Transcript Pro-Poor Growth:

Conference: “Taking Action for the World’s Poor and Hungry People”
Beijing, October 2007
Economic Growth is Not an
Antipoverty Policy
Martin Ravallion
Development Research Group
World Bank
1
Two influential paradigms for antipoverty policies
Paradigm 1: “Growth is sufficient”
• “The only thing that really matters to fighting poverty
is economic growth”
• Rising inequality is the unavoidable by-product of the
economic growth needed to reduce absolute poverty
• “Inequality should not be a concern in poor countries”
Paradigm 2: “Growth PLUS”
• Rapid poverty reduction requires a combination of
economic growth with pro-poor social policies.
2
Questions for this talk
What does theory and evidence now suggest about the
validity of paradigms 1 and 2?
Is there an aggregate equity-efficiency trade off?
What policies are needed for rapid and sustained
poverty reduction?
Can those policies be neatly separated into “pro-growth”
and “pro-equity”?
What about policy implementation? Can we make
sense of systematic governmental failure, even when
we know what to do?
3
Inequality and growth
revisited
Two stylized facts have emerged from the data
4
Stylized Fact 1:
Little or no correlation (either way) between changes in
inequality and rates of growth amongst developing
countries
.8
Difference in log Gini index
.6
.4
.2
.0
-.2
-.4
-.6
-.8
-1.6 -1.2 -0.8 -0.4
0.0
0.4
0.8
1.2
5
Difference in log mean
Stylized Fact 2:
Poverty measures tend to fall with aggregate
economic growth
Proportionate change in the
$1/day poverty rate
1.0
0.5
0.0
-0.5
-1.0
-0.3
-0.2
-0.1
0.0
0.1
Proportionate change in survey mean
0.2
6
Empirical caveats on SF1 and SF2
1.
2.
3.
4.
Some signs of a positive correlation since the early
1990s, though not very robust
Churning under the surface; gainers and losers at
all level of living
Measurement errors galore! However, seems
robust.
Conceptual confusions, e.g., relative vs. absolute
inequality =>
7
Relative inequality
Absolute inequality
15
Annualized change in absolute Gini index
Annualized change in relative Gini index
10
5
0
-5
-10
-0.2
-0.1
0.0
0.1
Annualized change in log mean
0.2
10
5
0
-5
-10
-15
-0.2
-0.1
0.0
0.1
0.2
Annualized change in log mean
8
Dubious policy inferences
from SF1 and SF2
9
Growth is not a policy!
• Stylized Facts 1 and 2 do not tell us that growthpromoting policies will reduce poverty and have no
effect on inequality.
• For that we need to establish that those policies:
– do in fact promote growth, and
– do not have systematic and strong distributional
effects favoring the non-poor
10
Nor do SF1 and SF2 tell us anything
about redistributive policies
• Stylized Fact 1 does not imply that policy makers
aiming to fight poverty in any given country can safely
focus on economic growth.
• All SF1 tells us is that, on average, there as been little
effective redistribution in favor of the poor.
– It does not tell us that re-distribution rarely happens
– or that distribution is unimportant to the outcomes for poor
people from economic growth
– or that social protection policies are unnecessary.
11
Inequality and the pace of
poverty reduction
12
The extent to which growth is propoor has varied enormously between
countries and over time
•
•
With 95% confidence, a 2% rate of growth will
bring anything from
– a modest drop in the poverty rate of 1% to
– a more dramatic 7% annual decline
Two proximate reasons:
1. Distributional changes during growth spells
2. Differences in initial inequality
13
1. Distribution changes a lot, and
the changes matter to progress
against poverty
– The median rate of poverty reduction is 10%/year
in the countries with falling inequality
– and barely 1%/year in those with rising inequality
Annualized change in relative Gini index
10
1%
5
0
10%
-5
-10
-0.2
-0.1
0.0
0.1
Annualized change in log mean
0.2
14
The pattern of growth matters
• Growth can be far more pro-poor in certain sectors
– Agricultural growth in China, helped by low land
inequality
– Agriculture and (esp.) services sector growth in India
– Services sector growth in Brazil
• Geographic imbalances in the growth process can
also stall overall rates of poverty reduction.
– India’s growth since early 1990s has not favored the
areas where poor people are concentrated
– China’s growth has favored coastal areas over inland
15
2. Even if distribution does not
change, high initial inequality impedes
poverty reduction
How long will it take to bring the poverty rate down
from 40% to 20% with 2% annual growth rate?
• Low-inequality country (Gini=0.30): 11 years.
• High inequality country (Gini=0.60): 35 years.
• Note: the argument works in reverse: high
inequality protects the poor from negative macro
shocks.
16
A growth-equity trade-off?
Will the PLUS policies undermine growth and
(hence) poverty reduction?
Do growth policies have adverse distributional
effects?
17
Theory: High inequality can be
inefficient and (hence) retard growth
Economic theory now questions the old presumption
that there will be an aggregate trade-off.
Two main arguments:
1. Credit-market failures
=> inequalities in wealth create inefficient
allocations of investment opportunities.
• More poor people means more credit-constrained
people and hence lower investment and growth
18
Theory: High inequality can be
inefficient and (hence) retard growth
2. Political economy
• High inequality also makes it harder to achieve
efficiency-promoting economic reforms that require
trust and cooperation
• In the long-run, resilient economic inequalities are
reflected in political inequalities.
=>
The institutions that develop in very unequal
contexts are less conducive to the protection of
property rights, innovation and growth (WDR, 2006)
19
Good and bad inequalities
• Good inequalities reflect and reinforce marketbased incentives that foster innovation,
entrepreneurship and growth
• Bad inequalities prevent certain segments of the
population from escaping poverty; inequality of
opportunity (WDR, 2006)
–
–
–
–
–
Geographic poverty traps,
patterns of social exclusion,
inadequate levels of human capital,
lack of access to credit and insurance,
corruption and uneven influence
• Bad inequalities are rooted in market failures,
coordination failures and governance failures
20
Evidence 1
• Countries with higher initial inequality
experienced lower growth controlling for other
factors
– Concerns about these tests (aggregation biases,
omitted variables)
– Sub-national and micro evidence still coming, but so far
more supportive of the hypothesis that high inequality is
inefficient.
• But none of this is about policies per se!
21
Evidence 2
• Mixed evidence on the distributional effects of
growth-promoting policies
– Trade reforms: Aggregate distribution neutrality (China,
Morocco,…) though strong horizontal inequality effects
– Other reforms: Still much we do not know, though
methodological problems abound
• Even weaker is our knowledge about the
aggregate efficiency impacts of successful
redistributive policies
• The jury is still out
22
Revisiting the separabilty case for
“Growth PLUS”
• Neat if we could have one set of policies for growth
and one set for redistribution.
• The claim: More rapid poverty reduction is possible
by combining the two.
– Growth policies create economic opportunities
– And growth makes it easier to finance progressive policies.
– The PLUS policies help assure that the poor are able to take
up the new opportunities in a growing economy or to
compensate those who can’t.
• However, the separability assumption is a strong one
– We know that some growth promoting policies have
distributional effects
– And that distributional policies have potential efficiency
implications
23
Two country examples
24
China: “Growth is sufficient” at work?
• Yes, rapid growth with rapid rise in inequality =>
• But China’s story does not vindicate Paradigm 1
• No sign of a poverty-inequality trade off
– The time periods of falling inequality saw more rapid growth
– The provinces with more rapid growth did not see a more
rapid rise in inequality
• Pattern of growth was key:
– Agriculture and rural development is far more povertyreducing than industry or services
– The bulk of the poverty reduction came from AGR reforms
(household responsibility system, price reforms, lower taxes)
• Arguably there is a counterfactual development path
for China with more rapid poverty reduction
25
40
36
Gini index
(right axis, %)
28
60
50
40
30
32
24
Headcount index
(left axis, %)
20
10
0
1980
1985
1990
1995
2000
26
Brazil: Growth PLUS at work?
• Services sector growth is more pro-poor than
agriculture or industry
• Change in policy regime around 1994
– stabilized prices + trade liberalization
• Pattern of growth switched away from the services
sector; higher growth but less pro-poor pattern of
growth
• A combination of higher overall growth and
redistributive social policies meant a higher rate of
poverty reduction post-reform
• However, overall pace of poverty reduction is still low.
27
The challenge of
implementation
28
Implementation is probably easier in
low-inequality countries
• We can probably identify pro-poor policies
appropriate to a given setting
• Political implementation is the real issue
• In low-inequality countries, high poverty will tend to
generate a demand for sound policies to fight poverty
poverty
A
the policy impact curve
the political
implementation
curve
pro-poor policies
29
A “high poverty + poor policies” trap
in high inequality countries?
• High poverty and inequality can be self-perpetuating
by impeding pro-poor policies
=> Multiple equilibria are then possible:
poverty
the political
implementation
curve may well be
downward sloping
in high inequality
countries
A
the policy impact curve
B
pro-poor policies
The big policy challenge: How do we move from A to B?
30
In conclusion:
“Growth is sufficient” misses
the point
And “Growth PLUS” is a patch-up at
best
31
Neither paradigm constitutes an
adequate poverty reduction strategy
• Given the diverse impacts of growth on poverty, it is
clear that something else is needed.
=> Growth PLUS
• However, this is still incomplete without a deeper
understanding of:
1. the distributional impacts of growth-promoting
policies.
2. the growth impacts of the PLUS policies.
32
How to achieve more pro-poor growth?
• Develop human and physical assets of poor people
• Help make markets work better for the poor, esp., for
credit, land and labor
• Remove biases against the poor in public spending,
taxation, trade and regulation
• Promote growth in key sectors (agriculture and rural
development; services)
• Invest in local public goods in poor areas with
economic potential
• Provide an effective safety net; short term palliative
and (possibly) a key instrument for long-term poverty
reduction
33
Monitoring and evaluation is key;
so is flexibility
• Sensitivity to country context is crucial for assessing
what set of policies is pro-poor.
• Continuous monitoring of progress and evaluation of
specific policies/programs is a crucial input to
effective domestic and international efforts against
poverty
• Lesson from China: Experiment with policy options;
scale up the success, and drop the failures.
34