Transcript What is pro poor growth?

What is pro poor growth?
Mohamad Ikhsan
The Institute for Economic and Social
Research University of Indonesia
Outline
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What is a pro poor growth ?
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Definition
Possible trade off
Implementation of a pro poor growth.
 Political Economy of Pro Poor Strategy
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Pro Poor Growth : Definition
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Many existing definitions all imply that growth must be to
the benefit of the poor and give them more access to
economic opportunities.
Others simply define pro poor growth as high elasticity of
poverty rate to economic growth (e.g. Ravallion and Datt,
2000)
Some define as the poor benefit disproportionately from the
economic growth. Meaning that the income of the poor
must grow more than the average income growth rate. This
definition works well under condition the poor portion
dominate the population. How about if the near poor
dominate?
I have two practical definitions of pro growth derived from
the decomposition of poverty measure (e.g. Kakwani, ?)
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Growth with better income distribution (strong preposition)
Growth but no change in income distribution (weak
preposition)
Possible Trade off
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Suppose we have to choose:
a)
b)
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Growth rate 7 % with a marginal deterioration of income
distribution?
Growth rate 3% but with an improved income distribution
which scenario would be more pro poor growth?
The answer may be depend on the magnitude of elasticity
of growth or inequality hence higher the poverty
reduction outcomes.
Current evidences show that China and Vietnam to
choose the second one while Indonesia in 1978 up to pre
crisis followed the first one and neither one during the
1999-2002 i.e. low growth but worsening income
distribution.
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Short run vs. Long Run.
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Direct impact may not take to account the indirect or
second round effects. For example one country
experiences the high growth rate but worsening
income distribution in the short run but in the long
run will sustain high growth rate and improved income
distribution
Are you going to choose the second policy choice?
Example of improvement access to electricity and
water. Heavy investment in those sector will produce
higher growth and possibly worsening income
distribution in the short run but once the poor get
better access – hence reduced cost of consuming
those relevant goods, income distribution may be
improved.
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Aggregate v.s Specific Approach
When evaluating and applying pro poor
growth, should we focus on aggregate as
policy choices and derived into specific
issue or other way around?
 Some may in favor of starting from
specific issues with better results on
specific issues but we may end up the
problem of excessive compensation on the
aggregate. This creates a political
economy problem.
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How to implement pro poor growth
It is clear that pro poor growth that
directly reduces poverty must be in
sectors where the poor are and use the
factors of production they possess. For
Indonesia’s case about ¾ of poverty
incidence is the rural one and mostly
agriculture .
 Thus pro poor growth must be focused on
rural areas, improved incomes and
productivity in agriculture and must make
intensive use of labor.
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Short term vs. long term
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In the medium term, we should also look for indirect
linkages between sectors and factors. High and labor
intensive growth manufacture can lead to labor
transformation and increase the incomes both poor
migrants and those poor left behind. This is consistent with
Indonesia’s experiences during 1980-1990s.
Similarly, growth that is intensive in skilled (non poor)
might increase the demand for unskilled as two are often
complementary.
Or as the poor improve their human capital, growth can be
pro poor if it becomes more intensive in human capital
rather simply in unskilled labor.
Those imply when designing pro poor growth we should
focus on the long term at least the medium term impact
rather than the short term impact.
Spatial Issue
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Many experiences show that high concentration
of poor people can often lead to persistent
poverty traps where concentrations of the
poverty generate negative spill-over effects
credit, land or labor markets, the quality of public
institutions, or too little public investment.
Pro poor growth must therefore try to stimulate
economic activity in these pockets of poverty. For
this case many experiences show that publicprivate sectors involvement is more effective
than leaving the public sector alone.
Breaking Poverty Cycle
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Other experiences show that persistent poverty
incidences happen because the inability of poor
family to break poverty cycle. With limited
resources, we then have to focus on how to
break those cycles by concentrating on
developing human capital of children from
nutrition, health and education investment. This
policy choice may end up low performance in
poverty reduction in short run but greater
achievement in the long run.
Can and Do the poor have capacity to wait for
longer time?
Thus, balancing the short term and long term is
also important.
Managing the side impact - risks
Expansions in economic opportunities
often- if not always – produce a greater
risk to the poor. The poor have
disadvantage to cope with the risks. Thus
resources also are needed for creating
safety net.
 The challenge then how to design good
targeting safety net schemes and not
destroying the traditional, informal and
more efficient scheme.
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Put attention on both supply and
demand
In general, a good poverty strategy should
handle both supply and demand sides to
reduce the transition period time.
 The demand side is particularly important
for the poorest and to encourage the poor
to participate in the poverty program.
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.. Finally some political economy issues
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When doing specific approach we may end up
with over compensation for the poor vis a vis no
thing for the near poor. This will create problem
to get political support particularly when the
portion of near poor dominate the population.
Pro poor growth also implies shifting public
resources from the middle class while they are
the decision makers.
It is more difficult to abolish the (inefficient and
ineffective) poverty program. So be careful to
introduce new program otherwise you will create
a dependency on poverty program.
Conclusion
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Message 1: growth is necessary but not sufficient
Message 2: Pro poor growth must be focused on
where the poor depend on for their livelihood and
use the factors of production they possess
Message 3: Balancing the short term and long
term growth is also essential.
Message 4: Go to specific issue is preferable but
don’t forget the aggregation problem ( the
excessive transfer)
Message 5: Taking into account the political
economy issue and we may end up with the
second best. Some leakages to the non poor may
be necessary for initiating pro poor growth
policies.
Thank you