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Economics

What it is that makes growth pro-poor

by Nicole Rippin
Einkaufszeile in Accra: Wachstum sollte allen nützen

Einkaufszeile in Accra: Wachstum sollte allen nützen

Pro-poor growth is the most important economic strategy to promote social inclusion. The term indicates that growth should boost the ability of the poor to take part in the national economy. Scholarship is discussing ways to achieve that. [ By Nicole Rippin ]

David Dollar’s and Aart Kraay’s article “Growth is good for the poor” stirred up debate in 2002. The two authors from the World Bank claimed that economic growth played an unexpectedly large role in the fight against global poverty. They found that global economic growth and per-capita income of the poor had risen in step over the past 40 years. Moreover, the authors found no indication of this relation weakening over the decades.

Dollar and Kraay also assessed the effects of policies generally considered to be pro-poor, such as public expenditures on health and education. Their sobering conclusion was that such policies had no systematic effect on how growth affected income distribution. The question thus arose whether the idea of pro-poor growth could not simply be reduced to pro-growth. The authors rejected that idea, arguing that their findings did not establish that growth in itself was enough to improve standards of living among the poor.

Since then, a wide range of literature has discussed the matter. Michael Krakowski’s collection of essays “Attacking poverty. What makes growth pro-poor?” (2004) includes a number of remarkable essays by various authors, providing a good overview. In one chapter, Stephan Klasen provides an overview of the complicated discussion about terminology. Indeed, there are several competing definitions of “pro-poor growth”. Klasen does not list them all, but he insists on several crucial aspects for a meaningful one. First, pro-poor growth must be distinguished from other kinds of economic growth. Second, poor strata of the people must benefit from pro-poor growth more than others. Accordingly, the one-to-one relationship noted by Dollar and Kraay would not qualify as pro-poor. Third, income distribution within poor strata also plays a role: extreme poverty should weigh more heavily. Fourth, though the emphasis should clearly be on the poor, economic growth as such also has to be taken into account.

Klasen also looks at political implications. He makes a clear distinction between political strategies that are controversial and those that are not. Macroeconomic stability, for instance, is considered crucial for pro-poor
growth. Monetary and fiscal policy must keep inflation in check, no doubt. However, the World Bank recommends competitive exchange rates, while other experts want to use undervalued exchange rates to create export incentives. Klasen similarly discusses consensus and dissents in other fields of policy-making.

In the same book, Louise Cord, J. Humberto Lopez and John Page study the argument Dollar and Kraay raised but did not prove. According to them, economic growth does not necessarily reduce poverty in the long run. Unlike Dollar and Kraay, Cord, Lopez and Page study the cases of specific countries instead of using global averages. On that basis, they show that growth can both increase equity and worsen inequality. Indeed, it may even happen that poor people’s incomes wane as the overall economy
grows. Examples for such a relationship are Ethiopia, Bulgaria, Costa Rica, the Dominican Republic, El Salvador, Nigeria, Panama, Senegal and Tanzania. Accordingly, growth is not in itself pro-poor.

Surjit S. Bhalla (2002) takes a different stand in “Imagine there’s no country – Poverty, inequality, and growth in the era of globalisation”.
This book is an all-out attack on World Bank findings concerning pro-poor
growth. The author explicitly asks how globalisation affects economic growth, income distribution and poverty. He finds that global income inequality dropped between 1980 and 2000 during a phase of fast economic
growth, and states that growth is always pro-poor.

His calculations of poverty differ considerably from those of the World Bank. He says that the much-discussed Millennium Goal of cutting extreme poverty in half by 2015 had already been more than reached in 2000. In contrast, the World Bank insists this goal has not been reached. Bhalla’s line of argument is certainly exaggerated and untenable, but his approach is interesting nonetheless because he points out weak points in the World Bank’s methodology.


Challenging methods

To anyone interested in methods, “Determinants of pro-poor growth – Analytical issues and findings from country cases”, a collection of essays edited by Michael Grimm, Stephan Klasen and Andrew McKay (2007), provides some valuable insights. Based on studies of eight countries studies (Ghana, Vietnam,Burkina Faso, Indonesia, Senegal, Bolivia, Romania, and Zambia), the book illustrates how analyses are conducted.

In their introduction, Grimm and Klasen sum up interesting conclusions of the book. For instance, they refer to the much-cited essay “Measuring pro-poor growth” by Ravallion and Chen (2003), who developed methods to study the effects of growth on income distribution. Grimm and Klasen point out the theoretical merits of that approach, but also insist that applying it in a meaningful way depends on excellent data, which are generally not available. In general, Grimm and Klasen complain that too many studies are not based on properly selected data, but merely make conclusions on whatever data base is available, whether that is appropriate or not.

The authors of the various essays make proposals for linking of macro- and microeconomic data. Grimm and Klasen underline the wide methodological variety of those essays. Among other things, they show that narrative data can be just as valuable as quantitative data. Finally, they state that the pro-poor growth debate would benefit quite a bit from looking at other dimensions of poverty besides low income.

Indeed, the pro-poor growth debate focuses mainly on income issues so far. But as Amartya Sen showed in his influential essay “The concept of development” back in 1988, that is an oversimplification. In “Development as freedom” (1999), Sen explained in greater detail why he understands
poverty to be a lack of means to increase one’s own well-being through one’s own actions. Poor health services, violent conflicts, lack of law and order, and destructive environmental and climate conditions limit such options.

While Sen’s arguments clearly make sense, his understanding of poverty is hard to quantify with data. As Grimm and Klasen justly point out, proponents of pro-poor growth ideas would therefore be well advised to expandthe concept of income poverty in meaningful ways so that it would cover the multidimensionality Sen emphasises.