This article published in VARTA-VOL-XXXIII,APRIL,2012,NO-1,PP1-22(ALLAHABAD UNIVERSITY)
Poverty
- Growth Nexus – A Review
Debesh Bhowmik
JEL
– D31,F13,F43,I32,O1,Q18
Keywords-
Income distribution,International trade and Institutions, Economic growth,
Poverty, Economic development, Agricultural growth and policy
Introduction
The growth poverty
nexus has been verified but it is not always true in every country because
there are other crucial variables which are less exemplified and less examined
statistically but are related with growth and poverty nexus.In this paper,I
endeavour to study the details perspectives on poverty-growth nexus along with
poverty reduction strategies noting all the related factors which can influence
the relation.
The
association between growth and poverty
E.M.Pernia (2001),M.G.
Quibria (1993,2001),Martin Ravallion (1995,2001),Gaurav Datt and Martin
Ravallion(1988) and D.Rodrik (2001) showed the inverse relationship between
economic growth and the incidence of poverty ratio.UNDP(1993-1996) headed by
Amartya Sen,Meghnad Desai and Sudhir Anand established the positive association
between economic growth and human development and thereby showed negative
association between human development index and poverty ratio.Timothy Besley,(2005) tested
with time series data during 1958-2000 to link growth with headcount
ratio,fitted straight line and found decreasing trend and found cross state
heterogeneity. The link between growth and changes in poverty can be sensitive
to the choice of poverty lines and poverty indices. For instance, even if the
incomes of the poor always increased in line with average growth in the
economy, the impact of growth on the headcount ratio (a popular choice among many possible poverty
indices) would depend on the income density around the poverty line, and thus
on the choice of that poverty line. Other poverty indices will almost always
vary quantitatively from the headcount, and they may sometimes also move in a
qualitatively opposite direction. Secondly, the impact of growth on absolute
poverty is often different from its impact on relative poverty and relative
inequality. Indeed, although positive income growth usually reduces the
absolute incomes of the poor, it does not have a systematic effect on their shares
in total income. This can have immediate repercussions on whether growth can be
unambiguously considered to be pro-poor. The reason is that the two leading
views on how to make judgements of pro-poorness differ radically as to whether growth should be expected
to change the incomes of the poor by at least some absolute amount — for absolute
pro-poor views — or by at least some proportional amount — for relative pro-poor
views.
This is because
the absolute pro-poor view attaches no weight to the relative impact of growth.
Conversely, the relative pro-poor view will judge as equally pro-poor, two
changes in an income distribution, a first one in which everyone sees his
income fall by 50 percent, and a second one in which everyone sees his income
increase by 50 percent. This is because the relative pro-poor view only
considers the relative impact of growth which were found in the literature of Dollar and Kraay (2002), Kakwani, Khandker,
and Son(2003), Kakwani and Pernia (2000), Klasen (2004), and Ravallion and Chen
(2003). The real challenge to establishing a development strategy for reducing
poverty lies in the interactions between distribution and growth, and not in
the relationship between poverty and growth on one hand and poverty and
inequality on the other, which are essentially arithmetic. There is little
controversy among economists that growth is essential for (income) poverty
reduction under the assumption that the distribution of income remains more or
less constant. Likewise, much evidence suggests that a worsening of the
distribution tends to increase poverty.
Ravallion and
Chen (1997) and Easterly (2000) estimated the income–growth elasticity of
poverty as a decreasing function of inequality. Similarly, using the rather limited sample of
32 paired rural and urban sectors for 16 SSA(sub-Saharan Africa) countries
employed in Ali and Thorbecke (2000), Fosu (2008) arrives at a similar conclusion
about the inequality impact on the income elasticity of poverty. Adams(2004)
also finds that a sub-sample of countries with a higher level of inequality exhibits a smaller
growth elasticity of poverty. On the assumption of a log normal distribution of
income, Bourguignon (2003) and Epaulard (2003) estimate equations that assume
that the income–growth elasticity, for instance, depends on the ratio of the poverty
line to mean income as well as on initial inequality. Based on similar specifications
as in Bourguignon (2003), Kalwij and Verschoor (2007) reach similar conclusions
as in Bourguignon (2003) and Epaulard (2003), emphasize regional diversity in
poverty responsiveness to growth and inequality.Global sample of 1977–2004 of
SSA and non-SSA countries finds the impact of GDP growth on poverty reduction
as a decreasing function of initial inequality. The study additionally observes
that higher rates of increases in inequality tend to exacerbate poverty, with
the magnitude of this effect rising with initial income. The income–growth
elasticity, moreover, tends to increase with mean income relative to the
poverty line.
This finding suggests that the marginal
benefit in terms of poverty reduction in the SSA region would require larger
reductions in inequality or accelerations in growth than elsewhere in the
developing world.Further more, the findings of the current study suggest that
the growth impact is likely to differ by country in SSA, depending primarily on
the inequality attributes of countries.
For example, the
poverty-reduction efficacy of a given rate of growth acceleration in Ethiopia
would be more than twice that in Namibia, thanks to the much higher level of inequality
in the latter country. Similarly, the degree of responsiveness of Botswana’s poverty
rate is estimated to be only slightly higher than that in Namibia, which might explain
the minimal rate of poverty reduction in Botswana, with the headcount poverty rate
for instance falling by only 5 percentage points in a decade, despite the
tremendous growth in that country. In contrast, in Ghana where the
income–growth elasticity is about twice that of Namibia, the headcount poverty
rate for example declined substantially, by about 10 percentage points within a
decade, in spite of the relatively modest growth. Thus, understanding the
inequality-generating characteristics of
individual
countries could help in designing most effective poverty-reducing strategies for
this region of the world where the
challenge seems so great.
If poverty is defined
as absolute dollar poverty incidence,
data for 65 developing countries in
the 1980s and
1990s suggest a big negative effect on conversion of growth into poverty
reduction. Growth of 1 percent in mean per-person consumption with an initial
Gini of 0.2 brought a 2.9 percent fall in dollar poverty incidence; with a Gini
of 0.4, a 2.1 percent fall; and with a Gini of 0.6, a 1.2 percent fall (World
Development Report 2000-2001, Chen and Ravallion 2000 and Ravallion1997).
If the sign of
“effect of growth on poverty” is the same as the sign of “effect of poverty on
growth”, the mutual effects cumulate and strengthen one another, e.g., a small
amount of pro-poor growth will later be amplified because the poverty decline then
ignites further growth. If the signs are different, each effect is damped. So
“whether (or how much) growth causes poverty reduction (or low-end
redistribution)” depends, after the earliest stages, on “whether poverty
reduction (or low-end redistribution) causes extra growth” There are three ways
in which lower, or falling, Ginis can improve the rate of transformation of growth into poverty reduction. Reducing the
per-person income or consumption Gini normally reduces static poverty, given
mean income. It may also tend to improve the impact of a given growth rate upon the poor, for arithmetical or
political economy reasons.
Ravallion
(1997),Bourguignon (2002), and Son and Kakwani (2003) review the poverty-growth-inequality relationship and note that the impact of
growth on poverty is reduced when inequality is
high. Poverty will therefore be more responsive to growth the more equal
the income distribution. Intuitively, if the poor have a low share in existing
income, they will likely have a low share in newly created income. Third, there
is no strong empirical evidence suggesting a general tendency for growth as
such to make income distribution more or less equal. For example, Dollar and
Kraay(2002) find that, on average, the income of the poorest fifth of society
rises proportionately with average incomes. Other studies concluding that
changes in income and changes in inequality are unrelated with studies of Deninger and Squire (1996), Chen and
Ravallion (1997) and Easterly (1999). Growth would thus
be good for the poor, or at least
as good as for
everybody else in society.Nanak Kakwani and Ernesto M.Pernia (2000) also
verified that poverty reduction depends on the rate of economic growth as well
as on the changes in income distribution. They decomposed the total change in
poverty into (i) the impact of growth when the distribution of income does not
change and (ii) the effect of income distribution when total income does not
change. They calculated the degree of pro-poor growth as f=h1/hg
where hg = percentage in poverty when inequality change in
poverty when inequality changes in the absence of growth.So,the proportional
change in poverty h=hg+h1.If f>1 when h1<0,
the growth will be pro-poor that is poor will benefit proportionately when
growth results in a redistribution in favour of the poor.But,when
f<1,economic growth actually leads to an increase in poverty.To minimize
adverse distributional effects in poverty reduction,consider the following
constraints;
If f≤ 0, growth is anti-poor
0<f≤0.33,growth is weekly pro-poor
0.33<f<1.0 , growth is pro-poor
f≥1.0 , growth is highly pro-poor.
They verified
the index in Lao PDR during 1992-93-1997-98 and found that the country’s index(0.21) is weekly pro-poor.
Barro (2000) and Lundberg and Squire (2003)
suggest that greater openness to trade(something to be welcomed when one has a
growth objective in mind) would go along with more inequality. Similarly, Li
and Zou (2002) present empirical evidence suggesting that increases in
government spending, while potentially leading to lower growth, would also
reduce inequality. Easterly (2001) also finds that structural adjustment in the
context of World Bank and International Monetary Fund programs tends to reduce
the growth elasticity of poverty, a result that would be consistent with a
positive relationship between increases in inequality and the implementation of
adjustment programs. Easterly speculates that this may be due to the poor being
ill placed to take advantage of the new opportunities created by structural adjustment
reforms. Our results suggest a small potential impact of inequality on growth:
a 1 percent deterioration in the Gini coefficient would lead to an annual
growth decline of 0.007 percent. On the other hand, we find that financial
development, trade openness, and decreases in the size of government would be
associated with increases in inequality. Thus, policies in these areas present
some conflict with respect to growth and inequality objectives. To the extent that their positive impact on growth
offsets the negative impact on inequality, these pro-growth policies would also
be pro-poor (in the sense that poverty falls as a result of the implementation
of the policy).The volatility of the business cycle is also positively related
to the Gini coefficient(sharper economic fluctuations would be associated with
higher inequality), although admittedly in the basic inequality specification
the standard deviation of the output gap is not significant. A possible
explanation behind the finding suggesting that the amplitude of the business
cycle is associated with higher inequality levels is that poorer groups in society
would likely find it more difficult to insure themselves against sharp fluctuations
in output growth.
(i) inequality
hampers poverty reduction, both because of its negative impact on the growth
elasticity of poverty (as stressed in the literature) but, in most scenarios also
because of its negative impact on the inequality elasticity of poverty; (ii)
for a given poverty line, the impact of
growth on poverty is stronger in richer than in poorer countries, and hence the
latter will find it harder than the former to achieve fast poverty reduction;
(iii) the share of the variance of poverty changes attributable to growth
should be generally lower in richer and more unequal countries; and (iv) given
the initial levels of development and inequality, the relative
poverty-reduction effectiveness of growth and inequality changes depends on the
poverty line -- the higher the poverty line, the bigger the role of growth and
the smaller the role of distributional change.( J. Humberto Lopez and Luis Servén,2006)
The relationship
between trade liberalization and economic growth is somewhat less clearly
established, although a consensus appears to be emerging that reducing trade
barriers is, indeed, supportive of growth. Representative of this consensus
view are Sachs and Warner (1995), Dollar and Kraay (2004) and Wacziarg and
Welch (2008). Rodríguez and Rodrik (2000) and Subramanian, Trebbi and Rodrik
(2004) present a divergent and more skeptical view about the benefits of trade
liberalization. There exists less empirical clarity on the benefits of
liberalizing cross-border financial transactions, counter to a compelling
theoretical case for a positive link between free capital flows and economic
growth (Kose et al., 2009, and Dell’ Ariccia et al., 2008).
Estimation
results show that, among the three dimensions of liberalization considered,
only domestic financial liberalization is significantly and positively
associated with per capita GDP growth. We find that domestic financial
liberalization is positively and significantly associated both with TFP growth
and aggregate investment in middle-income countries, and is positively
associated with TFP growth in low-income countries. Hence, in developing
economies structural reforms appear to be associated with both faster TFP
growth and higher capital accumulation. In middle-income countries, episodes of
domestic financial reforms are significantly associated with faster economic
growth. The estimated effect of domestic financial reforms is economically large:
economic growth increases by 1.2 to 1.4 percentage points on average in the 3
to 6 years following a reform episode.
Poverty and Agricultural growth
History shows
that different rates of poverty reduction over the past 40 years have been closely
related to differences in agricultural performance – particularly the rate of
growth of agricultural productivity. While increasing agricultural productivity
perhaps remains the single most important determinant of economic growth and
poverty reduction. Gallup et al. (1997) showed that every 1% growth in per
capita agricultural Gross Domestic Product (GDP) led to 1.61% growth in the
incomes of the poorest 20% of the population –much greater than the impact of
similar increases in the manufacturing or service sectors. Thirtle et al.
(2001) concluded from cross-country regression analysis that, on average, every
1% increase in labour productivity in agriculture reduced the number of people
living on less than a dollar a day by between 0.6 and 1.2%. No other sector of
the economy shows such a strong correlation between productivity gains and
poverty reduction. De Janvry and Sadoulet (1996) estimate that in Asia, a 10%
increase in total factor productivity in agriculture would raise the incomes of
small-scale farmers by 5%. Ravallion and Datta (1998) also noted that growth in
the primary sector is more effective in reducing poverty than growth in the
secondary sector. Then Kakwani (2001)
proved that a one percent increase in growth in agriculture reduces the
incidence of poverty by a little more than one percent. He regressed his model
on 45 countries in East Asia, Latin America, South Asia and Sub-Saharan Africa
during 1960-1998 and found significant results.
The agricultural
credit has a positive impact on the gross domestic product and its effect was
more pronounced on the Agriculture GDP. The impact of agricultural credit in
reducing poverty was significant both in the short run and long run. The short
run elasticities of agricultural credit with respect GDP and poverty were 0.03,
0.16, -0.35, and -0.27 respectively in the short run and long run respectively.
Growth –Poverty Nexus : Empirical Evidence
The eight
country studies give us useful insights on how to integrate short-term and long-term policies
to increase the impact of growth on poverty reduction.It is shown in Fig. -1.The
Regression
equation was also given inside of the Figure and was found significant.
Fig.1
Economic growth reduces poverty.
The relationship
between changes in growth and inequality among the eight countries in the 1990s
reveals a significant and positive relationship between changes (logged
differences) in growth and inequality, with a correlation coefficient of 0.32
percent (0.008) (figure 2). The three countries where inequality rose the
most—Vietnam, Uganda, and Bangladesh—were
also among the strongest growth performers. The
positive correlation between changes in growth and inequality means that poor
households benefited less than non poor households from growth.
The growth
incidence curves for the three countries with the greatest increase in
inequality indicate the average rate of consumption growth per capita for each
percentile of the distribution (figure 3). They show that the high rate of
economic growth generated significant poverty reduction (as shown by the
positive rates of income growth across the bottom percentiles).
But the upward
slope of the curves also points to rising inequality, because the rate of
income growth of individuals in the upper income percentiles was higher than
the income growth rate of the poor. The positive relationship between
inequality and growth that existed among these eight countries in the 1990s
challenges the consensus that no general relationship between inequality and
growth exists, and certainly not one in which growth systematically widens
inequality. The theoretical literature is divided on the relationship between
growth and inequality, and the empirical literature on developing countries has
found no consistent relationship between the two variables. For example,
Deininger and Squire (1998) found Kuznets’s inverted-U in 10 percent of the
countries they studied, an ordinary U in another 10 percent, and no
statistically significant relationship in the remaining 80 percent.
Fig.2
Fig-3
Significant Poverty Reduction but rising Inequality in
Bangladesh,Uganda,and Vietnam
While the Indian
economy has been on a higher growth path since mid-1990s, the impact of the
growth on poverty reduction has not been significant.Though there is a negative
association between economic growth and poverty ratio, reduction in the
proportion of the poor population can not be entirely attributed to growth and
its trickle down effect. It is obvious that achievement in poverty reduction
has been uneven across regions. The poverty reduction strategies have not done
well in some specific States, viz: Assam, Bihar, Orissa, Madhya Pradesh, Uttar
Pradesh and West Bengal, which together share nearly three-fourth of India’s
poor people. It is also important to note that their share has been growing
over-time reflecting the marginalization of the poor in the growth process. The
percentage share of backward states in rural poor has gone up from 53% in
1993-94 to 61% in 1999-2000. The share of agriculturally advanced States, like
Punjab, Haryana etc. on the other hand, has gone down from 3% in 1993-94 to
1.3% in 1999-2000. The urban poor are getting concentrated in Uttar Pradesh,
Maharashtra, Gujarat and West Bengal. Their share in urban poverty has risen
from 56% in 1993-4 to 60% in 1999-2000.
There have been several
attempts to explain the differential growth performance and anti-poverty effectiveness
of growth across Indian States (Besley et.al; 2000,2004, 2005; Datt and
Ravallion; 1998,2002; Dreze and Sen; 1997). Besley,et. Al (2005) identified four
typical patterns of growth and poverty performance across Indian States.They
noted that Kerala has been successful both in creating economic growth and in
making growth effective at reducing poverty, while West Bengal has witnessed
moderate growth in the post independence period, but relatively greater success
in poverty reduction. Maharashtra experienced above average growth, but failed
to transform this growth into substantial poverty reduction.
Another typical
situation is observed in Uttar Pradesh, which is primarily an agricultural
State and experienced below average growth rates, which did not translate into
any significant poverty reduction. They
identified the following five types of factors that could explain the
inter-state variations in economic growth performance and poverty reduction: [1]
Property rights, [2]Access to finance [3]Human capital,[4] Regulation,[5] Political
accountability,
It was estimated
that both the headcount measure of
poverty—the standard deviation of log income inequality measure—and the log of
income per capita between 1958 and 2000 for each of the 16 states in the
analysis show total (official) poverty and total adjusted (Sundaram and
Tendulkar 2003c) poverty for 1994 and 2000. Though the pattern of poverty
change is unclear in the early years, most states have experienced a decline in
poverty from the early 1970s onward. By contrast, inequality as measured by the
Gini shows no consistent patterns of change. The data also show a slow but
steady upward trend in income per capita from the 1970s in most states. The
most striking feature of the analysis , however, is cross-state heterogeneity
in these patterns. As noted above, poverty fell precipitously in Kerala but was
impervious to change in Bihar. Economic performance also varies greatly from
state to state. Growth rates divide the 16 main states of India into two groups
of equal size: in one group economic growth has been limited, but in the other
it has been intensifying. Patterns of inequality vary across states but not in
a systematic fashion. The relation reveals that the relationship between income per capita and
growth across states is heterogeneous.
The estimated
average elasticity for India is 0.65, with an average (robust) standard error
of 0.08. The size of the coefficient means that an increase in growth of 1
percent is associated with a reduction in poverty of 0.65 percent. That is,
growth reduces poverty less than proportionally. But an average is less
interesting than determining whether some states are more efficient
than others in
reducing poverty through growth. Elasticities range from 0.30 for Bihar to 1.23
for Kerala. Some states, such as Kerala, have achieved rapid poverty reduction
by combining relatively high economic growth rates with a high growth
elasticity of poverty. Others, such as West Bengal, compensate for low growth
with a high growth elasticity of poverty (and vice versa for Maharashtra and
other states). Laggard states such as Bihar that have achieved relatively
little poverty reduction have below average rates of growth and growth
elasticities of poverty.
We may include
four critical assessment of growth elasticity of poverty.
First, the
growth elasticity of poverty is a gross elasticity that combines two partial
elasticities: the partial growth elasticity (how poverty changes with growth
keeping inequality constant), and
the partial
inequality elasticity of poverty (how poverty changes with inequality when one
keeps growth constant). As a result, the growth elasticity of poverty reflects
not only the sensitivity
of poverty to
growth but also the initial level of development and inequality. Holding all
else constant, countries with a higher level of development or with a lower
level of inequality have higher elasticities (Lopez 2004b and Bourguignon
2003).
• Second, the
growth elasticity is also influenced by the rate of growth itself. In countries
with the same level of development and income inequality, an equal rise in
inequality in both countries will yield a higher growth elasticity in the
country with a higher growth rate, and vice versa if inequality falls (Lopez
and Cord 2005).
• Third, the
growth elasticity of poverty measures the change in headcount poverty with a 1
percent change in growth. If a high fraction of the population near the poverty
line is pushed over
Pro-Poor Growth
in the 1990s: Lessons and In sights from 14 Countries the line with a small
amount of growth, the growth elasticity of poverty will be high.
• Fourth, the
analysis of the relationship between growth and poverty reduction is
complicated by a variety of data issues, which more broadly affect the analysis
of poverty trends over time.
Some of the
country-studies can be seen as follows:
Pakistan enjoyed the fastest rate of GDP
growth in South Asia during the 1960-90 period, but this did not register
adequately in equally fast reduction of poverty. Obviously economic growth
failed to trickle down to the masses because of the feudal hold over the
distribution of income. The role of the government in transferring income and
opportunities to the poor has also remained marginal. The government in the
past has transferred only 0.2% of the GNP (per annum) to the poorest of the
poor through Zakat and Bait-ul-Mal.
The economic
growth experienced by Tunisia between 1995 and 2005 has thus unambiguously
decreased its level of absolute poverty, meaning that there is first-order
absolute poverty dominance for Tunisia of 2005 over 1995.Turkey's mean per
capita expenditure, expressed in 2005 PPP US dollars, grew from 6.8 dollars a
day in 1994 to 7.8 dollars a day in 2005. Notwithstanding this, the
distributional effects of Turkey's growth have been similar to those of
Yemen. Turkey has witnessed a
statistically significant rise in relative poverty between 1994 and 2005. Some
of the MENA countries, such as Tunisia and Mauritania, have seen robust decline
in the joint absolute and relative deprivation.
Over the last
quarter century, this headcount poverty rate has barely budged in SSA, from its
value of 42 per cent in 1981 to 41 per cent most recently in 2004 (World Bank
2007).
Based on
cross-country African data, Ali and Thorbecke (2000) find that poverty responds
more to income distribution than to growth.
Indonesia’s
pro-poor performance from the late 1960s to the mid-1990s was based on a
conscious strategy that combined rapid economic growth with investments and
policies that ensured the growth would reach the poor. This strategy integrated
the macro economy with the household economy by lowering the transaction costs
of operating in the factor and product markets, which provide links between the
two levels of the overall economy. This strategy was designed and implemented
by highly skilled economic planners (the “technocrats”) at the urging of
President Suharto. Long-term overall distribution of household expenditures in
Indonesia has changed relatively little; the average Gini coefficient is about
0.33 (compared with about 0.32 for India, 0.45 for the Philippines and
Thailand, and 0.50 for Malaysia). Part of Suharto’s commitment to the rural
economy appears to stem from the highly visible politics, and power, of food
security. The drive for higher
agricultural productivity—a key ingredient in pro-poor growth— was fueled at
least in part by the desire for households, and the country, to have more
reliable supplies of rice than historically had been available from world
markets. (Timmer 2000, 2005a).
Explanations for
pro-poor growth in Bangladesh can be rooted in a stable macroeconomic
environment that created fiscal space for public expenditures favoring the
poor. In addition, political commitments to social development have been
reflected in policy consistency, cutting across regime types since
independence. Successive governments emphasized the need for reducing
population growth, the importance of investing in primary and girls’ education,
and the role of primary health care in the forms of child and maternal
immunization and universal coverage of safe drinking water. Macroeconomic
policies, vulnerability management and agriculture policies, and changes in
rural factor markets have affected participation of the poor in the growth
process of the 1990s. Bangladesh achieved impressive growth and poverty
reduction in the 1990s through increased macroeconomic stability and trade
openness, enhanced resilience to shocks and greater capacity for managing risks
arising from vulnerability to natural disasters, and investments in rural
infrastructure and agriculture. This strong pro-poor growth performance also
reflected sustained political commitment to improving the welfare of the poor,
as evident by improvements in human development indicators and a steady drop in
fertility and population growth rates.
Future
challenges relate to generating momentum for continued broad based growth.
Political attention must shift to ensuring that the gains from trade
liberalization and structural transformation reach the extremely poor.
Mechanisms to circumvent or fill gaps left by weak public institutions are at
least in part responsible for a rise in urban inequality, which is particularly
worrisome in the context of internal migration and urbanization. Institutional
responses need
to enhance the urban poor’s access to capacity enhancing assets.
The story of
poverty-reducing growth in Vietnam is the story of the impact that the doi
moi (renovation) reform process begun in 1986 has had on transforming the
country’s economy and, in the process, raising the incomes of millions of
Vietnamese. The policy choices that unlocked Vietnam’s potential for high
growth and rapid poverty reduction deserve the closest study. If its past
successes offer lessons to others, Vietnam itself may well need to learn from
some of its efforts as it attempts to find new avenues to economic and social
progress.
Vietnam’s
political, social, and economic conditions in 1986 appeared anything but
conducive to economic growth and poverty reduction. This progress in aggregate
poverty reduction is the result of the high average per capita growth rate of
gross domestic product (GDP) of 5 percent during 1987–2001, along with the
relatively stable income distribution. As the growth incidence curve for 1993–2002 shows, all percentiles experienced
expenditure growth. As a result of slightly increasing aggregate inequality,
the national rate of growth for percentiles below the poverty line—as pro-poor
growth is defined—over the two decades was as high as 4.1 percent. Although the
relatively steady increase of the aggregate income-based Gini coefficients
appears to indicate a continuous worsening of income distribution, aggregate
inequality in Vietnam, as measured by expenditure-based Gini coefficients, did
not actually increase much between 1993 and 1998. It has only recently begun to
rise, a tendency also visible in the ratios of the richest-to-poorest
quintiles. The expenditure based urban and rural Gini coefficients remained
relatively stable between1993 and 2002 at values of 0.35 and 0.28,
respectively, suggesting that most of the increase in inequality occurred
between urban and rural areas.
IMF and World Bank Strategy on Poverty Reduction
Since 2000, the World Bank and
IMF have required poverty reduction strategy papers as the basis for providing
assistance to the world’s poorest and heavily indebted countries. The
strategies are intended to be nationally owned, highly participatory processes
that address comprehensive development issues including the economic, social,
institutional, and environmental aspects of development. According to World
Bank guidelines, the strategies should:
[i] Be country-driven and
country-owned.
[ii] Focus on benefiting the
poorest segments of society.
[iii] Address the multiple causes
and effects of poverty.
[iv] Include collaboration with
development partners, including civil society.
[v]
Demonstrate long-term planning for
reducing poverty.
The PRSP is also
linked to the World Bank’s Country Assistance Strategy (CAS), a roadmap that
guides all of the Bank’s activities and resource allocation—loans, grants,
technical assistance, analytical work, and advice—that take place in the host
country. Since 2002, all CASs in these countries have been based on a PRSP.
Executive Boards of the IMF and World Bank as the basis for concessional
lending from each institution and debt relief under the joint Heavily Indebted
Poor Countries (HIPC) Initiative. The targets and policy conditions in a
PRGF-supported program are drawn from the country's PRSP.This Program
Strengthens Governance and Promotes Growth.
As of August
2008, 78 low-income countries are eligible for PRGF assistance.Eligibility is
based principally on the IMF's assessment of a country's per capita income,
drawing on the cutoff point for eligibility to World Bank concessional lending
(currently 2007 per capita gross national income of $1,095).Loans under the
PRGF carry an annual interest rate of 0.5 percent, with repayments made
semiannually, beginning 5½ years and ending 10 years after the disbursement. An
eligible country may normally borrow up to a maximum of 280 percent of its IMF
quota under a three-year arrangement, although this may be increased to 370
percent of quota in exceptional circumstances. In each case, the amount will
depend on the country's balance of payments need, the strength of its
adjustment program, and its previous and outstanding use of IMF credit. The
expected average access under the initial three-year arrangement is 140 percent
of quota, and 125, 110, 90, 70, and 50 percent of quota for second through
sixth-time users of the facility, respectively. “Low-access” PRGF arrangements
with a standard level of 10 percent of quota may be used for members with
little or no immediate balance of payments need, which still desire a Fund
engagement as guidance for policy implementation. PRGF-eligible members with
per-capita income above 75 percent of the cut off for World Bank concessional
lending, or members borrowing on commercial terms, may combine PRGF
arrangements with lending from the IMF's non-concessional Extended Fund
Facility.
[A] Supporting Poverty Reduction and Growth
Reviews of the
PRGF by IMF staff in 2002 and by the Independent Evaluation Office (IEO) of the
IMF in 2004 confirmed that the design of the programs supported by PRGF lending
has become more accommodating to higher public expenditure, in particular
pro-poor spending. Building on this progress and in response to a 2007 IEO
report on the IMF and Aid to Sub-Saharan Africa, the IMF in 2007 adopted
principles to promote the full use of external aid while maintaining
macroeconomic and debt sustainability. A review of PRGF program design by the
Executive Board in September 2005 found that while macroeconomic outcomes in
low-income countries had improved markedly in recent years, per capita income
remains low. The review noted in particular, the importance of broad economic
institutions for sustained growth and stability, and the need to manage
carefully increased aid flows.
First, the
principles of broad public participation and country ownership are central to
the PRGF. Discussions on the policies underlying PRGF-supported programs are
more open than in the case of other Fund arrangements, since they are based on
the nationally-owned PRSP. With increased national ownership, PRGF
conditionality has become more parsimonious, focused on the Fund's core areas
of expertise, and limited to measures that have a direct and critical impact on
the program's macroeconomic objectives.
Second,
PRGF-supported programs reflect closely each country's poverty reduction and
growth priorities and, as long as macroeconomic stability is maintained, seek
to respond flexibly to changes in country circumstances and pro-poor
priorities. Key policy measures and structural reforms aimed at poverty
reduction and growth are identified and prioritized during the PRSP process,
and if feasible, their budgetary costs are assessed. Countries' budgets under
PRGF-supported programs reflect this analysis.
Third,
PRGF-supported programs focus on strengthening governance, in order to assist
countries' efforts to design targeted and well-prioritized spending. Of
particular importance are measures to improve public resource management,
transparency, and accountability. PRGF-supported programs also give particular
attention to the poverty and social impacts of key macroeconomic policy
measures.
PRGF-supported
programs are designed to cover only areas within the primary responsibility of
the IMF, unless a particular measure is judged to have a direct, critical
macroeconomic impact. Areas typically covered by the IMF include advising on
prudent macroeconomic and financial policies and related structural reforms
such as exchange rate and tax policy, fiscal management, budget execution,
fiscal transparency, and tax and customs administration.
There is no
clear statement of a definition of poverty. The characteristics of poverty in
the GPRS has been defined using household characteristics:
• size of
household;
• type of
dwelling (including access to safe water and sanitation);
•
economic/professional status;
• consumption
patterns;
• access to
public health system;
• education;
• gender;
• location
(region and rural/urban).
[B] How is the
poverty monitoring mechanism organized?
Current poverty
monitoring is based on the Household Income and Expenditure/Household Living
Conditions Survey. The GPRS proposes a new three-tier institutional framework
for monitoring and evaluation:
• National
Poverty Reduction Board - as multi stakeholder entity to provide political support
(including NGOs);
• The
Observatory and Analytical System with two components: the National Statistical
Systems and the National Planning System;
• Regional
Poverty Reduction Boards for effective decentralization of the monitoring mechanism.
This system will monitor:
• trends in
growth, poverty, vulnerability and inequality;
• implementation
of growth and poverty reduction programmes;
• impact of
growth and poverty reduction policies and programmes.
Further, outcome
indicators to monitor progress in each of the pillars have been identified .The
underlying areas of policies focus are:
(i) growth and
macroeconomic stability;
(ii)
decentralization;
(iii)
employment;
(iv) agriculture
development;
(v) maximizing
the impact of productive sectors with a multiplier effect on employment;
(vi) income
redistribution and social protection;
(vii) the
environment.
The PRSP process takes place in
many stages which may classified as follows:
[i] Identify influential leaders
who can participate in the PRSP process as stakeholders and are willing to
advocate for family planning.
[ii] Conduct analysis of the
current fertility and family planning situation and present it to stakeholders,
explaining linkages with poverty and how family planning contributes to
achieving the Millennium Development Goals.
[iii] Enlist allies among NGOs,
the private sector, and donor agencies.
[iv] Get involved early (ideally)
in the preparation process and stay involved through the annual review process.
[v] Create a task force or
coalition that will continue to meet and monitor the PRSP and family planning
programs.
[vi] In decentralized health and development systems,
pay attention to planning and budgeting at the district level.
[vii] Track progress (through selected indicators) at the
subnational level, so as to monitor progress among the neediest populations.
Pro-poor growth
Policies
The macro,
structural and sectoral policies of the country cases in the 1990s and how they
affected the ability of poor households to increase their agricultural and
nonagricultural earnings provide several important policy lessons. Five policy
messages emerge for agriculture:
• First,
investments in infrastructure connect poor households with economic potential
to higher growth markets in small towns and urban areas, particularly in the
low income countries of Sub-Saharan Africa and remote areas of the Asian and
middle income countries in the sample.
• Second,
strengthening property rights of poor households, and in particular women, and
reinforcing market institutions that support fair and equitable land
transactions strengthen the investment incentives for small farmers and
facilitate out-migration from agriculture.
• Third,
creating an incentive framework that does not discriminate against those
economic activities where poor households are engaged (as was the case prior to
the reforms for export crops in many African countries) is essential for pro-poor
growth. In addition, when carrying out price and trade policy reforms, which
will expand long-run growth opportunities, there may be some short-run
transition costs that are particularly difficult for poorer farmers to incur.
• Fourth,
improving the technology available to both men and women smallholders in arid
climates, particularly food crop producers, raises the incomes of poor rural
households and helps meet rising urban demand for food products, particularly
in Sub-Saharan Africa.
• Fifth, helping
poorer households reduce and cope with risk helps avoid deprivation but also
has important secondary effects. The study identified four policy lessons:
• First, the
quality of the investment climate, including the macro and trade framework, and
the incentives for labor-intensive production.
• Second, access
to secondary and girls’ education is important for poor households, given the
growing skill bias of non agricultural employment. Increasing girls’ education,
associated with falling fertility rates and rising female labor market
participation, is essential in a pro-poor growth strategy.
• Third,
designing labor market regulations that balance workers’ needs and employers’
needs, while reflecting the country’s capacity to implement the regulations,
can expand attractive employment opportunities for poor workers in the formal
sector.
• Fourth,
increasing infrastructure access stimulates growth of nonagricultural earnings
in poorer areas. Greater spending is required, but so is addressing the
institutional quality of service delivery and ensuring that core infrastructure
inputs are provided together (for example, roads and electricity).
Pro-poor growth strategies that reflect country conditions underscores that
the priority-setting and phasing of these policies will differ a cross countries—according
to their conditions. Successful pro-poor growth strategies need to be built on
a thorough analysis of what limits the
participation of
poor households in the growth process in specific countries. Ten lines of enquiry
for such analysis are attached to the report. Six characteristics that were particularly
relevant among the case studies are given below.
• Population
density and its degree of urbanization. A country’s population density and
degree of urbanization determine the extent to which transaction costs and
remoteness preclude rural households from participating in growth and the
relative importance of a targeted infrastructure strategy. • Asset and
income inequality. The initial asset and income inequality influences the
poverty-reducing impact of future growth. • Importance of agriculture. The
relative importance of agriculture in the economy and the workforce determines
the need to raise agricultural earnings or encourage mobility. • Climate in
and across sectors. Climatic instability affects agricultural earnings and
the need for risk management initiatives to protect poor farmers and to
encourage their investments in higher yielding but riskier activities. • Fertility.
The fertility rate indicates how women, particularly poorer women (since
they tend to have higher birth rates), can
participate in
the workforce. Where the fertility rate remains high, as for most of
Sub-Saharan Africa, countries should accelerate girls’ education.
• Institutions.
The quality and capacity of institutions (accountability, transparency) for
service delivery affect how much public investments can be relied upon to link
the poor to growth.
Areas for
further research
The experience
of the 14 countries in the 1990s underscores three broad areas of future
research to help policymakers understand how to increase the participation of
poor households in growth and accelerate poverty reduction.
• First, moving
from agricultural to nonagricultural employment was important in raising the
incomes of poor households in many countries.
• Second, the
impact of growth was uneven across regions within countries. The findings may
differ for low and middle income countries and be particularly important for
countries with decentralized governments.
• Third,
political economy considerations often affect the distributional outcomes of
structural and investment policies, often at the expense of poor households.
Five policy
interventions helped to raise the agricultural earnings of poor households in
the 1990s:
• improving
market access and lowering transaction costs,
• strengthening
property rights to land,
• creating an
incentive framework that benefited all farmers,
• expanding the
technology available to smallholder producers, and
• helping poorer
and smaller producers cope with risk.
Finally, as regards political economy and governance is concerned ,the
actual realization of Pro-poor growth policy requires good and strong
governance which must have a short as well as long term vision and
commitment.This ideas is clearly pictured how it operates through several steps which is given below in Chart
-1
Conclusion
The paper
concludes that the poverty-growth nexus is negative but it was verified
ignoring the inequality or income distribution.Agricultural growth has greatest
influence on the reduction of poverty ratio than other sectors of the
economy.The strategy of the IMF and World Bank to dwindle poverty through PRSP
have not been universally accepted to HIPC since it was resulted adverse
effects also. A few country studies showed the negative nexus. Some proposal of
policies regarding pro-poor growth strategies and new areas of research were
analysed clearly in the light of GPRS..
CHART - 1
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