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?

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Growth and Poverty Reduction: Pro-poor growth? Slide 2 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? Slide 3 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? Slide 4 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? Slide 5 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. Slide 6 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?). Slide 7 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 poor>incremental increase in the level of income for all of society, Slide 8 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. Slide 9 Growth and Poverty Reduction: Pro- poor growth? So, There is a relative improvement of the poor. This can be shown diagrammatically, Slide 10 Growth and Poverty Reduction: Pro-poor growth? Y, T growth Time Changes in Y, between t and t-1 change in Y for non-poor between t-1 and t change in Y for the poor between t-1 and t: If then pro-poor growth. t-1t Slide 11 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). Slide 12 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 income>share of the number of poor in the countrys population. Slide 13 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, Slide 14 Growth and Poverty Reduction: Pro- poor growth? The change in average income of poor>change 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. Slide 15 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). Slide 16 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!! Slide 17 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. Slide 18 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 Slide 19 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. Slide 20 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 Inequality Growth Leads to Slide 21 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. Slide 22 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. Slide 23 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) Slide 24 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 InequalityLow Growth Slide 25 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 re

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