CAN ECONOMIC GROWTH LEAD TO POVERTY REDUCTION?
MANSOOR M. DHANANI
Apr 11 - 17, 2011
The biggest tragedy of the mankind in the present world is poverty. Enormous progress has been made by mankind in every aspects of life. At one end mankind is spending billion of dollar to travel outer space for the search of living planet and on the other end almost half the world population live on less than $2.50 a day earning (World Bank Indicator 2008).
Every year some 10 million children die from easily preventive illness. Around 1.2 billion of the world's population live without safe water and 2.4 billion not have access to improved sanitation. Three quarter of world income belongs to 20 per cent of rich countries. Every year developed countries are spending billion of dollar on the weapons but if the little percent of this can be invested, every child on the earth can be able to attend school.
Poverty is widespread in many parts of the developing world and becomes a predominant subject for academics, institutions and policy makers. Before 1970s, poverty was not a central issue in the development studies. In 1970s, the World Bank shifted its focus from growth to poverty reduction. Similarly, International Labour Organization (ILO) initiated a basic need approach of poverty to development approach of poverty. In 1980s, two different thoughts of concepts were presented by Foster, Greer and Thorbecke (FGT) about the measure of poverty incidence. Similarly, Amartya Sen presented the definition of poverty in the light of entitlements and capabilities in late 1990 and early 2000. In October 2000, 180 countries signed the Millennium Declaration, pledged to meet the Millennium Development Goals (MDGs) by 2015 and the first and most important MDG is to reduce poverty by half by 2015.
In the decades of 1960s and 1970s, the definitions of poverty has been defined as relating to either lack of financial income or lower social status to fulfil the basic needs. In the last two decades, different concepts have been presented with regards to poverty. The well knows economist Amartya Sen defines no-poverty as "To meet nutritional requirements, to escape avoidable disease, to be sheltered, to be clothed, to be able to travel, and to be educated". Similar definition was presented by World Bank (2005) with little addition that poverty is deprivation in well-being. It includes low income, inability to acquire the basic goods and services necessary for survival with dignity. In additional, low levels of health and education, poor access to clean water and sanitation, inadequate physical security, lack of voice, and insufficient capacity and opportunity to better one's life are also described as poverty. The more elaborate definition about poverty has been presented by United Nations. According to UN (June 1998), "Fundamentally, poverty is a denial of choices and opportunities, a violation of human dignity. It means lack of basic capacity to participate effectively in the society. It means not having enough to feed and cloth a family, not having a school or clinic to go to, not having the land on which to grow one's food or a job to earn one's living, not having access to credit. It means insecurity, powerlessness and exclusion of individuals, households and communities. It means susceptibility to violence, and it often implies living on marginal or fragile environments, without access to clean water or sanitation". All these definitions are summarizing one important aspect that every human on earth should have capabilities to acquire basic things to enable them to live with dignity and pride.
Economic growth is an increase in the capacity of an economy to produce more goods and services. In other words, economic growth is the continuous increase in the productive capacity of the economy. Economic growth occurs whenever people take resources and rearrange them in ways that are more valuable. Take the example of e-ticket in the airline industry. The invention of e-ticket in the airline industry produced many benefits to industry and customers, likes cost savings, efficient passenger processing, real time access to financial results and provides effective and prompt service to passengers. E-ticket is the simple example, millions of such activities/inventions are required to double the average income of the nation. Economic growth is usually driven by private sector, private firms, and farms. They are responsible for most of an economy's production. Free and competitive market provides incentive to private sector to produce goods as efficiently as they can, to innovate, and to fulfil market demand. Economic growth can be measured in nominal terms, which include inflation, or in real terms, which are adjusted for inflation. For comparing one country's economic growth to another, GDP or GNP per capita should be used as these take into account population differences between countries.
There is an inverse relationship between economic growth and poverty reduction, and mostly implied that more growth would reduce poverty. More and more empirical evidence suggests a close relationship between rapid growth and poverty reduction. Let's take the example of some countries to evaluate whether economic growth can reduce poverty.
According to research article of Agrawal, Pradeep (2008, p.90-115), Kazakhstan is one of the most successful country among post soviet states in Central Asian for achieving high economic growth and significant poverty reduction. After the collapse of Soviet Union in 1990, Kazakhstan's economy has gone through the stages of decline, stagnation, and high economic growth. In the early 1990s, the government of Kazakhstan faced the challenging task to restore the economy of the country. In decade, Kazakh government has created a new constitution and legal framework, restructured industrial and agriculture sector, created a new privatized banking system etc. Indeed, this achievement has made Kazakhstan the most successful economy of the Central Asia. The initial seven years (1990 to 1997) after independence was the period of negative economic growth or zero growth (1990-1998). From 1999, Kazakhstan entered the phase of positive and sustained growth. Over the period of 1999-2007, the average GDP growth was nine per cent. Over the period 1998-2007, the poverty gap in Kazakhstan declined significantly from 39 percent in 1998 to 13.8 percent in 2007. In addition, the Kazakhstan economy received a big boost in beginning of 2003 from the discovery of large reserves of crude oil and gas. These have not only generated substantial revenue for government through export of crude oil, but have also generated growth in many other related sectors of the economy such as construction, transportation, etc., which in turn have generated much employment. The oil revenue has also allowed the government to expand the social security system in a big way. All this has helped Kazakhstan to reduce poverty.
Another great example of poverty reduction through economic growth is China, economy of which has been constantly growing since 1978. According to the World Bank data, the average annual GDP growth of China has been around 10 per cent over the period of 1978-2009 (31-year) which is the longest lasting period with the highest growth rate of GDP per capita and no doubt, the people of China largely benefit from it. This statistics correspond that the GDP per capita is doubling every 8.6 years. According to the estimation made by the World Bank, it took Britain 58 years to double its per capita income (1780-1838), America 47 years (1839-1886), Japan 34 years (1885-1919), South Korea 11 years (1966-1977).
According to the international poverty line, cost of living per capita per day is below $1. The World Bank estimates that Chinaís poverty gap has dropped from 39.25 per cent in 1981 to 3.95 per cent in 2005, showing a decrease of 35.3 per cent. Chinaís achievements in poverty reduction make huge contributions to the cause of poverty reduction of the world. In Asia, China, India, Pakistan, Indonesia, and Bangladesh are the most condensed poverty population countries. According to the international poverty line, Chinaís current proportion of poverty population is the lowest among all five countries. The above statistics demonstrate that in last two decades, China has made tremendous contribution in human history to reduce poverty by a largest margin and reversed the trend of increasing poverty in the past few decades in the world history.
In the course of strong economic growth, Kazakhstan and China are able to reduce poverty significantly. Similarly in East Asia and South-East Asia countries (Taiwan, Indonesia, Philippines, Malaysia), rapid economic growth has helped greatly to reduce poverty. In East Asia, where the proportion of people living in extreme poverty fell from 33 per cent in 1990 to 9.9 per cent in 2004, and in South-East Asia, where the proportion fell from 41 per cent to 29.5 per cent over the same period. The success enjoyed by these countries particularly China has driven global poverty down. However, economic development in many developing countries, particularly least developed countries, has not translated into poverty reduction.
Brazil saw rapid growth in 1970s but then its economy was stagnated or underwent low growth, therefore the country was not able to reduce poverty significantly but reduced poverty up to certain extent through social interventions. In 1970s, Brazil's economy had rapid growth but in 1980s the economy became stagnate. The average annual growth rate of GDP per capita over the period of 1985 to 1992 was negative 0.54 per cent. The per capita GDP regained from 1992 and the average annual growth over the period of 1992-2005 was 1.25 per cent. During the period of 1985 to 2004, the rate of poverty fell only four percent, from 33 per cent to 29 per cent of the population comparing with the developing world where poverty fell from 33 per cent to 18 per cent in the same period. Brazil's result was unsatisfactory in poverty reduction due to low economic growth. However, Brazil was able to reduce poverty up to some extent through social intervention. In 1990s, Brazil has made substantial expansion in the social security and social assistance systems, driven both by increases in coverage and in the average benefits level. As a result, the total monthly benefit bill in Brazil's rural areas rose from US$180 million in 1991 to US$750 million in 1998. Coverage almost doubled, and the average monthly benefit rose from US$44 to US$109.9. Since most minimum pensions are set at the level of the official minimum wage, benefit levels (in both urban and rural areas) also rose with the real value of that wage, which increased sharply in 1994. There is evidence that this increase in social spending helped reduce poverty and inequality.
In the case of Brazil, only 4 per cent poverty fell over the period of 1985 ñ 2004 and this reduction mainly because of social intervention by government. Similarly, in sub-Saharan Africa, the rate of poverty fell only 6 per cent from 47 per cent in 1990 to 41 per cent in 2004 due to slow economic growth.
From the above mentioned examples, it is obvious that the countries which were able to achieve strong economic growth were able to reduce poverty significantly. It is hard to find any country which was able to attain major poverty reduction in the absence of high economic growth. The secret to sustaining growth is basically getting the institutions and policies right. The role of government is very important to create the right conditions for growth. The key ingredients of economic growth are political stability, property rights, a well-regulated financial sector, competitive market conditions, e.g. by limiting state ownership of enterprises. High level of public investment is also required for economic development. Government also needs to tackle market failures, for example, by developing informational infrastructure such as asset registries and credit bureau, and appropriately regulating industries with natural monopoly characteristics such as electricity and water. Successful integration into the global market is also key to economic growth. It is hard to find example of any country which achieved high growth without involving country's economy into the global economy. Access to international markets is important because it is providing a major source of new market and source of investment capital and enabling business to acquire new technologies and other innovations, and a way to stimulate competition, all of which contribute to productivity growth. Will developing countries be ever able to achieve the high economic growth? It is apparent that high economic growth would be difficult for majority of developing countries due to economic crisis, corruption, civil war etc.
Developing countries must adopt the economic reform strategies which should be only poverty focus. Dani Rodrik the Professor of International Economy at the John F. Kennedy School of Government, Harvard University has presented in his article "Growth Versus Poverty Reduction" the three main elements of poverty focus economic reform strategies. First is social welfare intervention. A policy that increases the income of the poor by one rupee can be worthwhile at the margin, even if it costs the rest of the society more than a rupee. From this perspective, it may be entirely rational and proper for a government considering two competing growth strategies to choose the one that has a greater potential payoff for the poor, even if its impact on overall growth is less assured. Brazil example is good to present social welfare by government intervention. Brazil was able to reduce poverty up to some extent through social security and social assistance system. Second, even if the welfare of the poor does not receive extra weight, interventions aimed at helping the poor may still be the most effective way to raise average incomes. Poverty is naturally associated with market imperfections and incompleteness. The poor remain poor because they cannot borrow against future earnings to invest in education, skills, new crops, and entrepreneurial activities. They are cut off from economic activity because they are deprived of many collective goods such as property rights, public safety, and infrastructure and equal market opportunities. It is a standard tenet of economic theory that raising real average incomes requires interventions designed to close gaps between private and social costs. Third, focusing on poverty is also warranted from the perspective of a broader, capabilities-oriented approach to development. An exclusive focus on consumption or income levels constitutes too narrow an approach to development. Nobel Laureate Amartya Sen has emphasized, the overarching goal of development is to maximize people's ability to lead the kind of life they value. The poor face the greatest hurdles in this area and are therefore the most deserving of urgent policy attention. On the other hand, developed world particularly the G8 countries are required to provide foreign assistance to developing countries to invest in those projects, which are productive and can reduce poverty through building infrastructure, giving education, capacity building for macroeconomic management, and introducing market reforms and regulations.
Economic growth is crucial for poverty reduction. Countries likes Kazakhstan, China, East Asia and South-East Asia countries (Taiwan, Indonesia, Philippines, Malaysia) were able to reduce poverty significantly due to high economic growth. Conversely, Brazil, sub-Saharan Africa, and many developing countries experienced the slow economic growth and thus rate of poverty fell marginally.
The secret to sustaining growth is basically getting the institutions and policies right. Therefore, it is prime responsibility of the government of developing countries to execute poverty focus economic reforms to achieve economic growth. Simultaneously, developed countries have the great responsibility to provide all necessary assistances to developing countries for reducing poverty from this world. "Give a man a fish; you have fed him for today. Teach a man to fish; and you have fed him for a lifetime"