Does Economic Growth lead to Poverty Alleviation? Please compare and contrast very briefly the experiences of China, India and Brazil. What lessons can an African country of your choice learn from these experiences?
INTRODUCTION
The last few decades witnessed a rapid economic growth in developing countries. However, over 88% of the 1.2 Billion world poor (Olinto et al, 2013) live in these countries. (Appendix: Table 1.1) This phenomenon poses the question if the recent growth has been pro-poor .
This essay argues that growth output alone is not sufficient for poverty alleviation; rather complementary measures and policies need to exist to create sustainable pro-poor growth.
The essay has been organized as follows: First, the analytical debate on the correlation (or the lack of it) between economic growth and poverty reduction will be analysed. Second, case studies of China, India and Brazil will be presented with relevant data to make a brief comparison and apply the results to the developmental debate presented above. Third, Burkina Faso, a sub-Saharan country that went through a rapid development phase, will be brought into the discussion to analyse trends and offer recommendations gleaned from BIC experience. Finally, the discussion will be summarized by concluding if the hypothesis set above holds true for all four countries.
While a variety of tools and measures exist in the literature for poverty measures, the current essay will use the revised poverty line of $1.25 per day on a purchasing power parity basis and the popular head-count index (Chen and Ravallion, 2009; Ravallion et al, 2008).
ANALYTICAL DEBATE
The debate surrounding growth and human development resurfaced when the absolute poverty in the developing world dropped to 21% in 1990 from 43% in
2010, lifting 280 Million above the poverty line. (The World Bank, 2012; Appendix: Figure 2.1).
Unprecedented growth of China, India, Latin America and few African countries contributed to this massive poverty reduction. Rodrik (2007) and Kenworthy (2011) mention that historically economic growth has reached those at the very bottom.
A report published by DFID (2008) argues that growth is the most powerful instrument for poverty reduction and, thus, it should be at the heart of all development policies. Cross country studies carried out by Chen and Ravallion (1997), Adams (2002) estimates 10% increase in a country’s average income will reduce the poverty rate by between 20% and 30%.
Two more flagship studies, Besley and Cord (2007) and OPPG (2005), present conclusive arguments through cross country empirical evidence that on average, 1% increase in per capita income reduced poverty by 1.7% per cent. (Appendix: Figure 2.2 and Figure 2.3)
In Besley and Cord (2007) above, two authors Menezes-Filho and Vasconcellos (p. 219-243) draws on Brazil’s experience in creating pro-poor growth. In the book overview, Cord (p. 9) agrees that growth elasticity of poverty is negatively related to initial inequality and any increases in inequality further increase poverty incidence. He further states, “The factors conducive to pro-poor growth are those that improve the level of income and decrease income inequality”. This view is shared by the opponents of the current debate too.
Ravallion (2001) too observes the chance of growth being accompanied by increasing or decreasing inequality is roughly equal. However, a series of studies using cross-country data suggest that growth has neither a positive nor a negative effect on inequality. (Chen and Ravallion, 1997; Easterly, 1999; Dollar and Kraay, 2002; Ravallion, 2004, 2007)
Birdsall and Londono (1997) argue that social divide is created by the
“initial assets” while DFID (2008) warns any attempt of asset re-distribution may have an adverse effect on the incentives to save and invest.
Nevertheless, rising inequality in the developing world, spurred by liberalization and globalization, is a major concern for many economists. Stiglitz (2013) and Milanovic (2005) observe that a race to the bottom has been created by asymmetric globalization.
In the Lewis Theory (Todaro and Smith, 2011), surplus labour from the rural subsistence sector is gradually transferred to urban industrial sector for higher productivity. The rural-urban migration, in the long run, may result in urban unemployment, wage decrease, loss of agricultural productivity, debt accumulation, monopolization, lack of access to credit and insurance, and social exclusion. Amartya Sen (1999) described economic growth as a crucial means for expanding the substantive freedoms that people value. But in reality, in India, more than 270,000 farmers caught in a debt trap have committed suicide since 1995. (Shiva, 2013; Sainath 2013)
According to Gini index , global inequality is 0.7 points today (Milanovic, 2005) while it is between 4.5 – 4.7 for developing countries that saw a proliferation of economic activities in the recent past (Appendix: Figure 2.4 and 2.5)
The Kuznet’s curve , on the other hand, tells a different story about inequality. (Kuznets, 1955; Appendix: Figure 2.6). The inequality seen in developing countries is part of the development and will phase out as more growth is achieved. However, The Kuznets hypothesis has been one of the most debated issues in development economics. Banerjee et al (2006) explains the reasons for the drop in inequality in industrialized countries during the 20th century was not related to the optimistic trickle-down process advocated by Kuznets theory. For developing countries, high inequality is not necessarily a sign of growth or an expectation that the trend will reverse in a spontaneous fashion. Inequality, rather, can have harmful effects on the growth.
Ravallion and Chaudhuri (2007) speaks about “Good Inequality” (eg., that fosters entrepreneurship) and “Bad Inequality” (i.e., geographic and human resources traps) wherein the latter is capable of driving out the former.
Some view the rise of developing countries as convergence. But historically the trend of mobility among countries has been in opposite directions. Table 2.7 in the Appendix shows poor countries have seen a downward trend while rich countries too have seen an upward mobility (Quah, 1993, cited by Ralitza Dimova, 2013)
Another crucial point is the spatial dimensions of the problem. In his latest book, Global Poverty and the New Bottom Billion, Andy Sumners (2010) highlights that poverty is no longer a Low Income country issue; for currently ¾ of the world poor (approx. 1.3 Billion) live in Middle Income countries. According to new World Bank classification, (see footnote 1) many LICs have been graduated to MICs. This suggests that world poverty is turning from an international to a national distribution issue and internal politics, inequality, domestic taxation, redistribution policies are becoming of growing importance vis-à-vis economic growth.
Islam (2004) identifies a gap in the literature that advocates a direct correlation between income growth and poverty reduction. Through an empirical analysis, he demonstrates that there is no invariant relationship between growth and poverty reduction. For, the pattern and sources of growth as well as the redistribution mechanism are important from the point of view of achieving the goal of poverty reduction.
BIC COMPARISON
During the past three decades, China, India and Brazil – with a population count of 2.7 Billion in their countries – have attained extraordinary levels of economic progress. (Srinivasan, 2006; Acharya, 2004; Campos et al, 2002) China’s GDP grew at an average rate of 10.4 per cent, India at 10.3 per cent and Brazil at 7.5 per cent per year . (World Bank, 2012; Appendix: Figure
3.1, Figure 3.2, Figure 3.3)
During this period of rapid economic growth, China alone has lifted over 200 million people out of poverty (Qian, 2002). India’s poverty rate fell from 42% to 24% while Brazil’s “$3-a-Day” poor populace decreased from 17% to 8% (Ravallion, 2009).
What were the main drivers of economic growth in BIC countries? What were the approaches to reduce poverty? Are there any factors that impede sustainable and pro-poor growth?
a. Drivers of Economic Growth:
BIC experienced few common factors. The reforms appeared as a in the backdrop of a crisis-response. As a result, growth-promoting policy reforms were implemented. BIC also liberalized the markets and exposed local producers to foreign trade. An alternative view is put forward by Rodrik and Subramanian (2004) who argue India’s growth started in 1980s with government’s attitudinal shift towards reform.
However, certain factors of growth were exclusive to one or two of them. Although both China and India followed the Lewis theory of growth, China’s surplus labour from agricultural sector was transferred to industrial sector while India focused on the services sector. Brazil, followed the Rostow theory of growth, focusing more on local consumption.
b. Approaches to Poverty Alleviation:
Driven by its initial conditions, each country employed different strategies to tackle poverty. Brazil’s redistribution policy was markedly exclusive from other two players. It introduced Bolsa Familia , that helped lift 25M people out of poverty. (Klasen, 2009) China allowed the poor to participate in country’s growth process and social policies. (Ravallion, 2009). In all three experiences, we realize macroeconomic stability was vital to poverty reduction.
c. Sustainable and Pro-Poor?
This growth had its consequences. Both China and India saw worst disparities in income and opportunities. Klasen (2009) states that government policies, by favoring high productivity regions, fuelled this inequality and rural-urban divide. Brazil, on the contrary, had success in reducing inequality through its pro-poor redistribution policies . (Stiglitz, 2013, Ferreira et al, 2012; Appendix: Figure 3.4)
There is much debate on if the growth of BIC is sustainable. The Economist (2013a) brought to light Brazil’s slump in GDP growth, high public sector spending and other internal issues that resulted in mass public protests. (The Economist, 2013a; Ferreira, 2013)
China’s future too has been questioned because it no longer has that boundless cheap labour. China still hasn’t decided to privatise its state-owned enterprises that hog financial resources. Another major obstacle in China’s path is the lack of rights for rural farmers to their lands. This has further deepened the rural-urban divide in China. (The Economist, 2013b).
Das and N’Diaye (2013) predicts China will cross the Lewis Turning Point – due to cheap labour shortages caused by demographic shift – between 2020 and 2025. Garnaut and Song (2006) too refers to a turning point; but with regard to China’s energy usage.
Challenges loom into India’s ability to sustain the momentum too. Bhalla (2003) presents employment and labour market data to show the rise in unemployment, rural-urban divide and informal sector since 1990’s. The IT services sector employs 1 million out of a total labour force of 450 million and it has reached its capacity. (Siraj, 2011)
SUB-SAHARAN EXPERIENCE
Burkina Faso, has a population count of 16 million people. With population growth of just over 3 per cent per annum, Burkina Faso’s population is expected to double within 25 years. This poses major problems for the
country in terms of ensuring food security and the sustainable development. Past political instability, corruption, ethnic tensions and violence, especially in the neighbouring Cote d’Ivoire, government’s weak capacity to respond vigorously to exogenous shocks, etc., have left the country with lack of local services to support communities and improve people’s lives. (PRSP, 2007)
45% of Burkinabés live below the poverty line, half of them are cotton farmers. Malnutrition and HIV/Aids are major health concerns. Burkina Faso also has the lowest literacy rate, 13%, in the world. (UNDP Report, 2005) Burkina Faso has significant reserves of gold, but 80% of the population relies on subsistence agriculture, cotton being the economic mainstay. Only a small proportion of Burkinabés work in industry or services. (CIA World Fact Book)
Growth and Development
Bretton Woods Institutions are substantially involved in Burkina Faso since grants and foreign loans account for around 70% of state revenues. (The World Bank, 2013) Since 1991, country was espoused to a market economy, founded on the principles of free enterprise. Government’s economic and structural reforms aimed at creating the conditions for promoting private initiative and achieving sustainable growth, helped the national economy to grow at an average rate of 5 per cent a year in real terms.
Despite the fact that Burkina Faso’s economy grew at around 5% per year from 1995 to 2002, poverty increased from 44% in 1994 to 46% in 2003. (Appendix: Figure 4.1 and Figure 4.2) So while some people were becoming better off, others were becoming poorer. The inequality found in Burkina Faso is not related to income distribution. It is due to existing inequalities between men and women and regional disparities.
Sala-i-Martin and Pinkovskiy’s (2010) observation on African poverty (Appendix: Figure 4.3) contradicts with the reality in Burkina Faso. But Chen and Ravallion (2008) clarifies that because of the population growth in
Burkina Faso, the aggregate poverty rate has not been sufficient to reduce the number of poor. This explains why the expected outcome of Poverty Reduction Strategy Papers (PRSP) has not been favourable.
In addition, while income growth alone may not reduce poverty in other parts of the world, Burkina Faso’s experience has a direct correlation with wealth generation and poverty reduction.
Lessons from BIC
Burkina Faso’s context, demography and institutions differ from BIC countries. (Hagberg, (2001). Agriculture will be the centrepiece of Burkina Faso’s efforts to achieve growth, reduce poverty and ensure food security. This can be done by raising agriculture’s profitability through technological innovation. Burkina Faso can learn from China’s experience on agricultural growth as well as population planning.
Burkina Faso can capitalize on its mining industry through foreign market exposure, a lesson that can be learnt from India’s IT industry.
Brazil’s approach to developing human capital and social insurance can offer few directions to Burkina Faso to reform its education, health and social sector. It can also create community based rural development programs to offer social and income protection for farmers through subsidized programs.
Ravallion (2009) emphasizes that combining China’s growth-promoting policies with Brazil’s social policies would surely be a good formula for any country.
CONCLUSION
The objective of this essay was to understand if there is a direct relationship between economic growth and poverty reduction. To achieve this, I reviewed theoretical literature and relevant empirical data to understand the nature of the analytical debate. Brazil, India and China’s growth and poverty reduction experiences were explored, compared and contrasted. Then I
Burkina Faso was brought into the discussion to analyze trends.
BIC experience provides results that support my hypothesis. Major challenge was forming conclusions related to Burkina Faso. Unavailability of reliable and consistent data was a major impediment. Devarajan (2013) dubbed it as “Africa’s statistical tragedy”.
Africa’s Pulse (2013) observes that population censuses for Sub Saharan countries are out of date, poverty estimates are irregular, and incomparable over time due to changes in survey design and inadequate price deflators. However, through existing literature inference can be made that the growth in one aspect of the economy will not automatically translate into benefit the poor. Rather it depends on the profile of growth, the distribution across locations of the poor, and the extent of mobility across sectors.
Although the same cannot be said for BIC countries, Burkina Faso’s experience shows a robust relationship between economic growth and poverty reduction when the population growth is controlled for. Through implementation of PRSPs to achieve Millennium Development Goals, Burkina Faso has seen a considerable growth in the past five years. In 2012, it’s GDP growth rate stood at 10.1%, a target government, International donors and civil society actors aspired to achieve in 2015. Inequality was found to be minimal; but for reasons not created by Economic growth. Through PRSPs targets, Burkina Faso also saw an increase in child literacy from 19% to 30% while by 2015, government aims to achieve a 70% literacy rate amongst adults through Centres for Non-Formal Education that have been set up, funded by the international community. (MDG Challenges and Changes, 2011) REFERENCES
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APPENDIX
(All images and tables were taken from the referenced literature unless otherwise specified)
