Growth and poverty reduction - Pro-poor growth or trade-off?

8 February 2008 13:00 - 14:30 GMT+00
Public event

Speakers:

Richard Manning - former Chair, Development Assistance Committee, OECD

Professor Andy McKay - Professor of Development Economics, University of Sussex and Associate Director, Chronic Poverty Research Centre (CPRC)

Chair:

Kate Bird - Research Fellow, Poverty and Public Policy Group, ODI

Description

The first meeting in this series will seek to answer questions such as: is there ever a trade-off between growth and poverty reduction, or between growth and inequality? Should governments be prepared to make that trade-off? And how can governments promote pro-poor growth? Richard Manning, former Chair of the OECD Development Assistance Committee, will offer some reflections on pro-poor growth, drawing on his work with POVNET, the DAC network that was established to help bilateral agencies sharpen their focus on poverty reduction efforts. The network publishes guidance on how donors can promote pro-poor growth and enable a pace and pattern of growth that enhances the ability of the poor to participate in, contribute to and benefit from growth. Professor Andy McKay, Professor of Development Economics at the University of Sussex and Associate Director of the Chronic Poverty Research Centre, has written extensively on growth and pro-poor growth. He will offer an analysis of the issues and provide a response to Richard Manning's remarks.

Training Room

Mr. Richard Manning

  1. Richard Manning showed graphically how growth rates have increased (in China, India and other low-income countries more than middle-income and high-income countries), but inequality in developing countries has also increased. 
  2. The Development Assistance Committee (DAC) of the OECD formally committed to promoting pro-poor growth at the DAC High-Level Meeting on 5 April 2006.  This followed extensive work and discussion in the DAC’s Poverty Reduction Network and, of course, many years of debate.
  3. The three central messages delivered by Manning were:
    1. Rapid and sustained poverty reduction requires pro-poor growth.
    2. Policies to tackle the multiple dimensions of poverty should go hand in hand.
    3. Empowering the poor is essential.
  4. Manning defined pro-poor growth based on the DAC definition: ‘Pro-poor growth is a pace and pattern of growth that enhances the ability of poor women and men to participate in, contribute to and benefit from growth.’
    1. It was noted that the DAC has not taken a position on absolute and relative measures of poverty with this definition.
  5. Pro-poor growth is necessary because:
    1. A pro-poor pattern of growth makes growth more effective in reducing poverty.
    2. Inequality has implications for growth.
    3. The vulnerability of the poor to risk and the lack of social protection reduce the pace of growth and the extent to which it is pro-poor.
    4. To address the three points above, policies need to tackle the causes of market failure and improve market access.
  6. In terms of tackling the multiple dimensions of poverty, Manning argued:
    1. Perceptions of policy dichotomies have been misplaced.
    2. Too much emphasis has been placed on policy ‘trade-offs’.
      1. Policies can be both pro-poor and underpin longer term growth.  For example, rural infrastructure and the extent and quality of education.
  1. Empowering the poor is essential for pro-poor growth.
    1. The poor need to participate in and influence the policy reform process that goes with poverty reduction strategies.
    2. A well-functioning state is important for responding to the interests of the poor.
    3. Pro-poor reform is likely to required changes to the current political settlement among the diverse interests of different segments of society.
  2. Implications of pro-poor growth for donors:
    1. The pro-poor growth agenda is not ‘business as usual’ and more of the same will not be sufficient.
      1. This agenda challenges the current pattern of aid spending, where there has been a significant upturn in the share of social sector spending and decrease in agriculture, infrastructure and productive sector spending.  But DAC PovNet analysis shows that private sector, agriculture and infrastructure spending supported by development assistance was not so effective in the last.
      2. It was noted that new donors (China and the Millennium Challenge Organization, for example) are being asked to support infrastructure and agriculture, as developing country governments feel that the development balance (ie. focus on social sector rather than other sectors) is not quite right.
    1. Donors should focus on in-country policy processes.
    2. Donors support needs to be flexible and responsive to country situations.
    3. Donors need to enhance their organisational capacities to effectively support country-led, pro-poor growth.
    4. A pro-poor lens on areas important for pro-poor growth, such as private sector development, agriculture, infrastructure and risk and vulnerability requires a rethinking of donor agendas.
  1. Manning provided a caveat: the poor are not a homogenous group and policy implementation must be based on a sound understanding of who the poor are and how they earn their livelihoods.  The DAC are not promoting a ‘one size fits all’ approach.  There is no substitute for proper in-country assessment.
  2. Current DAC work on pro-poor growth
    1. Disseminating and field testing the pro-poor growth messages, through joint donor training (with Train4Dev) and country workshops.
    2. Piloting the Poverty Impact Assessment (PIA) approach.
    3. Guidance on promoting creation of more, better and more productive jobs.
      1. Donors in the past have not paid sufficient attention to employment.
    1. Guidance on reducing risk and vulnerability through social protection and empowerment.
    2. DAC countries currently listing priorities for the 2009/10 work period.
    3. Further reading is at www.oecd.org/dac/poverty.

Professor Andy McKay

  1. There is a need to refocus on growth.
    1. The focus on human development is justified, but the focus on economic growth has been lost in the last twenty years.  The two strands need to fit together.
    2. Growth has been effective in absolute income poverty reduction (eg. China, India, Ghana, Mozambique) but there is a serious problem of lack of growth in many countries, including the ‘bottom billion’.
      1. While there has been growth in sub-Saharan Africa in the recent past, the question is: how sustainable is this?
  1. It is difficult to get evidence of pro-poor growth.
    1. The assessment is typically based on examination of distributional pattern of growth, comparing results of income surveys at two or three points in time.
      1. But this type of analysis is sensitive to the points in time identified and the information that is available.
    1. It is even more difficult to get evidence of the impact of growth on non-income poverty.
      1. The impacts are often longer term and more indirect.  For example, current infant mortality figures may reflect what happened five to ten years ago.
  1. Economic growth is often unequal.
    1. Growth is a messy and difficult process, which is typically about change.  Income increasing changes (such as migration, or changing jobs) are often more difficult for the poor to make (and therefore it can be more difficult for the poor to benefit from economic growth).
    2. Vulnerability and the low levels of assets of the poor limit their participation in growth.  Where there are higher levels of uncertainty, people are often risk averse, which can result in a ‘poverty trap’ type of situation.  The poor may also be in lower growth potential areas of sectors.
      1. For example, agriculture may be a slower growth sector.
    1. Note that the Dollar-Kray evidence about growth benefiting the poor one for one is not supported by more in depth analysis.  There is a strong suggestion that growth goes with increasing inequality.
  1. Policy can influence the distributional pattern of growth, through a range of mechanisms:
    1. Policies that influence the sectoral pattern of growth;
    2. Agricultural policies;
    3. Regional policies (assistance to remote and/or disadvantaged regions);
    4. Improved market access;
    5. Policies to support the informal sector;
    6. Measures to reduce vulnerability;
    7. Policies to encourage sustainable resource exploitation.
  2. Institutional factors matter for pro-poor growth.  For example, democratic accountability allows poor people to participate more effectively in growth and is also good for growth. 
    1. Note that if policy is controlled by the elite, policy will not be developed to maximise the growth of the economy, but rather to maximise elite returns.
  3. Raising revenue is key for pro-poor growth.
    1. Growth is a source of revenue for government; without increasing tax rates growth increases the availability of revenue.  This has significant benefits for society if increased revenue funds public spending.  If sufficiently pro-poor, this can have significant impacts on income poverty and in turn, also on non-income poverty.
    2. The challenge is to have meaningful pro-poor spending, which benefits disadvantaged groups and regions.
  4. Gender equality and reduced fertility are potential win-wins, as both are likely to be good for growth and for poverty reduction.
  5. Donors and the pro-poor growth agenda: have donors been unhelpful? A number of issues were highlighted.
    1. There has been a lack of focus on growth.
    2. There has been limited support for trade policy, financial sector development and on private sector development (is that their comparative advantage?).
    3. There has been a reluctance to spend on infrastructure.
    4. Aid has arguably ‘crowded out’ regular revenue raising.
    5. Aid has led developing countries to be ‘hit’ with the latest donor fashions and fads.
    6. Donors have tended to engage with the central government, but is the central government the right group for donors to engage with on pro-poor growth?

Discussion

  1. The drivers of change and falling inequality (eg. shocks, politics and conflict) were raised, where it was asked: do countries need to experience a shock to take action to reduce inequality (and if so, is aid a hindrance rather than a help)?  McKay argued that often shocks are needed for inequality reducing change to take place (but also argued that aid should not be withdrawn as a result, as aid can cushion shocks).
  2. The external environment/context in terms of trade policy, the WTO, subsidies and oil prices were raised and the centrality of these issues to poverty were emphasised (eg. in relation to coffee and control over the coffee market; the cost of oil and OPEC).  Manning acknowledged that the international context is critical.  He argued that there was a feeling, however, that the import protection approach does not work.  He also stated that there is a lot of work to be done on supply chains and how to ensure these are pro-poor.  Donors need to focus on this area, in terms of transport costs, market access, etc.  Eg. Huge costs in trade in Africa due to transport costs and inadequate infrastructure (but competitive labour costs).  The experience of rising exchange rates in Africa, and their impact on the rural poor (rather than the well-organised urban poor), was highlighted as an example of why it important to empower poor people and ensure their voice is heard and government’s are effective and held accountable to their constituency. McKay argued that there are limited opportunities for growth if trade is protected, but there are things that countries can do to reduce vulnerability at the country level, despite the external environment.
  3. The unpleasant aspects of growth were highlighted (eg. young people working in factories for very low wages) and it was asked: how can donors engage with the unpleasant aspects of growth and sell this to their domestic constituents?
  4. The implications of the recommended shift towards infrastructure and agriculture were discussed.  Questions included: if there is a shift back in this direction, what will be done to ensure things are done differently this time?  What are the implications of this shift for aid modalities? Manning stated that a range of modalities/funding mechanisms should be used.  He also noted that experience has taught us that the private sector is good at some things (eg. telecoms) and less good at others (power, water and transport).  He argued that agriculture poses the biggest challenge from a sectoral perspective.
  5. The role of donors in supporting the private sector was raised as a question.  Manning argued that the public sector, and donors, should not choose ‘winners’ but rather work to ensure the enabling environment for private sector investment is developed.  Manning also argued that sometimes donors sometime might need to have a narrow focus (eg. role of telecommunications in improving market access in the developing world).
  6. The impact of growth in non-income poverty was raised and it was argued that there is perhaps a contradiction between the need to create growth, but to reduce non-income poverty be investing in health and education.  McKay clarified his argument in response, stating that there was a need to understand more about the relationship between growth and non-income poverty, but that there was no tension between human development and growth.  Both are needed, and increases in growth should lead to increases in revenue, which should be invested in human development sectors.
  7. The link between corruption, growth and development was highlighted.  McKay stated that he has some sympathy for Mushtaq Khan’s argument, that the return to tackling corruption might not be very high and perhaps not the best priority.  Manning argued that growth and corruption may be able to go together, but corruption needs to be taken very seriously and can significantly hinder growth.  For example, the high cost of transport (which impedes market access) is often due to corruption.
  8. The DAC’s definition of pro-poor growth was questioned in relation to the emphasis on the participation of the poor in growth.  It was argued that this downplays the role that poor people can play in growth through adverse incorporation, bonded labour, etc.  The poor can participate in growth, but in an anti-poor way.  As well, it was noted that participation is not always required for pro-poor growth (eg. China and the Asian Tigers).
  9. The relationship between pro-poor growth and climate change was raised, in terms of the impact of climate change on agricultural production and water scarcity, given that growth is generally based on resource intensive sectors.
  10. The presenters were asked to provide a good case study of pro-poor growth.  Manning argued that Mauritius (few assets apart from sugar deal in past, but through consistent set of policies and governance has developed) and Brazil (cash transfers effective in reducing inequalities) were good examples, and highlighted that in both cases, development was not driven by resources but rather effective policies and institutions.  McKay argued that Indonesia is a somewhat successful case.  Ghana is also a good case, having significantly reduced poverty (but increased inequality) over the last 20 years.
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