Growth With Equity is Good for the Poor

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Three years ago the President of the World Bank committed his institution to overcoming what he described as the tragedy of exclusion. He has attempted to shift the focus away from 'trickle down' economics and towards growth with equity, or pro-poor growth. Today, his vision is under increasing attack not least from within the World Bank. The basis of this attack is set out in a document written by David Dollar and Aart Kraay of the Policy Research Department of the World Bank entitled Growth is good for the poor. The report argues that economic growth is closely associated with poverty reduction, and that globalisation and openness bring the same benefits to the poor as to the non-poor. Notwithstanding a small caveat indicating that growth alone may not be enough, the clear message of the report is that standard economic policies on liberalisation will generate the growth and distribution patterns needed for success in poverty reduction.
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    Growth with equity is good for the poor   June 2000    Growth with equity is good for the poor Executive summary Three years ago the President of the World Bank committed his institution to overcoming what he described as the tragedy of exclusion. He has attempted to shift the focus away from 'trickle down' economics and towards growth with equity, or pro-poor growth. Today, his vision is under increasing attack not least from within the World Bank. The basis of this attack is set out in a document written by David Dollar and Aart Kraay of the Policy Research Department of the World Bank entitled Growth is good for the poor  . The report   argues that economic growth is closely associated with poverty reduction, and that globalisation and openness bring the same  benefits to the poor as to the non-poor. Notwithstanding a small caveat indicating that growth alone may not be enough, the clear message of the report is that standard economic policies on liberalisation will generate the growth and distribution patterns needed for success in poverty reduction. Growth is good for the poor   reflects an ideological hankering for a return to the golden age of free market economics in the 1980s. Openly supported by some northern governments, it is an attempt to radically change the direction of development policy. The poverty-focussed growth agenda developed by Mr Wolfensohn is being progressively undermined by a revival in free market fundamentalism represented by Messrs Dollar and Kraay. This is bad news for poverty reduction. Current patterns of economic growth are failing to benefit the poor on anything like the scale required to meet the 2015 target of halving income poverty. The change in policy direction advocated by Growth is good for the poor will provide a cast iron guarantee that the target will be missed. In Oxfam's view, Growth is good for the poor   suffers from two defects: namely, it is anti-poor and anti-growth. It is anti-poor because it ignores the critical role of income distribution in shaping opportunities for poverty reduction. And it is anti-growth because extreme inequality and the poverty associated with it, wastes productive potential on a vast scale. Much of the Dollar - Kraay report is spent attacking a red herring. The authors reject the view (held by almost nobody) that growth is bad for the poor, and contrast it with their (equally implausible) belief that economic growth is benefiting all in equal measure. Economic growth is self-evidently good for poverty reduction , since without growth, the average incomes of the  poor cannot rise over time, with attendant implications for poverty. But growth is not all that matters. At any given level of average income, the incidence of poverty is determined by income distribution. The larger the share of any increment to growth captured by the poor, the faster the rate of poverty reduction. Highly unequal countries are bad at converting growth into poverty reduction because they have to grow faster than more equal countries to achieve the same level of income gain for the poor. i  That growth is good for the poor is a statement of the obvious. The real question is what type of growth is best for poverty reduction, and which policies will help to bring about more equitable  patterns of growth. Similarly, even if it were the case that the poor benefit from growth in the same proportion as the wealthy, the initial distribution of income would still determine the rate of  poverty reduction. For policy makers concerned with poverty reduction, the aim should be to sustain high growth,  but with the poorest 20 per cent capturing a proportionately larger share of the increment to growth. Of course, any improvement in distribution achieved at the expense of growth would have adverse implications for poverty reduction. But there is no necessary trade-off between equity and efficiency, and there is plenty of evidence to suggest that countries with more equal income distribution have higher growth. Where extreme inequalities reinforce poverty they act as a barrier to growth by restricting the productive potential, undermining investment, and limiting the capacity of a large section of the population from responding to incentives created through market reforms. Bluntly stated, inequality is not just bad for social justice, it is also bad for economic efficiency. Experience in the 1990s illustrates the importance of distributional factors. East Asia is the only developing region now on target for achieving the 2015 goals. By contrast, economic recovery in Latin America has produced derisory results, with the incidence of poverty falling by just 1 per cent. High growth, backed by high rates of conversion from growth into poverty reduction, has  been central to East Asia's achievement. Each percentage point of growth in the region produces four times as much impact in terms of poverty reduction as in Latin America. If East Asia had achieved the same growth rate but had converted growth into poverty reduction at the Latin American rate, there would be 22 million more  people in the region living in poverty. Conversely, if Latin America had transformed growth into poverty reduction at the same rate as East Asia, there would be 3 million  fewer   people living below the poverty line. Latin America's experience refutes the claim that growth alone is sufficient to achieve poverty reduction on the scale required. Distribution of the benefits from growth in the region reflect the small share of national wealth trickling down to the poorest 20 per cent. In Brazil, this group accounts for 2.5 per cent of national income, compared to 9.2 per cent in Indonesia. As a result, Brazil has to grow at almost four times the rate as Indonesia to achieve the same average income gain for the poorest 20 per cent. Improved income distribution would strengthen the linkage between growth and poverty reduction. Unfortunately, there is evidence from many countries that wealth gaps between rich and poor are widening. Recent household survey data from the Inter-American Development Bank from fifteen countries in Latin America shows worsening income distribution. In India, wealth gaps between the rural poor and urban population, and between rich and poor states, are weakening the impact of growth on poverty. Similarly, rising inequality has contributed to an increase in poverty in China. Failure to reverse these trends through more equitable growth strategies will place the 2015 targets beyond reach. ii  Governments have a key role to play. Poor people are frequently excluded from the opportunities created by globalisation by inadequate access to productive resources, weak marketing infrastructures, illiteracy and poor health. Government action in these areas is vital to achieve a wider distribution of opportunity. Redistribution through fiscal transfers is one option. But the real challenge is to create the conditions in which poor people can produce their way out of  poverty, contributing to national wealth creation in the process. Growth is good for the poor fails to address the real challenge facing policy makers in this area. The challenge is to establish which types of growth are more likely to improve income distribution, and to develop policies to achieve more equitable patterns of growth. While Dollar and Kraay claim to reject the trickle down approach to poverty reduction, this is precisely what they offer. Some of the World Bank’s major shareholders could usefully recall the experiences of their own countries before allowing the World Bank to travel the route recommended by Dollar and Kraay. For instance, during the 1980s, both Britain and the United States experienced sustained increases in prosperity, accompanied by dramatic increases in inequality and child  poverty. Many developing countries suffered the same experience under the auspices of IMF and World Bank adjustment programmes that corresponded closely to the prescriptions offered in Growth is good for the poor  . Returning to the failed models is not a viable strategy for addressing the poverty reduction challenges of the future. iii
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