Economic Growth for Poverty Reduction by j73na6ddmd7f

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									Poverty, Inequality and
  Economic Growth

            Arild Angelsen
            Associate Professor
     Dept. of Economics and Resource
               Management
 Norwegian University of Life Sciences (UMB)

            HiO 4. October 2007
                  Outline
1.   Why are some poor (or rather: rich)?
2.   Explaining economic growth
3.   Defining poverty
4.   Growth, distribution and poverty
5.   THM
                 1. Why are we rich?
                        World GDP (0-2000)
      7000

      6000

      5000

      4000
USD




      3000

      2000

      1000

         0
                                           00

                                                  00

                                                         00

                                                                00

                                                                       00

                                                                              00
                   0

                         0

                               0

                                     0
             0

                 20

                       40

                             60

                                   80

                                         10

                                                12

                                                       14

                                                              16

                                                                     18

                                                                            20
             Why are some rich?
                  Real GDP (1990 USD)
25 000


20 000


15 000


10 000


 5 000


   -
          1700    1820     1870      1913   1950         1973       1998

         Norway     UK            USSR       Argentina          China
         Japan      South Korea   Africa     World
The power of exponential growth
                                    Growth projections

      14 000

      12 000

      10 000

       8 000                                                                                        1.0 %
GDP




                                                                                                    3.0 %
       6 000                                                                                        5.0 %
       4 000

       2 000

          0
               1     9      17   25     33   41    49     57    65      73   81     89    97
                                                   Year


Growth             Year 0        Year 25      Year 50          Year 75        Year 100         Difference
  1%                100           128             164           211               270              1.0
  3%                100           209             438           918               1 922            7.1
  5%                100           339         1 147             3 883         13 150              48.6
             Why are some rich?

   … because they live in countries that have
    had positive (but generally not very high)
    economic growth rates over long periods
    of time (decades or centuries).
   One billion are poor because they live in
    countries that have not experienced this
       Poverty: mainly a problem of total national
        income than distribution
             Ethiopia vs. Norway
   GNI (PPP): 710 and 37 300 (USD)
   What can explain the differences?
       Or: how many years of higher economic growth
        does Ethiopia need to catch up?

        Growth         Years
         1%             400               What happened

         2%             200
         3%             135
         4%             100
         5%              80
                2. Economic growth
   Economic growth = increase in real, mean
    (average) income (per capita)
       income (cash and subsistence):
            max consumption without reducing assets
       real (inflation adjusted)
       mean: says nothing about distribution
            but that’s not a critique of the concept!
            have good measures for the distribution (Gini)
       per capita:
            population growth eats up some of the total growth
          The sources of growth
         (first order explanations)
   Growth accounting
    Y = A * F(K,L)

   Three sources:
       Physical capital accumulation (K)
       Human capital accumulation (L)
       Technological progress (A)
        a. First generation models
   Harrod Domar model (1930s)
       Physical capital the key (K)
       ICOR (Incremental capital output ratios; 3-5)
       Save (+ aid)  invest  capital acc. 
        growth
   Basis for development policies and aid for
    several decades (and still is):
       Financial gap models
   East Asian miracle
       A story about capital accumulation (K, L)
  b. Second generation models
Solow (neo-classical) growth model (1957):
 Labour and capital substitution
 DRS: capital accumulation determines only
  income level (and thereby temporary growth),
  not long-term growth rates
 The only long-term source of growth is
  technological change
 Convergence hypotheses
     Unconditional (same income level) - rejected
     Conditional (same growth rate) – some support
        c. Third generation models

   Endogenous growth theories (Romer,
    Lucas, 1980s)
   Explain technological change
       Human capital accumulation
       Investments in R&D
       Technological spillover; economics of scale,
        cluster effects, poverty traps,
        complementarities
     Low and high technology (income)
      equilibriums (‘assurance game’)


         Profit with old         Critical mass
         technology




                  Profit with new
                  technology


Low tech eq                # of new tech. users   High tech eq
The underlying causes of growth
  (second order explanations)
    Growth accounting useful, but
     limitations
    Look for the deeper causes
    Three types of explanations:
    a.   Geography
    b.   Institutions
    c.   Policies (market integration)
            a. Geography
Montesquieu (1750):
 ”You will find in the climates of the
 North, peoples with few vices, many
 virtues, sincerity and truthfulness. Approach
 the south, you will think you are leaving
 morality itself, the passions become more
 vivacious and multiply crimes.... The heat can
 be so excessive that the body is totally without
 force. The resignation passes to the spirit and
 leads people to be without curiosity, nor the
 desire for noble enterprise.”
                     Geography …
   The poorest countries are around equator
   Geography, ecology, climate shape incentives and
    technologies
   Why?
       Natural resource endowments: soils, rainfall, minerals,..
       Climate, diseases
       Location (landlocked), transport costs
   Diamond (1997): germs and crops directly affects
    the technological development
       Draft animals (tse tse)
       Grains – the key food – are mainly from Eurasia
                  b. Institutions
   Good institutions (Acemoglu)
       Enforcing property rights
       Constraining elites
       Equal opportunities
   No natural gravitation towards good
    institutions, good institutions often blocked
    by the elite
       in some cases the elite privatized the state and
        controlled by violence
The role of institutions in growth
    (A. Smith and D. North)
   Higher productivity & economic growth


     Specialization and division of labour


           Transactions (markets)



           Low transactions costs


              Good institutions
     Which institutions are needed
               (Rodrick)
1.       Market creating:
     •     enforce property rights and contracts
2.       Market regulating:
     •     externalities, economics of scale, monopolies
3.       Market stabilizing:
     •     macroeconomic stability
4.       Market legitimizing:
     •     social insurance, manage conflicts, redistribution
    Empirical evidence (Rodrick)
•       The simple correlation (next page)
    •        The ’chicken-egg’ problem
•       Econometric analysis
    •        institutions the key
    •        integration has no direct effect on income
    •        geography has weak effect
    •        institutions has positive effect on integration, and
             vice versa
    •        geography important for institutional quality
         •     Colonialists established extractive institutions in the
               tropics, but settled in the temperate colonies (North
               America, Australia-NZ, South Africa)
              c. Policy/Integration
   Integration view: Being part of a larger global
    economy
       Comparative advantage
       Transfer of technology
   Policy view
       Good policies the key to high economic growth:
        macroeconomic stability, openness to trade,...
       Difficult to distinguish policy from institutions (Hal
        Edison):
        ”The bottom line is not that policies are unimportant
        but that their influence on economic performance is
        already reflected in the strength of institutions.”
    Summary on economic growth

   First order explanation:
       Capital accumulation and technological
        progress
   Second order explanations
       Institutions and good policy
             3. What is poverty?
   The traditional definition:
    ”The lack or relative lack of money or
    material possessions” (Webster 1993)
   Income (or consumption) per capita as the
    key measure:
       poor if fall below the poverty line
   Gradual expansion to other (less material)
    dimensions of human well-being
     The evolution of the poverty
              concept:
   From one-dimensional to multiple
    indicators
   From top-down to holistic participatory
   From outcomes to causality-inclusive
    indicators
   From materialistic to soft assets
                       But:
   This is mixing measurement and
    analysis of poverty
       Indicators: targeting, measure change, ...
       Analysis: understanding, design PPP
   The indicators are often highly
    questionable
   Comparison difficult
   Concept degradation, because various
    groups want to piggy-back on the
    ”poverty boom”
        Why use an income/-
    consumption based definition?
   Includes both subsistence and cash
   Includes fluctuations in income: risk,
    vulnerability
   Many of the extensions are means to reduced
    income poverty
   Many of the extensions (e.g., health, education)
    are strongly correlated with income
   Problems of measurability and comparability
    with more comprehensive measures
A narrow poverty definition

         but


   A broad poverty analysis
 4. Growth, poverty and
        distribution

Growth             Distribution



         Poverty
          Two ways of reducing
            income poverty
1.    Higher average income (economic
      growth).
     A bigger cake.
2.    Redistribution (reduced inequality).
     Bigger share of the cake to the poor.

     $


     $1


                                             individuals
             Empirical evidence
   Changes in poverty in developing countries
    primarily determined by growth (size of cake)
   Changes in inequality of secondary importance
    in most cases
       Inequality sticky (much more variation across
        countries than across time within countries)
       Politically much easier to promote growth than
        change the distribution
   Growth is good for the poor
       In 90 % of the cases, economic growth has led to
        poverty reduction (Fields, 2001)
GDP/capita
explains close
to 90 %; and
the elasticity
close to 1%
Very few cases with
negative growth and
poverty reduction




                      Some cases of
                      growth without
                      poverty reduction
    Why controversial (Kanbur)?
Growth         Technical    Growth policies
               concept      ala IMF/WB
Poverty        Absolute     Relative
               Income       Multidimensional
Time horizon   Long         Short


Trade          Mutully      Exploitation
               beneficial
How growth affects inequality
   The Kuznets curve (1955)

Ineq.


                                             Income

   Among the stylized facts for decades
   But limited empirical evidence:
       The Latin effect
       No systematic change during growth
       Inequality sticky
How inequality affects growth
   Traditional view: Inequality good for growth
       Rich have higher savings rate: giving $1 from a
        poor to rich increase savings (and thereby growth)
   New thesis: Ineq. is bad for growth
       Political economy explanation (higher taxes and
        demand for redistribution)
       Social conflicts and instability
       Poor excluded from ’joining the party’: credit
        markets, no education/skills, health,...
   Empirical evidence
       Some support for the two latter hypotheses
       Politically correct view?
               Pro-poor growth
             (growth with equity)
        Growth is good for the poor, but some
         types even better
1.       Preconditions
          Egalitarian asset distribution (next page)
          High educational level
2.       Type of growth
          Labour intensive technologies
          Rural focus
          Investments in education
          Technologies for pro-poor consumption goods
          Good governance
          Ravallion’s model

          Rate of poverty reduction
         = (k * (1-G)a * growth rate
G – Gini, a = 3, k = constant
Example:
2 % growth, 40 % HC poverty:
G = 0.3: poverty falls by 6.4 % per year
G = 0.6: poverty falls by 1.2 % per year
       Types of growth (Fields)
Type          Charac-     Where        Income Poverty
              teristics                distr.
Modern        Labour    East Asia      ??      Less
sector        intensive
enlargement
Modern        Capital   Parts of LA,   Less    Same
sector        intensive China          equal
enrichment              (84+)
Traditional   Capital   Sri Lanka,     More    Less
sector        intensive Kerala,        equal
enrichment              China (-84)
        Summary on growth, poverty and
                   distribution
              Growth has on average         Inequality is bad for growth
              small effects on income
              distribution


         Growth                         Distribution

                                              Less inequality
Higher average income
                                              can reduce
reduces poverty
                         Poverty              poverty, but
(elasticity ~ 1)
                                              difficult
          5. Take home messages
   Growth:
       capital accumulation (short term)
       technological progress (long term)
   Institutions key to lower transaction costs
       how to get good institutions?
       Sachs vs. Easterly: ‘Utopian social engineering’ vs.
        ‘Piecemeal democratic reform’ (Karl Popper)
   Poverty definition
       narrow definition (income)
       broad analysis
         Take home messages (2)

   Growth is generally good for the poor!
       But, it’s not trickle down!
       Economic growth is by everyone in making
        the cake bigger!
   Some types of growth even better!
       Favourable initial conditions
       Labour intensive, rural based
             How to end poverty?
   Economic development!
   The role of aid?
       It’s not the key, but can help (and much aid has done
        so)
       Massive transfers and technological fix ala Sachs’
        proposal will not work
       One reason why aid has not reduced poverty is that it
        was not meant to reduce poverty
   Good national policies + time = economic
    development => poverty reduction

								
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