Growth and Poverty Reduction:

Pro-poor growth?
Growth and Poverty Reduction: Pro-poor growth?

Lecture Outline

(i) What is pro-poor growth?

(ii) What are the Theoretical Under-pinning of Pro-Poor

Growth?

(iii) Methodology

(iv) Evidence of pro-poor growth?

(v) Policies for pro-poor growth: 1970s vs. present?

 Growth and Poverty Reduction:
Pro-poor growth?
(i) What is pro-poor growth?

Definition of Pro-Poor Growth:

“…growth that leads to significant reductions in (absolute)

poverty”
(OECD 2001, and UN 2000) – italics added in brackets.

Too broad for economists since what definition of poverty do

researchers use? Kraay (2004) makes this point in his World
Bank Working Paper No. 3225, “When is Growth Pro-Poor?”
 Growth and Poverty Reduction:
Pro-poor growth?
A basic idea from the works of White and Anderson
(2001) and Kakwani and Pernia (2000) is that any
increase in growth should benefit the poor more than the
rich.

This really is “inequality-reducing” growth rather than

pro-poor growth – is concerned with relative poverty.

The question is, “Should new growth benefit the poor

more, thus increasing their incomes and thus reducing
inequality, whilst the rest of society sees little income
improvement?”
 Growth and Poverty Reduction:
Pro-poor growth?
If, ‘Yes’ to this then could have the issue of national
income increasing by 5% but income of the poor
increasing by 7%: whereas there could be a
possibility of growth for the poor of 7% when
national income increased by 10%.

The poor in the second scenario are absolutely better

off, but are relatively worse-off compared to the non-
poor: In the first scenario the poor are absolutely
worse-off compared to scenario 2, but are relatively
better off.
Growth and Poverty Reduction:
Pro-poor growth?
(Q) So which one is better?

(A) In poor countries better absolute improvements preferred

to relative improvements, at least initially…..

Problem with the above ‘inequality-reducing’ scenario is that

we do not know whether following an inequality-reducing
growth plan will result in lower growth or higher growth.

So we want to have improvements in both absolute levels of

income (absolute poverty tackled) and relative levels of
income (relative income of poor improves and income
inequality declines?).
 Growth and Poverty Reduction:
Pro-poor growth?
Formalising these issues has been undertaken by White and
Anderson (2001)

White and Anderson (2001): 3 definitions of pro-poor

growth

(1) The poor’s share of incremental income exceeds their

current share.

This means that the incremental increase in the level of

income to the poor>incremental increase in the level of
income for all of society,
 Growth and Poverty Reduction:
Pro-poor growth?

p p
(Yt  Yt 1) /(Yt  Yt 1)  t 1

Where the numerator represents change in income of

the poor, the denominator is the change in income of
society andt 1 represents the income share of the
poor in the last time period, t-1.
 Growth and Poverty Reduction:
Pro-poor growth?
So,

p p
(Yt  Yt 1) /(Yt  Yt 1)  t , and thus t t 1

There is a relative improvement of the poor.

This can be shown diagrammatically,

Growth and Poverty Reduction: Pro-poor growth?

Changes in Y, between t change in Y for non-poor

and t-1 between t-1 and t
Y, T growth

change in Y for the poor

between t-1 and t:
If t  t 1 then pro-poor
growth.

t-1 t
Time
Growth and Poverty Reduction:
Pro-poor growth?
The problem with definition (1) is that the poor’s share can
increase slightly and the richest 10% or 15% can still
cream off much more and this is pro-poor growth.

E.g. If poorest 20% have 5% of income and the richest 20%

have 40% of income then if in every extra $1 the poorest get
10cents and the richest 30cents then still have PPG.

If in the above then White and Anderson (2001,

pp. 269) coin the phrase anti-poor growth (APG).
t  t 1
 Growth and Poverty Reduction:
Pro-poor growth?
(2) The second definition brings into the equation the share of people
in a country who are defined as ‘poor’. Formally,

p p o p
(Yt  Yt 1) /(Yt  Yt 1)  P  N / N

Where the P term represents the share of poor people/households in the

country.

What the equation is saying is that the increase in the share of the
poor’s income>share of the number of poor in the country’s
population.
 Growth and Poverty Reduction:
Pro-poor growth?
Can be re-arranged so that,
p p
(Yt / N p )  (Yt / N )  (Yt 1 / N p )  (Yt 1 / N )

These represent average income levels of the poor and

of society, and can be further simplified to,

p p
Yt  Yt  Yt 1  Yt 1, or

Y p  Y
 Growth and Poverty Reduction:
Pro-poor growth?
The change in average income of poor>change
in average income of society.

Problem with definition 2 is that it is too

restrictive and under this definition few
countries actually have pro-poor growth.
 Growth and Poverty Reduction:
Pro-poor growth?
Definition 3

Take an ‘international’ norm of median income shares

of the bottom 20% and 40% (can choose any %).

Issue here is that “if the poor’s share currently exceeds

the international norm then their share of incremental
income can be less than their current share and thus
qualify as PPG” (ibid, pp. 269).
 Growth and Poverty Reduction:
Pro-poor growth?
Another Definition of Pro-Poor Growth:

“…focuses on accelerating the rate of income growth of the poor and thus increase
the rate of poverty reduction”
(Ravallion and Chen, 2003)

Pro-Poor Growth = F(GDP growth)

Changes in income equality have an ambiguous effect on pro-poor growth since can
impact on GDP growth.

Thus, if pro-poor growth is to accelerate then need to accelerate growth but also need
to enhance and make poor households aware of the opportunities growth generates.

Hence there is no one agreed definition of what PPG actually is….hence a huge
debate as to whether PPG has occurred or not!!
Growth and Poverty Reduction: Pro-poor
growth?
(ii) What are the Theoretical Under-pinning of Pro-
Poor Growth?

Gunnar Myrdal in 1920s and 1930s India argued that initial

income inequality was an important factor in improving the
quality of people and hence productivity.

Ravallion and Datt (2002) report larger absolute poverty-

household income elasticities in countries with lower gini
indices.

%PHH / %YHH  3 if gini index is 0.25.

%PHH / %YHH  1if gini index is 0.6.
Growth and Poverty Reduction: Pro-poor
growth?
(ii) What are the Theoretical Under-pinning of Pro-Poor Growth?

The idea here is that any growth that does occur is likely to benefit more
people if income inequality is low in the first place.

(Q) So what then determines income inequality?

Assets – particularly land in LDCs

Education
Networks
Rural-Urban
Property Rights, Legal System
 Growth and Poverty Reduction:
Pro-poor growth?
(ii) What are the Theoretical Under-pinnings of Pro-Poor Growth? Cont…

The 1970s…

In the 1970s the ‘Redistribution with Growth’ development economists believed in

the inverted-U hypothesis of Kuznets.

Kuznets inverted-U of growth and inequality:

Stage 1: low per capita income level, low income inequality.

Stage 2: per capita income increases with development, income inequality

rises.

Stage 3: gets to a point where per capita income increases with continued
development, income inequality declines.
 Growth and Poverty Reduction:
Pro-poor growth?
Growth
Growth Leads to Inequality

Evidence from Ahluwalia (1976) supports the Kuznets hypothesis, by

simply regressing inequality onto income and income-squared:

Inequality  1Y   2Y 2
He found that as economic growth increased so income inequality
increased ( ) but at a decreasing rate ( ): however
unsure where1 the
 ve
turning point is!  2  ve
 Growth and Poverty Reduction:
Pro-poor growth?
The Redistribution with Growth economists
argued (in line with Kaldor’s growth model) that
inequality caused growth since the rich had a
higher marginal propensity to save.

Also Lewis’s model of economic development

with unlimited labour supply was consistent with
rising income inequality through profits of
entrepreneurs growing more quickly than wages.
 Growth and Poverty Reduction:
Pro-poor growth?
Empirical Rejection of Kuznets, 1980s-1990s…

Rejected in Bruno, Ravallion and Squire, (1996) since much of the

empirical evidence of the 1970s and 1980s was flawed, and studies
were actually capturing between-country effects not within-country
effects.

By using panel estimates country-specific effects, time effects and

joint country and time effects are captured and the Kuznets U-shaped
curve disappears.

Studies find that between-country effects are causing the inverted-U

shape and that for some countries (e.g. India) the relationship between
inequality and income is simply U-shaped: Inequality high, then low,
then high again as growth increases.
 Growth and Poverty Reduction:
Pro-poor growth?
Currently whilst the theoretical debate continues as to whether economic
growth causes income inequality to change, the empirical evidence is
stacking up against a correlation in the first place.

E.g. Deininger and Squire (1996), Chen and Ravallion (1997), Easterly
(1999), Dollar and Kraay (2002) and Deaton (2005). According to Fields
(1989, 2001),

Method should be looking at country-specific analysis – when Fields (1989)

looked at 70 growth spells across 20 countries he found that inequality rose
in 10 countries, decreased in 11 and remained unchanged in 1.

“…income inequality increased in about half the growth spells and declined
in the other half.”
(World Bank, 2005, pp.17)
 Growth and Poverty Reduction: Pro-poor growth?

New Theories of Pro-Poor Growth?

High Initial Inequality Low Growth

Initial income inequality feeds into poor growth or greater income

equality positively affects growth rates.

Based largely on the conflicting progress of East Asia (e.g. South

Korea and Taiwan) and Latin America.

Latin America: notoriously unequal in income distribution (Brazil

regularly found to have the highest Gini coefficient).
Growth and Poverty Reduction: Pro-poor growth?

This means that any growth benefits the rich only and
tends to be skills-biased and capital intensive, thus
the poor have no chance of getting a piece of the
expanding pie: relative poverty increasing.

The income inequality also means that consumption

is relatively low since the rich have low MPC which
negatively effects AD and growth.
Growth and Poverty Reduction: Pro-poor growth?

East-Asia growth of the 1960s and beyond has seen no conflict between
growth and income distribution, meaning income inequality remains constant
as growth increased.

(Q) Is there a theory that can explain this?

(1) The mechanism given for this ‘income inequality-neutral’ path is that low
initial income inequality results in more evenly distributed economic growth.

The reason is that consumption expenditure patterns are similar amongst the
poor for goods which they themselves produce hence generating demand for
these labour-intensive products: hence mass consumption takes off rather than
consumption being driven by the minority.

(2) Also the case that savings of the poor can be channelled if appropriate
investment opportunities are in evidence.
Growth and Poverty Reduction: Pro-poor growth?

(iii) Methodology

Dominant Method - Cross-Country Studies (Time

Series and Panels).

Has growth affected absolute poverty, relative

poverty and been pro-poor or not.
 Growth and Poverty Reduction:
Pro-poor growth?
Method I – Cross-Country Studies

White and Anderson (2001): find a negative

relationship between growth and income growth of
the poor: i.e. growth negatively effects the
portion/share of income the poorest of the population
get.
 Growth and Poverty Reduction:
Pro-poor growth?
Back to the pro-poor question and for this see White and Anderson (2001)

Regress changes in income of the poor as a share of changes in total income of country,

p p
(Yt  Yt 1) /(Yt  Yt 1)
and changes in share of income of the poor,

p p
(Yt / Yt )  (Yt 1 / Yt 1)

onto a number of regressors that include, change in GDP per capita, change in trade openness
dummy, change government expenditure as share of GDP, change in political rights and civil
liberties, and change in life expectancy.

Why 2 dependent variables? Dependent variable 1 can be affected by outliers represented by large
changes in incomes of the poorest groups when total income for the country has increased. Changes
in the poor’s share of income gets around this issue.
 Growth and Poverty Reduction:
Pro-poor growth?
White and Anderson (2001) – (cont…)

Find that variations in the poor’s share of incremental income

(Dependent variable 1) is very large for growth
rates<4%..........some incremental shares are negative and very
large.

Confirms our expectations.

However using dependent variable 2 find that,

 Growth and Poverty Reduction: Pro-poor growth?
Regression results for Change in Share of Income (poorest 40% and poorest
20% - t-tests in brackets
DQ20
DQ40
Constant -0.001 0.000
(-0.76) (-0.40)

Growth (if improves) -0.056 -0.011

(-2.03) (-1.03)

Change in Political Freedom (if -0.006 -0.002

worsens)
(-1.97) (-1.53)

Trade Openness -0.001 -0.001

(-0.94) (-1.30)

Change in Urban (more 0.003 0.002

urbanisation)
(2.41) (3.41)

Change in life expectancy (greater -0.006 -0.002

life expectancy)
(-1.85) (-1.57)
 Growth and Poverty Reduction:
Pro-poor growth?
Note:
(1) Positive coefficient means an increase in the explanatory variable
will have a positive impact on the poor’s share of GDP, i.e. improve the
poor’s share of GDP

Find that growth negatively impacts on the poor – only the poorest 40%
though. Implication is there is a trade-off between growth and distribution
which contradicts World Bank thinking.

Less political freedom bad for the poor.

Increased urbanisation good for the poor

 Growth and Poverty Reduction:
Pro-poor growth?
Dollar and Kraay (2002, 2004): find a positive relationship between growth and
growth of incomes of the poor.

The Model

The key thing is the coefficient on yct . This represents the elasticity of income
of the poorest quintile with respect to mean income.

Control for 4 policy interventions that are likely to positively contribute to PPG:
(1) primary educational attainment (2) public spending on health and education,
(3) labour productivity in agriculture relative to rest of economy and (4) formal
democratic institutions.

Find none of these factors impact on PPG in their cross-country survey.

Growth and Poverty Reduction: Pro-
poor growth?
That the coefficient on log GDP of the country is
NOT significantly different from 1…..NO evidence
that % change in GDP is different from % change in
GDP of poorest 20%.

They cannot “reject the hypothesis that incomes of

the poor on average rise equiproportionately with
average incomes” (pp. 198), See next slide for Table
5 that confirms this.
Growth and Poverty Reduction: Pro-poor growth?
Growth and Poverty Reduction: Pro-poor growth?
Figure 4, Dollar and Kraay (2004).
 Growth and Poverty Reduction:
Pro-poor growth?
Finds that changes in inequality and changes in
income are not correlated.

(Word of warning given by authors and by others is

that cross-country comparisons are subject to a lot of
measurement error and that country-specific studies
are required for a clearer picture – What the World
Bank has done).

Dollar and Kraay (2004), Economic Journal paper in

special edition of linkages between trade,
development and poverty.
 Growth and Poverty Reduction:
Pro-poor growth?
Whilst not explicitly looking at income inequality
Dollar and Kraay findings are consistent with
headcount poverty declining more in those countries
with more equitable distributions of income.

Example from Klasen (2003).

Since Dollar and Kraay are looking at proportionate

income changes of the average and the poorest
quintile then clearly if income inequality is lower in a
country then the proportionate increase in income
will lead to a greater reduction in absolute poverty.
Growth and Poverty Reduction: Pro-poor growth?

Barro (2000) tests the Kuznets hypothesis again with a

panel of countries.

Regresses growth rate per capita output onto variables that

theoretically are predicted to determine growth, e.g. log of
per capita GDP, rule-of-law index, democracy (or freedom)
index, investment/GDP, years of schooling.

Then includes a gini coefficient index.

 Growth and Poverty Reduction: Pro-poor growth?

Model 1

Model 2

Model 3

Growth rate is the dependent variable here.

When the gini index is introduced linearly there is no relationship with growth (0.000) – Model 1.

When the gini index is interacted with log(GDP) – a proxy for economic development – then we see
a negative relationship between income inequality and growth (-0.328) but that when log(GDP) is
higher the relationship is actually positive (0.043) – Model 2.

Implication is that at lower levels of log(GDP) income inequality does significantly impact on
growth rates.
Growth and Poverty Reduction: Pro-poor growth?

Barro also finds evidence that Kuznets curve is alive

and kicking. Income inequality first increases and then
decreases with economic development (log(GDP)).

However log(GDP) is not explaining

the majority of the variation in income
inequality across countries or across
time.
Growth and Poverty Reduction: Pro-poor growth?

Summary

Still no consensus.

Some find that changes in income are not correlated with changes in inequality
means that any growth in income does not appear to have any impact on inequality
and impacts positively on absolute poverty, (see Fields, 1989 and 2001).

Dollar and Kraay (2002) find that growth of the country positively effects growth
of income of the poor – implication is that growth is thus crucial for reducing
absolute poverty and the number of absolutely poor.

White and Anderson (2001) find that when dependent variable takes a ‘relative’
form that growth negatively effects the share the poorest in a country have of GDP.

Barro (2000) finds that income inequality can impact on growth rates of very poor
countries only.
 Growth and Poverty Reduction:
Pro-poor growth?
(V) Policies for pro-poor growth?

Killick (2002) mentions a wish list that would enhance pro-poor growth:

(1) Land reform – NOT land grab.

(2) Improved access by the poor to education and health - public sector, or public-
private partnership?
(3) Micro-credit schemes targeted on the poor – charity or public sector since is too
risky for private sector to invest in!
(4) Adoption of labour intensive techniques in production
(5) Agricultural and rural development – very broad
(6) Government expenditure on education and health - public sector?
(7) Avoidance of macroeconomic crises – external factors that cannot be avoided,
e.g. sustained food price increases caused by emerging economies changing their
diet.
(8) Investment in rural infrastructure – public sector, or public-private partnership?
(9) Labour-intensive industrialisation
Growth and Poverty Reduction:
Pro-poor growth?
World Bank Report, pp.74.
For Agriculture:
– Investments in infrastructure to connect the poor, e.g.
telecommunications, roads, public transport.
– Strengthen property rights notably of women particularly regarding
land
– Create incentive frameworks that do NOT discriminate against those
economic activities the poor are already undertaking
– Improve technology for food-producers so can protect crop.
Essential given urban food demand increases.
– Help poor households reduce and cope with risk which could
encourage greater risk with more high-yielding crops – (Q) Are poor
households risk-averse in gambling when times are good and risk-
taking when times are bad?
 Growth and Poverty Reduction:
Pro-poor growth?
For Non-agricultural poor:
• Designing labour market rules and regulations that “balances workers’
needs with employers’ needs”, (ibid, pp. 75) – is an issue in many Latin
American countries where trade unions are strong, also the case in South
Africa.
• Access to secondary and girls’ education important for poor households
given the growing skill bias in non-agricultural employment – “falling
fertility rates and rising female labor market participation is essential in
a pro-poor growth strategy” (ibid, pp. 75).
• Quality of investment climate (assumed to be determined by macro and
trade environment, as well as degree of labour market regulation)
determine quantity and quality of employment.
• Improved infrastructure for the poor.
 Growth and Poverty Reduction:
Pro-poor growth?
Factors that affect the success/failure of these World Bank policies
include:

• Initial income and asset inequality – if high then can have negative
impact on pro-poor growth.
• Must re-distribute…but how? Land reform not land grab, transfer
payments in the form of state pensions to the poor.
• Importance of agriculture to the poor. Need to improve the efficiency of
agriculture (e.g. technology, co-operatives, training, access to financial
markets).
• Since agriculture is affected by climactic conditions there needs to be a
risk management structure in place to protect poor farmers but which do
encourage more risk-taking – (Q) Are poor farmers likely to be risk-
takers?
• Delivery of services and capacity of institutions to deliver to the poor –
issue of corruption.
Growth and Poverty Reduction: Pro-poor growth?

References
Dollar, D., and Kraay, A., (2002), “Growth is Good for the Poor”, Journal of Economic Growth, Vol 7, pp. 195-225.

Fields, G., (1989) “Changes in Poverty and Inequality in Developing Countries”, World Bank Research Observer 4(2), 167-
85.

Fields, G., (2001) Distribution and Development: A New Look at the Developing World, MIT Press.

Kakwani and Pernia (2000) “What is pro-poor growth?”, Asian Development Review, Vol 18(1), 1-16.

OECD 2001 “Rising to the Global Challenge: Partnership for Reducing World Poverty.” Statement by the DAC High Level
Meeting, April 25-26, Paris

Ravallion and Chen (2003) “Measuring Pro-Poor Growth.” Economic Letters Vol 78(1), p3-99.

White and Anderson (2001) “Growth vs Redistribution: Does the pattern of growth matter?.”, Development Policy Review,
Vol 19(3), 167-289.

World Bank, (2005), Pro-Poor Growth in the 1990s Lessons and Insights from 14 Countries.