital in a climate of
  macroeconomic stability
• Domestic reforms have to do the lions share
• Economic Growth that reduces inequality has a
  large impact on poverty reduction

35
Pro-poor growth
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Based on
• World Development Report 2000/2001 Attacking
  Poverty World Bank Group 2000
• Martin Ravallion, 2004. Pro-Poor Growth A
  Primer, Policy Research Working Paper Series
  3242, The World Bank.

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What is Pro-poor growth?
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Definition 1 Situation in which any
  distributional shifts accompanying economic
  growth favour the poor
• meaning that poverty falls more than it would
  have if all incomes had grown at the same rate.
• -gt focus on changes in inequality during the
  growth process
• Income of the poor grows at a higher rate than
  for non-poor
• Problem contracting economy

37
What is Pro-poor growth?
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Definition 2 pro-poor if and only if poor
  people benefit in
• absolute terms, as reflected in an
  appropriate
• measure of poverty (Ravallion Chen)
• -gt depends on what happens to the distribution
  and to average living standards
• focus on what happens to poverty rate of change
  in poverty

38
Is growth typically pro-poor?
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• On average, surveys state no correlation between
  growth and inequality
• -gt growth is distribution-neutral on average !
• absolute changes more obvious than proportional
  changes to people
• Absolute poverty measures tend to fall with
  growth! (Kraay, Ravallion)
• Significant negative correlation between poverty
  reduction and growth!

39
Poverty falls but at different rates gt Can be
said economic growth is typically pro-poorBut
wide range of impact
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty
40
China and India an Example
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Table Growth incidence curves for China and
  India
• growth rate rises as moving up on distribution
  variation of 3-9 between poorest richest
  percentile
• India U-shape, lowest growth rate in third
  percentile from bottom, but also peak at high end
  of the curve
• Rate of pro-poor growth positive in both cases,
  higher in China

41
Growth with decreasing inequality
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Rwanda
• Growth in 1990s on average 5 p.a.
• All income groups profited from growth!
• 1992-98 share of people living in poverty from
  56 44 !!
• Gini coefficient had fallen from 0.36-0.34 in
  only 5 years
• Consumption changes
• the poorest decile 27
• the richest decile 15
• Poverty among crop producer fell more than twice
  as much as for the whole country

42
Growth growing inequality
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Bangladesh
• GDP grew at 2 p.a. during the 1990s
• BUT poverty declined slowly !!!!
• 1983-96
• share of poor fell from 40,9 35,6
• share of moderate poor 58,5 53,1
• Rural poverty remained very high

43
Income inequality has impact on success of growth
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Why so slow?
• Increasing inequality in rural urban areas
• 1992-96 increasing Gini coefficient 0.26 0.31
  !!!
• Around 1/5 to 1/3 of poverty reduction potential
  of growth lost through inequality increase
• If no growing inequality, expected 7-10points
  lower in 95/96

44
What makes growth more pro-poor?
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Rate of growth is a clearly important
  determinant of the rate of absolute poverty
  reduction
• but why these differences?
• 2 sets of factors
• 1. initial level of inequality
• 2. how inequality changes over time

45
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Initial level of inequality
• - the higher the initial inequality, the less
  the poor profit from
• growth
• Systemic differences in initial conditions are
  important!
• - poverty responds slowly to growth in high
  inequality countries
• -gt must grow at higher rates to achieve rapid
  poverty
• reduction

46
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• 2. Changing income distribution
• Country-specific factors tax system, trade
  regime, changes in demographics, welfare policy
  regime
• Geographical and sectoral patterns of growth
• Incidence of rural and urban economic growth
• Special aspect sector in which growth occurs
• Growth in sectors where poor people work
  (agriculture) leads to big benefit for the poor
  against poverty
• If not growth bypasses them!
• They cannot take the opportunities

47
Is poverty an impediment to growth?
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Often seen as a feedback effect
• In developing countries capital market failure
• - investments too low due to missing credits
• - or moral hazard incentive to accumulate
  wealth in
• high inequality countries
• Macroeconomic instability possible -gt impedes
  reforms growth
• the higher the proportion of poor people in an
  economy, the lower the rate of growth
• gt poverty is self-perpetuating!!!

48
Conclusion
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Growth has a positive net effect on poverty
  reduction!!!
• In higher inequality countries faster growth
  needed to reduce poverty faster
• In developing countries with average inequality
  growing inequality increasing in growth
• gt just higher rates of growth needed to reduce
  poverty (Kraay)
• BUT growth is not sufficient!
• Making growth more pro-poor requires combination
  of
• more growth
• more pro-poor patterns of growth and
• success in reducing antecedent inequalities that
  limit the prospects for poor people to share in
  the opportunities unleashed in a growing economy.
• Ideal combination varies with country
  circumstances!

49
Policy implications
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Many things government can do to reduce poverty
  and encourage pro-poor growth!
• high priority to public action (skills, health
  etc in growth stage)
• Measures to limit the growth of inequality
• Growth must reach the poor and therefore the
  rural areas
• insure poor to help underpin their long-term
  prospects of escaping poverty
• doing less damage (often biases against poor in
  tax system, spending policies e.g. allocation of
  infrastructure spending)
• well-designed direct public action against
  poverty can help promote growth and hence
  longer-term poverty reduction!

50
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• gt The challenge for policy is to combine
  growth-promoting reforms with the right policies
  to assure that the poor can fully participate in
  the opportunities unleashed, and so contribute to
  that growth
• (Ravallion 2004, p.20)

51
Trade and Growth
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Literature
• Jagdish N. Bhagwati T. N. Srinivasan, 2002.
  Trade and Poverty in the Poor Countries,
  American Economic Review, American Economic
  Association, vol. 92(2), pages 180-183.
• L. Alan Winters Neil McCulloch Andrew McKay,
  2004. Trade Liberalization and Poverty The
  Evidence So Far, Journal of Economic Literature,
  American Economic Association, vol. 42(1), pages
  72-115.

52
General arguments and evidence
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Freer trade openness in trade - said to be
  economically benign!
• -gt increases the pie
• Anti-globalization critics openness is socially
  malign
• Results from cross-country analysis, surveys etc.
  show ambiguity
• Caused by heterogeneity of poverty!
• -gt there are many reasons why people are
  poor!!!
• -gt Outcome of trade policy varies from case to
  case !!!

53
Problem how to identify impact on the poor?
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• We need information about
• Specific trade reform measures
• Economic environment (also policies)
• Characteristics of the poor (sector, employment,
  production, consumption etc.)
• Definition measurement of poverty
• Concern is poverty not inequality

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Key areas of analysis
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Economic Growth Stability
• Households and Markets
• Wages and Employment
• Government Revenue and Spending

55
Economic Growth and Stability
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Trade liberalization aids growth
• Growth aids poverty alleviation
• BUT NOT AUTOMATICALLY !!!
• In the long run and on average
• Key to poverty alleviation is
• gt Economic growth !!!
• Attention Liberal trade is only one indicator of
  openness

56
Advantages of openness
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Inflation seems to be lower
• Enhances income level
• Access to new technology, more and new knowledge,
  better intermediate goods
• Increased competition gt higher productivity
• Export efficient firms export and grow faster
• Import weak and inefficient companies disappear
• Volatility of growth and stability no real
  agreement found
• More volatility more instability due to
  uncertainty

57
Effects of competition
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Problem
• in Africa many firms unable to cope with import
  competition they disappear
• Lack of preparation for competition (quick
  adaptation also important)
• Absence of policies promoting technological
  improvements
• Poor technological and human infrastructure

58
Households and Markets
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Important factors for transmission of prices
• Transport costs
• Infrastructure
• Domestic taxes and regulations
• Privatisation
• Can lead to higher prices higher income
  better supplies
• Or killing industry by under pricing
• -gt abandoning remote areas
• gt deterioration of infrastructure
• -gt higher transaction costs -gt more insulation

59
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Market creation or destruction
• Important are the policy measures accompanying
  trade liberalization!
• E.g. privatization of marketing arrangements
• E.g. forcing international companies to buy
  local products, not to import goods cheaper (due
  to subsidies like in EU or US)
• Keynesian multiplier effect important, also on
  household level
• -gt creation of backward and forward linkages !!!

60
Wages and Employment
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Stolper-Samuelson Theorem
• increase in price of a labour-intensive good
  will increase its production and hence increase
  its real wage
• not sufficient for real world as world is
  multi-factor
• Evidence 1 household gains, 1 loses from price
  increase

61
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Segmentation into formal vs. subsistence vs.
  informal sector
• Skilled and unskilled labour (skills gap)
• Trade on average more unskilled labour needed
• But dependence on natural resources
  outsourcing is negative
• Liberalization of agriculture very important
• -gt reaches the poorest and very low-skilled (if
  well done)
• Important aspect is openness encouraging
  education?

62
Government Revenue and Spending
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• With trade reforms comes potential reduction in
  revenues, especially in low-income countries
• -gt unbalancing government budget
• Alternative resources not easy to mobilize, but
  available
• Careful with regressive replacement taxation and
  public expenditure cuts!
• Harms the poor!
• No need to cut social spending which has big
  effect on the poor, but not inevitable if trade
  liberalization comes with losses in revenue
• But
• with political will social spending oriented
  towards the poor, poverty alleviation will be
  possible

63
Important for policies
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• 1. Impact on trade liberalization depends on
  existing and building environment, also the
  policies coming with it!

64
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Much evidence that the poorest households are
  less able to protect themselves against negative
  effects or to profit from positive opportunities
  created by policy reform.
• Complementary policies strengthening social
  protection for losers
• Enhance ability for the poorest to take
  opportunities and beneficial changes
• Desirable also without trade liberalization, but
  especially important in case of effects of the
  trade reforms on the poor or near-poor
• Attention to each countrys circumstances

65
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Trade liberalization is not necessarily the most
  powerful mechanism to address poverty in the
  country, but it is one of the easiest to change.
• tariff reduction uniformity, abolition of
  non-tariff barriers
• -gt easy to do
• Often it also saves resources
• Therefore
• trade reform may be one of the most cost
  effective anti-poverty policies available to
  governments!
• (Winters, McCulloch McKay 2004, p.108)

66
Questions???
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty
67
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty

• Thanks for your attention!

68
10 key recommendations
Introduction - Measurement - MDGs - Pro-poor
Growth - Trade and Poverty