Growth and Poverty Reduction: Pro-poor growth?

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Growth and Poverty Reduction Pro-poor growth?
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Growth and Poverty Reduction Pro-poor growth?

• Lecture Outline
• (i) What is pro-poor growth?
• (ii) What are the Theoretical Under-pinning of
  Pro-Poor Growth?
• (iii) Methodology
• (iv) Evidence of pro-poor growth?
• (v) Policies for pro-poor growth 1970s vs.
  present?

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Growth and Poverty Reduction Pro-poor growth?

• (i) What is pro-poor growth?
• Definition of Pro-Poor Growth
• growth that leads to significant reductions in
  (absolute) poverty
• (OECD 2001, and UN 2000) italics added in
  brackets.
• Too broad for economists since what definition
  of poverty do researchers use? Kraay (2004)
  makes this point in his World Bank Working Paper
  No. 3225, When is Growth Pro-Poor?

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Growth and Poverty Reduction Pro-poor growth?

• A basic idea from the works of White and
  Anderson (2001) and Kakwani and Pernia (2000) is
  that any increase in growth should benefit the
  poor more than the rich.
• This really is inequality-reducing growth
  rather than pro-poor growth is concerned with
  relative poverty.
• The question is, Should new growth benefit the
  poor more, thus increasing their incomes and thus
  reducing inequality, whilst the rest of society
  sees little income improvement?

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Growth and Poverty Reduction Pro-poor growth?

• If, Yes to this then could have the issue of
  national income increasing by 5 but income of
  the poor increasing by 7 whereas there could be
  a possibility of growth for the poor of 7 when
  national income increased by 10.
• The poor in the second scenario are absolutely
  better off, but are relatively worse-off compared
  to the non-poor In the first scenario the poor
  are absolutely worse-off compared to scenario 2,
  but are relatively better off.

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Growth and Poverty Reduction Pro-poor growth?

• (Q) So which one is better?
• (A) In poor countries better absolute
  improvements preferred to relative improvements,
  at least initially..
• Problem with the above inequality-reducing
  scenario is that we do not know whether following
  an inequality-reducing growth plan will result in
  lower growth or higher growth.
• So we want to have improvements in both absolute
  levels of income (absolute poverty tackled) and
  relative levels of income (relative income of
  poor improves and income inequality declines?).

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Growth and Poverty Reduction Pro-poor growth?

• Formalising these issues has been undertaken by
  White and Anderson (2001)
• White and Anderson (2001) 3 definitions of
  pro-poor growth
• (1) The poors share of incremental income
  exceeds their current share.
• This means that the incremental increase in the
  level of income to the poorgtincremental increase
  in the level of income for all of society,

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Growth and Poverty Reduction Pro-poor growth?

• Where the numerator represents change in income
  of the poor, the denominator is the change in
  income of society and represents the
  income share of the poor in the last time period,
  t-1.

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Growth and Poverty Reduction Pro-poor growth?

• So,
• There is a relative improvement of the poor.
• This can be shown diagrammatically,

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Growth and Poverty Reduction Pro-poor growth?
Changes in Y, between t and t-1
change in Y for non-poor between t-1 and t
Y, T growth
change in Y for the poor between t-1 and t If
then pro-poor growth.
t-1
t
Time
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Growth and Poverty Reduction Pro-poor growth?

• The problem with definition (1) is that the
  poors share can increase slightly and the
  richest 10 or 15 can still cream off much more
  and this is pro-poor growth.
• E.g. If poorest 20 have 5 of income and the
  richest 20 have 40 of income then if in every
  extra 1 the poorest get 10cents and the richest
  30cents then still have PPG.
• If in the above then White and
  Anderson (2001, pp. 269) coin the phrase
  anti-poor growth (APG).

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Growth and Poverty Reduction Pro-poor growth?

• (2) The second definition brings into the
  equation the share of people in a country who are
  defined as poor. Formally,
• Where the P term represents the share of poor
  people/households in the country.
• What the equation is saying is that the increase
  in the share of the poors incomegtshare of the
  number of poor in the countrys population.

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Growth and Poverty Reduction Pro-poor growth?

• Can be re-arranged so that,
• These represent average income levels of the
  poor and of society, and can be further
  simplified to,

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Growth and Poverty Reduction Pro-poor growth?

• The change in average income of poorgtchange in
  average income of society.
• Problem with definition 2 is that it is too
  restrictive and under this definition few
  countries actually have pro-poor growth.

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Growth and Poverty Reduction Pro-poor growth?

• Definition 3
• Take an international norm of median income
  shares of the bottom 20 and 40 (can choose any
  ).
• Issue here is that if the poors share
  currently exceeds the international norm then
  their share of incremental income can be less
  than their current share and thus qualify as PPG
  (ibid, pp. 269).

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Growth and Poverty Reduction Pro-poor growth?

• Another Definition of Pro-Poor Growth
• focuses on accelerating the rate of income
  growth of the poor and thus increase the rate of
  poverty reduction
• (Ravallion and Chen, 2003)
• Pro-Poor Growth F(GDP growth)
• Changes in income equality have an ambiguous
  effect on pro-poor growth since can impact on GDP
  growth.
• Thus, if pro-poor growth is to accelerate then
  need to accelerate growth but also need to
  enhance and make poor households aware of the
  opportunities growth generates.
• Hence there is no one agreed definition of what
  PPG actually is.hence a huge debate as to
  whether PPG has occurred or not!!

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Growth and Poverty Reduction Pro-poor growth?

• (ii) What are the Theoretical Under-pinning of
  Pro-Poor Growth?
• Gunnar Myrdal in 1920s and 1930s India argued
  that initial income inequality was an important
  factor in improving the quality of people and
  hence productivity.
• Ravallion and Datt (2002) report larger absolute
  poverty-household income elasticities in
  countries with lower gini indices.

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Growth and Poverty Reduction Pro-poor growth?

• (ii) What are the Theoretical Under-pinning of
  Pro-Poor Growth?
• The idea here is that any growth that does occur
  is likely to benefit more people if income
  inequality is low in the first place.
• (Q) So what then determines income inequality?
• Assets particularly land in LDCs
• Education
• Networks
• Rural-Urban
• Property Rights, Legal System

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Growth and Poverty Reduction Pro-poor growth?

• (ii) What are the Theoretical Under-pinnings of
  Pro-Poor Growth? Cont
• The 1970s
• In the 1970s the Redistribution with Growth
  development economists believed in the inverted-U
  hypothesis of Kuznets.
• Kuznets inverted-U of growth and inequality
• Stage 1 low per capita income level, low income
  inequality.
• Stage 2 per capita income increases with
  development, income inequality rises.
• Stage 3 gets to a point where per capita income
  increases with continued development, income
  inequality declines.

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Growth and Poverty Reduction Pro-poor growth?

• Evidence from Ahluwalia (1976) supports the
  Kuznets hypothesis, by simply regressing
  inequality onto income and income-squared
• He found that as economic growth increased so
  income inequality increased ( ) but
  at a decreasing rate ( ) however
  unsure where the turning point is!

Growth
Growth
Inequality
Leads to
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Growth and Poverty Reduction Pro-poor growth?

• The Redistribution with Growth economists argued
  (in line with Kaldors growth model) that
  inequality caused growth since the rich had a
  higher marginal propensity to save.
• Also Lewiss model of economic development with
  unlimited labour supply was consistent with
  rising income inequality through profits of
  entrepreneurs growing more quickly than wages.

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Growth and Poverty Reduction Pro-poor growth?

• Empirical Rejection of Kuznets, 1980s-1990s
• Rejected in Bruno, Ravallion and Squire, (1996)
  since much of the empirical evidence of the 1970s
  and 1980s was flawed, and studies were actually
  capturing between-country effects not
  within-country effects.
• By using panel estimates country-specific
  effects, time effects and joint country and time
  effects are captured and the Kuznets U-shaped
  curve disappears.
• Studies find that between-country effects are
  causing the inverted-U shape and that for some
  countries (e.g. India) the relationship between
  inequality and income is simply U-shaped
  Inequality high, then low, then high again as
  growth increases.

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Growth and Poverty Reduction Pro-poor growth?

• Currently whilst the theoretical debate
  continues as to whether economic growth causes
  income inequality to change, the empirical
  evidence is stacking up against a correlation in
  the first place.
• E.g. Deininger and Squire (1996), Chen and
  Ravallion (1997), Easterly (1999), Dollar and
  Kraay (2002) and Deaton (2005). According to
  Fields (1989, 2001),
• Method should be looking at country-specific
  analysis when Fields (1989) looked at 70 growth
  spells across 20 countries he found that
  inequality rose in 10 countries, decreased in 11
  and remained unchanged in 1.
• income inequality increased in about half the
  growth spells and declined in the other half.
• (World Bank, 2005, pp.17)

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Growth and Poverty Reduction Pro-poor growth?

• New Theories of Pro-Poor Growth?
• Initial income inequality feeds into poor growth
  or greater income equality positively affects
  growth rates.
• Based largely on the conflicting progress of
  East Asia (e.g. South Korea and Taiwan) and Latin
  America.
• Latin America notoriously unequal in income
  distribution (Brazil regularly found to have the
  highest Gini coefficient).

High Initial Inequality
Low Growth
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Growth and Poverty Reduction Pro-poor growth?

• This means that any growth benefits the rich
  only and tends to be skills-biased and capital
  intensive, thus the poor have no chance of
  getting a piece of the expanding pie relative
  poverty increasing.
• The income inequality also means that
  consumption is relatively low since the rich have
  low MPC which negatively effects AD and growth.

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Growth and Poverty Reduction Pro-poor growth?

• East-Asia growth of the 1960s and beyond has
  seen no conflict between growth and income
  distribution, meaning income inequality remains
  constant as growth increased.
• (Q) Is there a theory that can explain this?
• (1) The mechanism given for this income
  inequality-neutral path is that low initial
  income inequality results in more evenly
  distributed economic growth.
• The reason is that consumption expenditure
  patterns are similar amongst the poor for goods
  which they themselves produce hence generating
  demand for these labour-intensive products hence
  mass consumption takes off rather than
  consumption being driven by the minority.
• (2) Also the case that savings of the poor can
  be channelled if appropriate investment
  opportunities are in evidence.

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Growth and Poverty Reduction Pro-poor growth?

• (iii) Methodology
• Dominant Method - Cross-Country Studies (Time
  Series and Panels).
• Has growth affected absolute poverty, relative
  poverty and been pro-poor or not.

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Growth and Poverty Reduction Pro-poor growth?

• Method I Cross-Country Studies
• White and Anderson (2001) find a negative
  relationship between growth and income growth of
  the poor i.e. growth negatively effects the
  portion/share of income the poorest of the
  population get.

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Growth and Poverty Reduction Pro-poor growth?

• Back to the pro-poor question and for this see
  White and Anderson (2001)
• Regress changes in income of the poor as a share
  of changes in total income of country,
• and changes in share of income of the poor,
• onto a number of regressors that include, change
  in GDP per capita, change in trade openness
  dummy, change government expenditure as share of
  GDP, change in political rights and civil
  liberties, and change in life expectancy.
• Why 2 dependent variables? Dependent variable 1
  can be affected by outliers represented by large
  changes in incomes of the poorest groups when
  total income for the country has increased.
  Changes in the poors share of income gets around
  this issue.

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Growth and Poverty Reduction Pro-poor growth?

• White and Anderson (2001) (cont)
• Find that variations in the poors share of
  incremental income (Dependent variable 1) is very
  large for growth rateslt4..........some
  incremental shares are negative and very large.
• Confirms our expectations.
• However using dependent variable 2 find that,

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Growth and Poverty Reduction Pro-poor growth?
Regression results for Change in Share of Income
(poorest 40 and poorest 20 - t-tests in
brackets
DQ40 DQ20
Constant -0.001 0.000
(-0.76) (-0.40)
Growth (if improves) -0.056 -0.011
(-2.03) (-1.03)
Change in Political Freedom (if worsens) -0.006 -0.002
(-1.97) (-1.53)
Trade Openness -0.001 -0.001
(-0.94) (-1.30)
Change in Urban (more urbanisation) 0.003 0.002
(2.41) (3.41)
Change in life expectancy (greater life expectancy) -0.006 -0.002
(-1.85) (-1.57)

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Growth and Poverty Reduction Pro-poor growth?

• Note
• (1) Positive coefficient means an increase in
  the explanatory variable will have a positive
  impact on the poors share of GDP, i.e. improve
  the poors share of GDP
• Find that growth negatively impacts on the poor
  only the poorest 40 though. Implication is
  there is a trade-off between growth and
  distribution which contradicts World Bank
  thinking.
• Less political freedom bad for the poor.
• Increased urbanisation good for the poor

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Growth and Poverty Reduction Pro-poor growth?

• Dollar and Kraay (2002, 2004) find a positive
  relationship between growth and growth of incomes
  of the poor.
• The Model
• The key thing is the coefficient on .
  This represents the elasticity of income of the
  poorest quintile with respect to mean income.
• Control for 4 policy interventions that are
  likely to positively contribute to PPG (1)
  primary educational attainment (2) public
  spending on health and education, (3) labour
  productivity in agriculture relative to rest of
  economy and (4) formal democratic institutions.
• Find none of these factors impact on PPG in
  their cross-country survey.

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Growth and Poverty Reduction Pro-poor growth?

• That the coefficient on log GDP of the country
  is NOT significantly different from 1..NO
  evidence that change in GDP is different from
  change in GDP of poorest 20.
• They cannot reject the hypothesis that incomes
  of the poor on average rise equiproportionately
  with average incomes (pp. 198), See next slide
  for Table 5 that confirms this.

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Growth and Poverty Reduction Pro-poor growth?
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Growth and Poverty Reduction Pro-poor
growth?Figure 4, Dollar and Kraay (2004).
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Growth and Poverty Reduction Pro-poor growth?

• Finds that changes in inequality and changes in
  income are not correlated.
• (Word of warning given by authors and by others
  is that cross-country comparisons are subject to
  a lot of measurement error and that
  country-specific studies are required for a
  clearer picture What the World Bank has done).
• Dollar and Kraay (2004), Economic Journal paper
  in special edition of linkages between trade,
  development and poverty.

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Growth and Poverty Reduction Pro-poor growth?

• Whilst not explicitly looking at income
  inequality Dollar and Kraay findings are
  consistent with headcount poverty declining more
  in those countries with more equitable
  distributions of income.
• Example from Klasen (2003).
• Since Dollar and Kraay are looking at
  proportionate income changes of the average and
  the poorest quintile then clearly if income
  inequality is lower in a country then the
  proportionate increase in income will lead to a
  greater reduction in absolute poverty.

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Growth and Poverty Reduction Pro-poor growth?

• Barro (2000) tests the Kuznets hypothesis again
  with a panel of countries.
• Regresses growth rate per capita output onto
  variables that theoretically are predicted to
  determine growth, e.g. log of per capita GDP,
  rule-of-law index, democracy (or freedom) index,
  investment/GDP, years of schooling.
• Then includes a gini coefficient index.

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Growth and Poverty Reduction Pro-poor growth?
Model 1
Model 2
Model 3

• Growth rate is the dependent variable here.
• When the gini index is introduced linearly there
  is no relationship with growth (0.000) Model 1.
• When the gini index is interacted with log(GDP)
  a proxy for economic development then we see
  a negative relationship between income inequality
  and growth (-0.328) but that when log(GDP) is
  higher the relationship is actually positive
  (0.043) Model 2.
• Implication is that at lower levels of log(GDP)
  income inequality does significantly impact on
  growth rates.

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Growth and Poverty Reduction Pro-poor growth?

• Barro also finds evidence that Kuznets curve is
  alive and kicking. Income inequality first
  increases and then decreases with economic
  development (log(GDP)).

However log(GDP) is not explaining the majority
of the variation in income inequality across
countries or across time.
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Growth and Poverty Reduction Pro-poor growth?

• Summary
• Still no consensus.
• Some find that changes in income are not
  correlated with changes in inequality means that
  any growth in income does not appear to have any
  impact on inequality and impacts positively on
  absolute poverty, (see Fields, 1989 and 2001).
• Dollar and Kraay (2002) find that growth of the
  country positively effects growth of income of
  the poor implication is that growth is thus
  crucial for reducing absolute poverty and the
  number of absolutely poor.
• White and Anderson (2001) find that when
  dependent variable takes a relative form that
  growth negatively effects the share the poorest
  in a country have of GDP.
• Barro (2000) finds that income inequality can
  impact on growth rates of very poor countries
  only.

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Growth and Poverty Reduction Pro-poor growth?

• (V) Policies for pro-poor growth?
• Killick (2002) mentions a wish list that would
  enhance pro-poor growth
• (1) Land reform NOT land grab.
• (2) Improved access by the poor to education and
  health - public sector, or public-private
  partnership?
• (3) Micro-credit schemes targeted on the poor
  charity or public sector since is too risky for
  private sector to invest in!
• (4) Adoption of labour intensive techniques in
  production
• (5) Agricultural and rural development very
  broad
• (6) Government expenditure on education and
  health - public sector?
• (7) Avoidance of macroeconomic crises external
  factors that cannot be avoided, e.g. sustained
  food price increases caused by emerging economies
  changing their diet.
• (8) Investment in rural infrastructure public
  sector, or public-private partnership?
• (9) Labour-intensive industrialisation

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Growth and Poverty Reduction Pro-poor growth?

• World Bank Report, pp.74.
• For Agriculture
• Investments in infrastructure to connect the
  poor, e.g. telecommunications, roads, public
  transport.
• Strengthen property rights notably of women
  particularly regarding land
• Create incentive frameworks that do NOT
  discriminate against those economic activities
  the poor are already undertaking
• Improve technology for food-producers so can
  protect crop. Essential given urban food demand
  increases.
• Help poor households reduce and cope with risk
  which could encourage greater risk with more
  high-yielding crops (Q) Are poor households
  risk-averse in gambling when times are good and
  risk-taking when times are bad?

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Growth and Poverty Reduction Pro-poor growth?

• For Non-agricultural poor
• Designing labour market rules and regulations
  that balances workers needs with employers
  needs, (ibid, pp. 75) is an issue in many
  Latin American countries where trade unions are
  strong, also the case in South Africa.
• Access to secondary and girls education
  important for poor households given the growing
  skill bias in non-agricultural employment
  falling fertility rates and rising female labor
  market participation is essential in a pro-poor
  growth strategy (ibid, pp. 75).
• Quality of investment climate (assumed to be
  determined by macro and trade environment, as
  well as degree of labour market regulation)
  determine quantity and quality of employment.
• Improved infrastructure for the poor.

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Growth and Poverty Reduction Pro-poor growth?

• Factors that affect the success/failure of these
  World Bank policies include
• Initial income and asset inequality if high
  then can have negative impact on pro-poor growth.
• Must re-distributebut how? Land reform not land
  grab, transfer payments in the form of state
  pensions to the poor.
• Importance of agriculture to the poor. Need to
  improve the efficiency of agriculture (e.g.
  technology, co-operatives, training, access to
  financial markets).
• Since agriculture is affected by climactic
  conditions there needs to be a risk management
  structure in place to protect poor farmers but
  which do encourage more risk-taking (Q) Are
  poor farmers likely to be risk-takers?
• Delivery of services and capacity of institutions
  to deliver to the poor issue of corruption.

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Growth and Poverty Reduction Pro-poor growth?

• References
• Dollar, D., and Kraay, A., (2002), Growth is
  Good for the Poor, Journal of Economic Growth,
  Vol 7, pp. 195-225.
• Fields, G., (1989) Changes in Poverty and
  Inequality in Developing Countries, World Bank
  Research Observer 4(2), 167-85.
• Fields, G., (2001) Distribution and Development
  A New Look at the Developing World, MIT Press.
• Kakwani and Pernia (2000) What is pro-poor
  growth?, Asian Development Review, Vol 18(1),
  1-16.
• OECD 2001 Rising to the Global Challenge
  Partnership for Reducing World Poverty.
  Statement by the DAC High Level Meeting, April
  25-26, Paris
• Ravallion and Chen (2003) Measuring Pro-Poor
  Growth. Economic Letters Vol 78(1), p3-99.
• White and Anderson (2001) Growth vs
  Redistribution Does the pattern of growth
  matter?., Development Policy Review, Vol 19(3),
  167-289.
• World Bank, (2005), Pro-Poor Growth in the
  1990s Lessons and Insights from 14 Countries.