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On Growth And Poverty Reduction Famous Speech by Nancy Birdsall
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On Growth And Poverty Reduction Famous Speech by Nancy Birdsall
February 8, 1997
Admirably, our conference
moderator, Jeff Sachs, wants to keep things simple by not adding to the
list of what must be done in development. I do not want to add to that
list either, but I must. Why? Frustration about Latin America-- where
growth in the 1960s and 1970s did reduce poverty, but not by enough. Where
early post-war growth was not sustained. Where growth in the 1980s
collapsed, and the number of poor more than doubled from 70 to 150
million. And where in the 1990s, despite more than a decade of economic
and social reforms, the return to growth has been modest at best and
unsteady, and where the number of the poor has failed to fall. In Latin
America, in short, though development has been a success when measured in
terms of improving literacy and life expectancy, growth rates are still
low and poverty persists.
So I want to add an ingredient to Jeff's list: the distribution issue. Not
income distribution per se, but something more fundamental: the
distribution of assets and opportunities, especially as it affects the
poor. I want you to consider for a few minutes a possible lesson for Latin
America from East Asia (where income inequality has for decades been much
lower than in Latin America): that distribution of assets is relevant for
ensuring that growth occurs from below, and therefore brings about poverty
reduction.
Why has growth been consistently higher and poverty reduction so much
greater in East Asia compared to Latin America? Why are the Koreans
worrying about a drop in growth to 5 percent, while, outside Chile, 4
percent growth is considered a success in Latin America? The so-called
Miracle study of East Asia's success, done at the World Bank, focused on
broad-based, export-driven, shared growth. I believe behind shared growth
was, in fact, what could be called growth from below; that is, growth
fueled by increasing productivity of the poor in societies where the
distribution of opportunities was relatively equal. To talk about
distribution requires that I clarify its relation to the reduction of
absolute poverty. Tonight I am fundamentally concerned with the reduction
of absolute poverty. Societies tend to care about distribution, in
addition to absolute poverty, if unequal distribution reflects destructive
inequality, i.e. a lack of opportunities or a lack of mobility--which is
likely to cause absolute poverty. There can also be constructive
inequality, which provides incentives for mobility and rewards high
productivity; this inequality usually reflects broad-based opportunities
and is not associated with high absolute poverty and social immobility.
Thus inequality in itself may or may not matter. But if it reflects or
generates policies, programs and historical patterns in which the rich
enjoy privileges and rents that ultimately undermine efficiency, growth,
and poverty reduction, it certainly does matter.
World Bank Approach to Poverty Reduction:
At the IDB, my colleague Juan Luis Londoo and I recently prepared an
assessment of World Bank poverty reduction policies for a session of the
AEA conference held this past January on World Bank policies. One of our
conclusions is straightforward: World Bank and other development
economists have not focused enough on the fundamental issue of the
distribution of assets and opportunities.
The World Bank's historic and continuing emphasis on growth as key to
poverty reduction is absolutely correct. In 1968, the then-President of
the World Bank, Robert McNamara, introduced the explicit goal of poverty
reduction. But for all practical purposes in the analytic work and lending
of the Bank, poverty reduction is seen as occurring through and because of
growth. There has been some emphasis on distribution of income, but as an
outcome rather than a determinant of growth or of poverty reduction. This
lack of emphasis on income distribution and underlying asset inequality is
not that surprising. Mainstream economic theory (in contrast to the
Marxist tradition, which was certainly without influence in the World
Bank) saw distribution as: (a) an outcome [Chenery et al., Redistribution
with Growth]; or (b) as problematic in that redistribution through
populist transfers has historically been a cause of destabilization and
has inhibited sustainable growth. Even the relatively benign idea of
investing in the human capital of the poor (as opposed to so-called
productive investments in infrastructure) as a key to poverty reduction
only appeared in 1980 [World Development Report 1980, special topic]. And
in fact it was almost 10 years before Bank lending actually reflected this
view--it took a decade to bring education and health lending up to a mere
10 percent of total lending.
In the 1980s, the strategy of growth and human capital accumulation as the
means to reduce poverty was put on hold while analytical and operational
work focused on adjustment issues. Then in 1990 came a second World
Development Report with a special section on poverty. The report presented
a three-pillar strategy for poverty reduction reflecting the history I
have briefly outlined. The three pillars were growth, human capital
accumulation via social programs, and safety net programs to protect the
vulnerable and to alleviate poverty during periods of adjustment.
The Three Pillars in Latin America:
In Latin America, the three-pillar approach seemed an appropriate recipe,
and it has in fact been implemented in the 1990s. Major economy-wide
reforms, enacted starting in the mid to late 1980s, have brought a return
to growth of 3-4 percent annually in the 1990s. Countries have also
implemented major increases in their spending on human capital; social
spending per capita (excluding pensions) has increased 22 percent in the
1990s, equivalent to an additional percentage point of GDP spent on health
and education. Finally, most countries in Latin America have created some
form of safety net, generally emergency funds for social protection.
With economic reforms, the region achieved some positive growth in the
early 1990s, so that per capita income recovered to its 1980 levels. But
average growth rates have been anemic, and some portion of the growth
achieved reflects catch up effects after a period of no growth. Moreover,
the overall results of the economy-wide reforms and increased social
spending have been less than satisfactory for poverty reduction. With the
possible exceptions of Chile and Colombia, countries in the region have
managed little or no reductions in poverty in the 1990s.
Two other trends are worrisome. First is evidence of worsening income
distribution over time, and its link to the minimal progress against
poverty. If the economies of Latin America had maintained the same income
distribution throughout the 1980s and 1990s as in 1970, the increase in
poverty would have been smaller by almost half in the years 1983 to 1995.
In other words, at least half of the rise in poverty since the 1970s is
associated with a deterioration in the distribution of income. Second is
evidence that the distribution of education itself is worsening. Using
data on the education of adults (years of school completed) over the last
three decades, we estimate that average education, though it has increased
from about 3 years in 1970 to more than 5 years today, is becoming more
and more unequally distributed (in that the standard deviation of average
adult education has increased). Thus the pattern of inequality is being
repeated over time. In sum, the three-pillar recipe in Latin America is
not delivering the desired results, at least not yet. Moreover, the
worsening trends in income distribution and distribution of education
suggest that the recipe of growth, human capital accumulation and safety
nets may not alone address Latin America's underlying problems of poverty
and high inequality.
Growth and Inequality Across Countries:
In our work at the IDB, we have examined the relationship between economic
growth, the income of the poor and inequality across a group of 43
countries over the past three decades. Using the high-quality income
distribution data compiled by Klaus Deininger and Lyn Squire, we selected
countries with Lorenz curves available for two periods of time separated
by at least five years. For the resulting sample of 43 countries, we also
use income estimates per capita in international purchasing power prices,
and information on physical capital investment, the education of the labor
force, land distribution, and trade indicators. Our regressions confirm
the now standard results of growth analysis: economic growth reduces
poverty, and income inequality reduces economic growth. So less income
inequality would reduce poverty by increasing growth.
But there is more to the story. To the standard regressions we added
variables measuring the initial distributions of land and human capital.
We find that a more equal distribution of assets matters. It reduces
poverty not only indirectly by accelerating economic growth, but directly
by enhancing income growth of the poorest groups. In fact, the positive
effect of lower asset inequality on income growth is almost twice as great
for the poor as for the population as a whole.
Thus we have two virtuous circles: a more equal distribution of assets
reduces poverty (1)indirectly by enhancing aggregate growth which in turn
reduces poverty, and (2) directly. But the mirror image of these is a
vicious circle where high initial asset inequality inhibits asset
accumulation which traps the poor in poverty and, by limiting aggregate
growth, reduces society's capacity to help the poor.
These findings are obviously relevant for Latin America. Growth has been
anemic in the region and poverty reduction has been minimal. Income
inequality is high and procyclical. These outcomes are related to weak
asset accumulation (particularly of human capital) and high inequality of
assets (land and human capital).
Compared to the East Asian economies, Latin America has had much lower
physical capital accumulation. The region also had a lower level of
initial human capital and higher initial asset inequality in human capital
and land. Consider this. With East Asia's distribution of assets--land and
education--in 1960, Latin America would have half the number of people
living in poverty today. The number of poor would likely be even lower for
two reasons. First, the number of poor would be lower if we were to take
into account the effects of greater asset equality on growth, and of
growth on poverty reduction. Second, the number would be lower still if,
in fact, physical and human capital accumulation were a function of
initial inequality (as could be tested in a structural model).
Lessons for the Multilateral Development Banks (MDBs):
Several lessons emerge for the multilateral development banks. First, the
emphasis on growth and human capital accumulation as key to poverty
reduction makes sense. Second, and less positive, more attention should be
focused on a second key determinant of poverty reduction and aggregate
growth: the distribution of assets, both physical and human capital. The
long-standing inattention of all the MDBs to inequality in the
distribution of assets, especially education, has been costly. More
concern earlier with the causes and the consequences of income inequality
would have called greater attention to a fundamental constraint on poverty
reduction: the poor's lack of access to the assets necessary for increased
productivity and income.
In the context of Latin America, the multilateral development banks have
long decried populist transfers. There is an alternative: to focus on
programs that put productive assets in the hands of the poor. This means
focusing not only on expanding education, but on its distribution as well.
It means seeking other mechanisms beyond education to increase the access
of the poor to productive assets: land reform, reform of legal systems,
credit, and fair competition. All of these can create opportunities in
previously unequal societies, eliminating the hidden privileges in asset
markets historically enjoyed by the rich. The growing support of the MDBs
for microenterprise programs acknowledges the relevance of access to
assets and opportunities for income growth among the poor. Similarly, new
emphasis in the banks on political and economic decentralization and on
participation of the poor in the design and implementation of social and
economic programs, with real voice and the power of choice, can be
effective in poverty reduction. In democratic societies only political
access and economic freedom can help ensure greater access to the assets
that will raise incomes.
Thank you.
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On Growth And Poverty Reduction Famous Speech by Nancy Birdsall
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