Economic Growth and Poverty

Is a reduction of poverty always a consequence of sustainable economic growth?”

The World economic growth as measured by the Gross Domestic Product par capita rapidly increased beginning the Industrial Revolution.

But, still poverty is still there.

The 2007 World Bank report “Global Economic Prospects” predicts that in 2030 the number living on less than the equivalent of $1 a day will fall by half, to about 550 million. However, much of Africa will have difficulty keeping pace with the rest of the developing world and even if conditions there improve in absolute terms, the report warns, Africa in 2030 will be home to a larger proportion of the world’s poorest people than it is today. However, economic growth has increased rapidly in Africa after the year 2000.

What could explain this situation?

If the sustainable economic growth is a pre-requisite to the reduction of the poverty, and it will be the first part of this note, the second part will outline that it is not sufficient and that complementary policies have to be implemented.

The third will refer to the OECD role in this regard.

Definition of the poverty

Poverty is generally considered as a multidimensional phenomenon. Its economic dimension is the most frequently taken into account and is broken up into four forms:

  • Monetary,
  • Living conditions (including illiteracy, ill health, nutrition, house property…)
  • Potentialities (lack of means allowing to get out of poverty),
  • Human poverty as measured by the UNDP Human Poverty Indexes (HPI); 2 indexes exist, one for the developing countries and one applied to the OECD countries; it encompasses the cultural, social, political and ethnic dimensions of poverty.

Since the focus here is on sustainable economic growth, the material dimension of poverty is the primary concern, but not the only concern. One cannot define an effective strategy for rapid and equitable growth without addressing the need to enhance capabilities of the poor (through education and health) and reduce their vulnerability to economic shocks. Empowerment is also addressed partially, in connection with the issue of establishing participatory approaches for policy and program management.

For that reason, I will refer to the poverty as measured by the HPI; furthermore, I will limit the analysis of the possible solutions, in part two, to the developing country.

Sustainable economic development.

Sustainable development generally encompasses three policy areas: economic, environmental, and social

This approach entails debate and criticisms coming either from the environmentalists (no constancy of the resources) or from the poorest countries (debate on pollution). This note will outline some possible solutions without pretending to answer to all the stakeholder arguments.

Part 1- The sustainable economic growth is has pre-requisite to the reduction of the poverty

1.1- Strong link between economic growth and monetary poverty

Over the past five years, the quality and availability of international data on income distribution and poverty has improved enormously. From this data, it could be noticed that there is a strong link between the growth of the GDP and the reduction of the poverty. Conversely, a strong link exists between the stagnation or the decrease of the GDP per capita and the increase of the poverty.

As above mentioned, the world GDP per capita has increased constantly and quickly over the last century. During, the same time, the poverty has decreased.

The proportion of the developing world’s population living in extreme economic poverty (World Bank definition: less than $1 per day) fell from 28 percent in 1990 to 21 percent in 2001. Looking at the period 1981-2001, the percentage of the world’s population living on less than $1 per day has halved.

World Bank data shows that the percentage of the population living in households with consumption or income per person below the poverty line has decreased in each region of the world since 1999:

East Asia and Pacific15.40%12.33%9.07%
Europe and Central Asia3.60%1.28%0.95%
Latin America and the Caribbean9.62%9.08%8.64%
Middle East and North Africa2.08%1.69%1.47%
South Asia35.04%33.44%30.84%
Sub-Saharan Africa46.07%42.63%41.09%

Recent studies consistently find a one-to-one to a one to four average relationship between growth per capita income and reduction of monetary poverty.

1.2 Therefore, the situation could be tremendously different according to the countries

Naturally, there is a lot of variation around the above-mentioned average.

Much of the improvement has occurred in East and South Asia. In East Asia and the World Bank reports that “The poverty headcount rate at the $2-a-day level is estimated to have fallen to about 27 percent, down from 29.5 percent in 2006 and 69 percent in 1990.

In Sub-Saharan Africa GDP/capita shrank by 14 percent and extreme poverty increased from 41 percent in 1981 to 46 percent in 2001, increasing the number of people living in poverty from 231 million to 318 million.

Other regions have seen little change. In the early 1990s the transition economies of Europe and Central Asia experienced a sharp drop in income. Poverty rates rose to 6 percent at the end of the decade before beginning to recede.

Of course, the conditions are not the same in each country in terms of resources, history… but, from the observation, one can conclude that the economic growth does not ensure automatically the reduction of the poverty or in the same proportion. The second part will study from what the link between Growth and reduction of poverty depends.

Part 2- Link between the sustainable economic growth and the reduction of poverty: Conditions for creating the link

2.1. Analysis of the main macroeconomic parameters

As previously mentioned, the poverty is the result of several factors and the situation is different from one country to another one. From the panel of solutions which can be applied, no unique solution exists and an analysis by country should be done.

So, it is important to collect date on the main macroeconomic components of growth, mainly, such as:

  • The investment rate (ratio of capital investment to GDP), and
  • The productivity of investment.

(Harrod-Domar model)

The investment rate is determined by savings from two sources: foreign saving (net foreign financing), and domestic saving (in both the public and private sectors).It refers to the expected returns in a context of perceived risks and uncertainty.

The productivity of investment is based on the assumption that investment policies should be designed to stimulate efficient and competitive projects, rather than fostering inefficiency; in other words, the analysis of the sectorial components of the growth is essential.

A range of policy tolls exist for promoting investment and improving productivity.

The third basic factor is the population growth (example of China).

Other theory – the Solow-Swan (SS) model – adds two additional factors to the growth equation:

  • Labor force growth, and
  • Investment in human capital.

2.2. Public policies

An enormous volume of empirical research on economic growth has appeared in recent years. Researchers have studied a wide variety of indicators to establish the most important factors for fostering sustainable growth, through their effects on investment and productivity.

Different studies use various methods, data definitions, and data samples and therefore come up with somewhat different results. Nonetheless, the overall empirical record points to a short list of main growth factors relating to public policy such as:

  • Peace and political stability
  • A consistent record of sound macroeconomic management
  • Investment in education and health
  • Investment in infrastructure
  • Openness to international trade – particularly, export promotion
  • Quality of market-supporting institutions
  • Financial market development.

The aim is to create conditions in which the poor edge participate in, contribute to, and benefit from economic growth so that social poverty can be reduced. This pro-poor growth includes:

  • more investments in infrastructure for poverty reduction and growth through private sector development and regional cooperation,
  • support for productive environmentally sustainable sectors that help the poor, such as finance, private sector development, and the small scale urban and rural economy,
  • research of opportunities for strengthening regional cooperation and cross-border development,
  • Clear policy of redistribution: income but also, land, access to health and education, to water,
  • promotion of a growth process that is environmentally sustainable,
  • promotion of education, health, and social protection systems that strengthen the labour market
  • elimination of gender disparities.

These are the main basis of the policies which are applied today; they are the results of a long process of discussion and experimentation since the years 1970 when economists realised that the economic growth does not always reduce poverty. The OECD plays a role in this debate and goes on to contribute to its progress.

Communication and co-operation is essential if the poverty has to be reduced on a long term run. For the time being, too many divergences exist even inside the development agencies and these can jeopardize the efficiency of the aid by ignoring the institutional or recurring costs or by developing parallel channel of distribution

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