Growth Policy and Poverty Reduction

In his remarks on the East Asia crisis and the financial hypocrisy summarized in the post below this one, Joseph Stiglitz says:

The poor were among those who bore the biggest burden of the crisis, as wages plummeted and unemployment soared. As countries emerged, many placed a new emphasis on "harmony," in an effort to redress the growing divide between rich and poor, urban and rural.

They gave greater weight to investments in people, launching innovative initiatives to bring health care and access to finance to more of their citizens, and creating social funds to help develop local communities.

Dani Rodrik discusses whether "investing in people" is always the best growth strategy:

Pro-poor growth, social growth, or just growth?, by Dani Rodrik: Income per head in a landlocked African country stands at a fraction of levels it had reached in the 1970s, with only the last few years seeing some decent economic growth. What kind of a growth strategy should this country follow? A strategy that focuses on expanding employment opportunities in the rural areas where most of the poor live? Should it consist of expanding their capabilities, by investing directly in education and health? Or should it focus on wherever the economic activities that will provide sustainable sources of income growth into the future lie, even if these may be in mostly urban areas and likely to foster greater inequality in the short-run?

These are the unexpected questions which a meeting with the World Bank raised... When my colleagues and I pushed for a growth strategy that focused, well, on growth, the reaction from the World Bank staff present was skeptical. It was pro-poor growth they wanted. ... Growth should be social growth, which means investing in people...

Here is how I see it. Having a growth strategy that focuses on growth proper ... does not mean that you don't care about poverty or inequity. It just means that you recognize different targets require different strategies. I recognize that a growth policy may not necessarily achieve significant poverty reduction in the short-run. That is why there is always room for social policy. Growth policy is not social policy--at least not necessarily in the short to medium-run (although in the long-run it probably is the most effective social policy we can think of). But it is indispensable to generate a sustainable increase in the economy's resources and long-run living standards. ...

And by the same token, social policy (targeting the poor directly) should not be confused for a growth strategy. Trying to come up with "pro-poor growth strategies" may backfire if it shortchanges us on growth while distracting us from the need for proper social policies.

Comments

[anne]

An interesting question that I will think carefully about, but my supposition has long been that growth policy is only effect when combined with povert reduction policy. Can anyone present an instance otherwise? When was effective growth policy in America not combined with poverty reduction policy? What was our expansion before and after homesteading about? What was public schooling about?

China's sustained development surge would have been impossible without rural and urban public assistance from the beginning, from schooling to hard infrastructure. A freely passable road from a village changes prospects immediately as any African understands.

[ken melvin]

I'm going to go way out on a limb here and say that it is not about growth. It is, or should be, about increasing the living standards of everyone in a manner sustainable.

[paine]

social policy
as a pro poor ..grrowth policy
is just updated charity
mascarading
for the soul benefit of the "giving class"

secular goo gos
translate pro poor growth
into caring

the policy itself
is really at its noblest
a containment policy
a way to warehouse
the presently unexploitable excess toilers

why all the talk of more ed ???

uplift uplift
not finding jesus that's dangerous actually
but bolting the poor beggars
with some
enlightenment lightning strikes

that's the new
missionary position

[paine]

dropped a set up line
vanity requires i reload

sitting quietly
on your bench in an out door "class room"

awaiting "the words
that will set u rising toward prosperity "

that is
the new missionary position

[Barry]

Dani Rodrik: " I recognize that a growth policy may not necessarily achieve significant poverty reduction in the short-run. That is why there is always room for social policy. Growth policy is not social policy--at least not necessarily in the short to medium-run ..."

Perhaps the big divide between liberals and economists is that most liberals don't believe that. We've heard too many economists talk about anti-powerty programs distorting the markets, and therefore (somehow) reducing growth.

We've seen too much IMF destruction, heavily and directly concentrated against social policies favoring the poor.

We've seen too many economists telling us to wait for the long-run, which either never comes, or comes with economists telling us (again!) to wait for the long run.

[calmo]

"soul benefit" twas good
an distractin...
if twernt for
"grrowth" that
wet me pants

the dangers of readin
paine unprepared, you know?

[Nu]

"social policy
as a pro poor ..grrowth policy
is just updated charity
mascarading
for the soul benefit of the "giving class"

Paine, I love you.

[Jack]

Ah, the old trade off between growth and equity. It always seems economists want to emphasize growth policy over distribution policy, probably because wealth distribution is more of a moral than a technical matter, which means they have less to say on it. Because of this I am always suspicious when economists talk about concentrating on growth rather than distribution, (even though here, in the case of poor, developing countries, such a move is probably warranted). It seems that economists always try to put off such discussions of distribution in order to concentrate on growth because it keeps economists more relevant to the conversation.

[ken melvin]

For such paine they should pay.

[calmo]

I dunno.
With the dilution of the veracity of prose
As we know it:
Plonked on the newsprint (for cromagnons like rdf and me)
or paraded shamelessly on the (even more) disposable forms (TV news et al) [just try gettin your mitts on an older newsclip an see if it ain't so],
izit any wonder that the wider dimensions
of poetry
have its attractions?

The response here, "true"
(ok, "false"...B combative, I love it.)
is a misplaced bark for those upancomin wolf cubs
who are done fetchin every stoopid little thing.

I'm startin to only hear howls, you?

says...

How many examples can you think of where governments have enacted significant social, redistributional policies, where development outcomes have fallen drastically because the govt failed to account for the effects on growth? I can think of lots.

How many examples can you think of where governments have enacted strong growth policies, where development outcomes of the lower incomes has fallen? I can think of lots.

Ultimately, you need both. The question should be, how much of one or the other, not whether one or the other.

[Meh]

It's worth noting that if a country is in receipt of "money from the sky" (as some have called "foreign aid") then the way that money is spent in a democracy might not be purely a matter of simply assuring growth.

In the short term, projects around clean water may significantly reduce the death rate which may be as good a "utilitarian" use of the money as investing for longer term growth and, crucially, may represent a more correct fulfilment of the democratic mandate of the government.

[anne]

Simply to write a reasonably spelled sentence: my supposition has long been that growth policy is only effective when combined with poverty reduction policy. I can think of no exceptions which is why as Brad DeLong would continually complain a decade ago development economics seemed such a fruitless pursuit through the 1900s. With DeLong I am convinced there has been a profound change these last 15 years.

These last 5 years have marked what I find the fastest deepest growth period for developing economies in a century.

[notsneaky]

"Because of this I am always suspicious when economists talk about concentrating on growth rather than distribution, (even though here, in the case of poor, developing countries, such a move is probably warranted)."

If anything, it's the opposite. Poor countries are, by definition, poor, and hence there isn't that much stuff to redistribute. If a country has a per capita income of less than 1000$ per year (PPP adjusted, all that), then no amount of redistribution, up to perfect equality, can raise that.

[Random African]

"These last 5 years have marked what I find the fastest deepest growth period for developing economies in a century"

and weirdly enough, pro-poor growth strategies have been less popular in the past 5 years.

[anne]

Random African makes a profound point:

"These last 5 years have marked what I find the fastest deepest growth period for developing economies in a century"

and weirdly enough, pro-poor growth strategies have been less popular in the past 5 years.

Please do continue the thought which I will think about carefully, and which I agree with and which I find frightening.

[notsneaky]

In the literature the effect of growth on poverty is known, surprisingly, as "the growth elasticity of poverty". Standard (i.e. most common) estimates are that it is 3. A 1% increase in average income is associated with a 3% decrease in the poverty rate (as measured by the headcount). So, on average, growth is a pretty effective poverty reducing strategy.

However, other things matter too. There's some research which suggests that more equal countries get more poverty-reduction benefit from growth than unequal ones. A relatively equal country like Indonesia (gini of about .32) has a growth elasticity of poverty of about 5 (1% up in mean income is associated with a 5% decrease in poverty rate) while a relatively unequal country like Brazil (gini of about .57) has an elasticity of about 2.

I'm somewhat skeptical of empirical work that has both the Gini and average income in the same regression but these results seem plausible.

[anne]

Interesting; but the way in which we understand equality has to be more subtle in construction, focusing on resource availability from education to hard infrastructure rather than merely personal asset command.

[Random African]

"but the way in which we understand equality has to be more subtle in construction, focusing on resource availability from education to hard infrastructure rather than merely personal asset command"

why ?
to avoid the special cases in which unequality in income/assets does not translate in inequality in ressources availability ?

[anne]

We should think about the tragedy in Bangladesh and who is effected and how and why. Try to look to the pictures and notice that the poor are those profoundly effected. The poor live in the most vulnerable areas, in the poorest conditions to fend for themselves no matter community strength and will take the longest to recover of themselves.

China just weeks ago had passed through a typhoon in the south that was handled astonishingly. There were several millions evacuated, property was remarkably protected, the property of common households, and recovery was almost immediate given the remarkably sound infrastrucutre to take advantage of. there is an equality in China in this regard, an equality not evident in Bangladesh no matter the indexing.

[anne]

We can command community assets along with personal assets. Education command is command of a community asset, as is command of hard infrastructure. Community asset command can save a community from a typhoon as well as affordingg healthy infants by affording clean drinking water.

[Random African]

Continental China has more than twice the per capital GDP of Bangladesh.
and that's excluding Hong Kong and Macao, that are both in the south.
and that's with coastal China being far richer than the interior.

does that have an influence on the availability of say solid housing, government response and stuff and stuff ?

[anne]

Absolutely; geography matters and where we begin a development cycle matters lots. Bangladesh needs assistance, and I surely do not like looking at topographical maps of Bangladesh as I have in the past. But, there is a severe need of urban infrastructure development, much more of an urban population base focus, that has been lacking.

I am not being critical, simply having read, now thinking.

[Lafayette]

Article (Rodrick): And by the same token, social policy (targeting the poor directly) should not be confused for a growth strategy. Trying to come up with "pro-poor growth strategies" may backfire if it shortchanges us on growth while distracting us from the need for proper social policies.

Interesting commentary, but beating about the academic bush. For which the World Bank is infamous.

Lets look at growth strategies that work, meaning function in a dirt-poor country. First, one must assure base infrastructure. Sick and stupid people are not good "human capital" for growth. Roads that wash out at the first rainfall aren't the best for getting your produce to market. (And, frankly, let's forget about investing in the development of mineral wealth -- nine times out of ten it is already in the hands of the power elite who are milking it wildly to build their villas somewhere else in "civilization": meaning, likely, wherever they went to university in Europe or North America.)

Let's look at what works, and what works is micro-credits that give farmers the wherewithal to buy seed and market women to purchase (for retail) farm produce. Micro-credits, expanded, can get farmers the most basic land-plowing motor-powered mechanisms, such that they do more with less. Or, why not micro-leasing (rent to purchase)?

And, why not negotiate special oil import prices from the Middle East destined for such purposes. Yes, difficult to administrate and police, I admit. But, this is what Bill Clinton did to get Africa price-acceptable AIDS medication for the African poor.

In terms of natural resources, places like Africa and Indonesia are being literally raped. Their wood reserves are being exported wholesale without any transformation whatsoever.

Here's an example: A program that trains woodworkers, that is, craftsmen who can add value to wood by producing chairs, tables, beds -- furniture of all sorts for the home. This is the sort of down-to-earth strategy that can work. For as long as those people are assured a fair return for their value-added labor transformation of tree-trunks. This requires capital input, however: Saw mills, wood-working machines, assembly lines, transportation to market, etc.

Meaning this: Target the needs at the most base level, and focus on what is already available as a resource. (Easier said than done, that.)

The success of such "grass roots" growth strategy depends upon "fair-trade" market policies which developed import countries should exact from their importers How is that done? Good question. Let's answer it.

My take on the answer: First and foremost, is a "Fair Trade" tag on such articles -- on sale at your local mall -- such that consumers know that it wasn't produced by 10 year old boys in a sweat shop. And a commercial campaign that heightens customer awareness of just what such a tag means.

[Lafayette]

And I didn't even mention Abortion Clinics. Until the poor, undeveloped countries get population growth under control, they are condemned to poverty.

It's as simple as that.

[Lafayette]

RA: to avoid the special cases in which unequality in income/assets does not translate in inequality in ressources availability ?

Call it what you like, but after half a century of state-to-state handouts in the Third World, the bulk of which ends up in a villa on the Cote d'Azur or some bank account in Switzerland, what is meant is money-that-works.

The classical African challenge is tribal elites-in-power with their hands on the financial levers, making sure that incoming donated funds serve first themselves and then their people.

Which is why there are NGOs all over the place, trying to assure that the funds get to where they should go. Problem is, they are bailing against the tide. Handouts remain handouts. They debilitate the person obtaining them by making them dependent, like a narcotic.

Micro-credits work because they carry with them obligation to repay. It is amazing what such obligations can do to give people a bit of personal discipline. Micro-credits work because people pay them back.

[reason]

Lafayette

to buy seed and market women

Taken out of context I know, but maybe you might want to rephrase that!

[Random African]

Lafayette,

that's a lot of clichés in 3 posts.

[Lafayette]

reason: but maybe you might want to rephrase that!

Take your mind out of the gutter! ;^)

Market women are those who work retailing produce in town markets. They are invariably related to the producers for fruit, vegetables, fish and meats.

At HarBus, they'd call it "Vertical Integration"! In Africa, it's just the family at work. (Which is why we are not likely to see a Harvard B-school campus opening in Kenya anytime soon ....)

Really, what the World Bank should do is stop hiring development economists and start hiring people who know third-world village markets. Anybody can learn the ins and outs of micro-credit lending in a week. (NB: The defaults on these credits is amazingly low.)

But, I don't think they like to get their hands dirty with micro-anything. They like the Big Picture.

[Lafayette]

RA: that's a lot of clichés in 3 posts.

Is that all you've got as rebuttal? Waste of bandwidth. How's that for a cliché?

You can do better. C'mon, try harder.

[Random African]

it sure wasn't not all i got for a rebuttal, Lafayette.
it's just that I didnt have the time to adress each of your clichés. But since you ask so nicely:

what you say about who benefits from mineral wealth is weird.. I mean do you have an idea of the number people who directly make their livelyhood in the sector ? and the number of people working in sectors that depend from the mining industry ? or the extra capacity most countries have ?
I mean what's wrong is that people tend to look at ownership and royalties and deduct that "the people" don't benefit from it without looking at the well-pais jobs opportunities created. i mean how the hell do you explain how Lumumbashi has a million inhabitants ? certainly not from hand outs.

you mentionned wood reserves. well, first of all Timber exploitation creates lots of jobs in remote places. sure often at the expense of local populations but then again the state propriety/permit structure is already robbing locals from their propriety. The recent renewed interest in African timber is due to the Malaysian ban on rough timber export. But then again, the malaysian government was less concerned about royalties than with making sure more employment and investment were created/made in the country. once again, rapped is not the word.

and hand-outs ? dude, people who gave money to kleptocratic dictatorships knew what they were doing. why don't go and think about the motivation of the people who supported Habyarimana, Mobutu, Bokassa or Biya ? or alternatively why don't you go ask your government why did they pressure the World bank to gove debt relief to a regime who openly admitted they can't account for part of their oil revenue ?
loans, aid, debt relief is pork but at the international level. The goal is to help friendly rulers (no matter why they're considered friendly) and therefore help them stay in power. handouts they're surely not.

i really could go on but i have better things to do.

[anne]

http://www.irinnews.org/PrintReport.aspx?ReportId=75139

Thinking about infrastructure and development, the United Nations reports that 47% of Bangladeshi chuldren do not complete primary school. This could not have been the case in China since the 1950s, and surprises me.

Bangladesh spends less of its national income on education than any souta Asian country, 50% less than the World Bank suggests and the World Bank suggestion should I have argued be higher than the current 4%. Primary education is defined as 5 years. I would expect then that girls especially seldom finish primary schooling.

The preliminary sense I have is that soft and hard infrastructure development efforts in Bangladesh have worsened in recent years, but why if so would that be?

Still, poverty reduction and growth absolutely go together.

[Random African]

"The preliminary sense I have is that soft and hard infrastructure development efforts in Bangladesh have worsened in recent years"

i seriously doubt that.
and poverty reduction depends on growth more than growth on poverty reduction.
like Notsneaky said a bigger pie = more to share.
or alternatively how do you fund all that hard or soft infrastructure ?

[anne]

I am not impressed with recent Bangladeshi development comments from the United Nations, and know there has been considerable protest and repression in fairly recent months, but I will in time know much more.

[Patricia Shannon]

On variable that affects economics is climate.
If you've lived w/o air conditioning in the south, you know heat saps your energy. Once it gets over 95 F, about all I'm good for is lying down with a fan blowing on me. I would think that even people whose ancestors are native to tropical lands, and thus probably have more adaptation to the heat, would be less energetic in the heat.
And tropical regions have much more problem with parasites.
In some regions of Africa, virtually everybody w/o the sickle cell trait gets infected with malaria. Fortunately, some progress is being made against malaria.

http://www.sciencedaily.com/releases/2007/03/070308121847.htm

ScienceDaily (Mar. 9, 2007) — An article published in 'The Lancet' by researchers from the Menzies School of Health Research (MSHR) in Darwin has revealed a breakthrough in the battle to treat Malaria -- a disease which effects 40 per cent of the worlds population.

[Lafayette]

Thank you, RA, for some value-added thought in rebuttal. It is so rare around here.

RA: I mean what's wrong is that people tend to look at ownership and royalties and deduct that "the people" don't benefit from it without looking at the well-pais jobs opportunities created.”

You are right. These people are a piddling amount (working in mining or forestry) compared to the vast numbers condemned to eking out a living from agriculture.

Besides, they are fairly well paid. But, the profits from these operations go first to the foreign investors and secondly to the empowered tribal factions. If a Mobutu was able to stay in power so long, it was because he paid to keep the tribes silent. This worked until the very end.

And, that story, in one form or another, can be repeated throughout Africa, which is beset with the sociological challenges of ingrained tribalism. (We don’t call it that in the Middle East, but it is tantamount to the same thing. And, in the US, we call it “Income Inequality”, but it is, in substance, not different.)

RA: alternatively why don't you go ask your government why did they pressure the World bank to gove debt relief to a regime who openly admitted they can't account for part of their oil revenue ?

All good questions. But, none of the answers will save Africa.

Don’t blame miscreant western democracies for playing factions against one another in Africa during the Cold War. It was done all over the globe. Africa was just one more sad chapter in the book of Insane Cold War Foreign Policy.

Back to basics: What can help Africa LONG TERM out of its mess is to build a capital-based internal economy. And the way to do that is micro-credits (and micro-leasing) to get to farmers the wherewithal to exploit agriculture more efficiently.

Until recently, African nations complained that the US and Europe were exporting cereals at below cost (subsidized) prices that even African farmers could not compete with. Since there was no financial incentive, African farmers were not motivated to pursue its production. OK, I'll grant that such may have been true.

Well, God Bless Us, the cereal prices have gone through the roof. So, what is Africa’s fall back argument now?

Think quickly. I’m sure you can come up with something plausibly rational.

But, in the end, Africa has got to stop making excuses for itself. Above all, repeatedly blaming inane Western foreign policy is getting really and truly borrrrr-ing.

i really could go on but i have better things to do.

Yes, disdain suits you so well. Thanks for the visit.

Come back when you are not so bored.

[Stefan]

"Growth policy is not social policy--at least not necessarily in the short to medium-run (although in the long-run it probably is the most effective social policy we can think of)..."

Domestic politics is what really undermines growth and poverty reduction. Growth is great for the poor in the long-run, but often not so good in the short-run. Politicians are myopic and will rather support short-run policies which make little real change.

[Lafayette]

Stefan: Politicians are myopic and will rather support short-run policies which make little real change.

BigMoney decides

And that will not change in a country where the vested interests of BigMoney decides who gets elected.

Until Americans demonstrate that they are impervious to campaign media funding, then nothing will change the way politicians are elected.

Why not have ALL political candidates subsidized for either state or federal government campaign expenses? This next presidential campaign is estimated to cost close to 500 Megabucks. That's insane.