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Poverty, Pro-Poor Growth and Simulated Inequality Reduction

Author: R Fuentes
Date: 2005
Size: 31 pages (311 KB)

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Summary

What is the relative importance of growth promotion versus inequality reduction in terms of lowering poverty levels? What kinds of economic growth are most effective at reducing poverty? This paper from the United Nations Development Programme analyses economic models and real-world data to compare the effectiveness of growth-based and redistributive policies in combating poverty. It argues that “pro-poor growth policies”, targeted at promoting growth in the agricultural sector and increasing education levels among the poor, could halve global poverty far quicker than growth without redistribution.

Recent studies have challenged traditional arguments that there is a trade-off between equity and growth. While commentators were previously divided between proponents of absolute growth and advocates of redistribution, later research has suggested that the two approaches can productively be combined to tackle poverty.

This economic approach has been named “pro-poor growth”. Relative pro-poor growth lowers inequality by promoting growth among the poor at a faster rate than among the rich. In this scenario, increases in growth are redistributed to poorer sectors and, while the better-off only suffer minor changes to their wellbeing, the poor gain significant welfare benefits.

Four simulations tracing the effects on poverty of different inequality levels and growth patterns produce various findings:

• In the first simulation, where the poorest have their income doubled by a wealth transfer from the richest 20 percent, poverty is cut by over 10 percent, while costing the rich under 5 percent of their income. Such redistribution would be hard to attain in the poorest countries, but might benefit middle-income economies.
• The subsequent simulations calculate the number of years needed to halve poverty under varying rates of pro-poor and absolute growth. When applied to real-world situations, the time needed to halve poverty drops markedly under condition of pro-poor growth. In Brazil, pro-poor growth would raise the poor out of poverty 20 years faster than growth without this redistribution.

The majority of the poor live in outside cities, so pro-poor growth policies should focus on tackling rural deprivation:

• Increasing agricultural productivity, especially for food crops, by encouraging investment and the use of modern crops and fertilisers, can have a greater impact on poverty reduction than improvements to the manufacturing or service industries.
• Enhancing access to markets by investing in roads, communication, irrigation and ports have created jobs and reduced poverty in Asian economies. Such investment could have a similar effect in Africa, where agricultural potential is high, but market access is poor.
• Strengthening farmers’ property rights by decollectivising land and issuing land use certificates encourages farmers to invest in their land and increase productivity. The lack of transparency and clarity of land system in Africa could be addressed by such policies.
• The chances of emerging from poverty are greater for the minority of poor people who do not work in the agricultural sector. Here, increasing secondary school enrolment and incentives to expand women’s education can reduce poverty by enhancing skills and lowering fertility rates.

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Source: Fuentes, R., 2005, ‘Poverty, Pro-Poor Growth and Simulated Inequality Reduction’. Human Development Report Office, Occasional Paper, United Nations Development Programme, New York
Author: Oslo Governance Centre, http://www.undp.org/oslocentre/