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2 The Concept of Pro-poor Growth

Both theoretical and empirical evidence have shown that a country or region can achieve poverty reduction by accelerating its economic growth. For example, Kraay (2004) found that approximately half of the variation in short-run changes in poverty can be explained by growth in average incomes. In the mediumto longrun, the author found that between 66 and 90 % of the variation in changes in poverty can also be accounted for by the growth in average incomes. Dollar and Kraay (2002) also found that incomes of the poor [1] appear to rise proportionately with rise in average income. The converse argument also has been found to hold in that low or declining economic growth was found to also lead to increasing incidence of poverty (Chen and Ravallion 2004; Lopez 2004).

It is quite clear that the precise effect of growth on poverty depends on the initial level of income inequality in a country or region and how it changes during an economic growth period. For example, Lopez (2004) found that Senegal and Burkina Faso had similar levels of economic growth of about 2.2 % per capita per year over a similar period of time. However, poverty declined by 2.5 % annually in Senegal and just about 1.8 % in Burkina Faso in that period. The author concluded that Senegal made better progress in reducing poverty because it is a less unequal society. Therefore, a potential approach in reducing poverty is by changing the income distribution in favor of the poor. Indeed, historical experience shows that persistent efforts at sustaining economic growth may help in reducing poverty; although it is not clear that every growth episode in every country led to an increase in the average income of the poor (Ravallion 2001; Kakwani and Pernia 2000).

The concept of pro-poor growth has its genesis in the 1990s when there was growing clamor to explain the relationship among economic growth, poverty, and income inequality. Conceptually, it provides a yardstick of the way in which national income growth improves the welfare of the poor through changes in income inequality. The broad definition of pro-poor growth by a number of international organizations is economic growth that leads to significant reductions in poverty (OECD 2001; UN 2000; World Bank 2000). This gives rise to the notion that pro-poor growth occurs when economic growth leads to increased welfare of the less well-off in a society. Putting it bluntly, pro-poor growth is growth that raises the incomes of the poor.

Two operational definitions have emerged in the literature. The first strand defines growth as pro-poor when the poor benefit disproportionately from it; that is to say that it shows whether the distributional shifts accompanying growth favor the poor. The second strand defines growth as pro-poor if it absolutely reduces poverty. In the first case, the rate of income growth of the poor would exceed that of the non-poor, such that growth is pro-poor if it is accompanied by a decrease in inequality. The second case implies that average income growth results in pro-poor growth except when the incomes of the poor are stagnant or when they decline [2]. Therefore, to assess whether growth is pro-poor would require knowledge of the shifts in income distribution during the growth episode, and how this absolutely affects the welfare of the less well-off based on changes in an appropriate measure of poverty [3]. Although the literature admits that neither definitions of pro-poor growth is satisfactory, yet it is agreed that they attempt to address a common public policy objective—reducing poverty through economic growth. Additionally, both definitions suggest that there may be tradeoffs between development strategies that are pro-poor and those that are pro-growth.

Clearly, from the first definition of pro-poor growth it is apparent that policies that promote growth at the expense of increasing income inequality are not pro-poor. However, the second definition does not make a clear distinction between pro-poor and pro-growth policies. It appears that to the extent that policies that support economic growth continue to raise the incomes of the poor, they may also result in increasing income inequality and still remain pro-poor. An alternative and important strand of the literature on growth and poverty reduction proposes that the distinction between growth and pro-poor growth as a public policy goal is not that relevant in the case of low income countries (such as those in SSA) in that policies that are designed to maximize the rate of growth in those countries as a whole also maximize the growth in income of the poor. For example, Dollar and Kraay (2002) found that the poor typically share in rising aggregate income and suffer from declining aggregate income in the same proportion as the non-poor. Therefore, they argue that on average growth is as good for the poor as it is for everyone else. Other researchers have also argued that growth oriented policies are unlikely on average to impact income distribution and result in pro-poor growth (Foster and Szekely 2000; Deininger and Squire 1996; Ravallion and Chen 1997). Easterly (1999), on the other hand, simply observes that growth in low income countries has been illusive and that most poor countries have not been experiencing growth. In other words, since most poor countries are not growing the issue is to “put growth at the center of the policy agenda and poverty reduction will (necessarily) follow.”

Therefore, based on the two conventional definitions of pro-poor growth, it appears that to measure whether economic growth is pro-poor would require knowledge of whether there have been distributional changes in income and whether those changes have improved the welfare of the poor. In the literature, poverty is broken into two components; poverty attributed to economic growth and poverty attributed to changes in income distribution (Datt and Ravallion 1992; Kraay 2005). Kraay defines three sources of pro-poor growth, namely: (i) a high rate of growth of average incomes, (ii) a high sensitivity of poverty (also referred to as “poverty elasticity”) to growth in average incomes, and (iii) a poverty-reducing pattern of growth in relative incomes.

The literature also discusses results from the distributional effect of growth on the rate of poverty reduction. For example, Bourguignon (2003) revealed that distributional changes in income contributed to variations in response of poverty to growth over time. The author suggested that income redistribution contributed to an increase in the elasticity of poverty, and accelerated the rate of poverty reduction given a certain level of growth. In other words, distributional changes also explain rates of poverty reduction in certain countries. Bourguignon (2003) also found that a reduction in the Gini coefficient from 0.55 to 0.45 caused poverty to drop by more than 15 % in 10 years. However, if inequality remained unchanged, then it would take about 30 years to achieve comparable reduction in poverty.

Additionally, Ravallion (2001) shows that the median rate of decline in the $1 per day headcount index was 10 % per year in countries that combined policies of growth with falling inequality, but was only 1 % per annum otherwise (for those countries which adopted policies encouraging growth with rising inequality). The author also revealed that extreme income inequality unequivocally disrupts using income growth to reduce poverty. He found that for countries with high inequality, a 1 % increase in average household income led to lower reduction (0.6 %) in poverty than in countries where income inequality was very low (at 4.3 %). Ravallion (2001) also found that rising inequality reduced the impact of future economic growth on poverty reduction.

  • [1] The authors defined the poor as constituting the bottom quintile of income distribution for a country. This is treated as a relative measure of a proportion of the population, compared to an absolute measure of poverty such as income below a pre-specified threshold of $1.25 per day (based on the purchasing power parity or PPP)
  • [2] For a complete survey of the definitional debate see Cord et al. (2003) and Klasen (2003).
  • [3] The measures of poverty that are generally used are the headcount index and the poverty gap
 
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