Transcript in Southern Africa: what challenges for

DOES ECONOMIC GROWTH ALWAYS REDUCE POVERTY?
MARC WUYTS
INSTITUTE OF SOCIAL STUDIES
ERASMUS UNIVERSITY OF ROTTERDAM
A RISING TIDE RAISES ALL BOATS
THE ARGUMENT GOES AS FOLLOWS:
IF (OVER A PERIOD OF TIME – SAY, 5 0R 10 YEARS),
1. GDP PER CAPITA GROWS SIGNIFICANTLY,
1. AND, INEQUALITY (USUALLY DERIVED FROM HOUSEHOLD BUDGET SURVEYS) DOES
NOT BECOME (SIGNIFICANTLY) WORSE;
THEN
•
INCOME POVERTY – USING AN ABSOLUTE POVERTY LINE – MUST FALL.
NOTE:
IF THIS DOES NOT HAPPEN, A PARADOX IS SAID TO EXIST OR, AS IS MOST COMMONLY
ASSERTED, SOMETHING IS WRONG WITH THE DATA.
IMPLICIT ASSUMPTIONS AND SILENCES
IT APPEARS, THEREFORE, AS IF PER CAPITA GDP GROWTH DIRECTLY TRANSLATES
ITSELF INTO IMPROVED STANDARDS OF LIVING, PARTICULARLY THOSE OF THE
POOR, REGARDLESS OF THE MECHANISMS THROUGH WHICH THESE
TRANSMISSIONS ARE SUPPOSED TO TAKE PLACE.
THIS ASSUMES THAT:
•
THE GROWTH IN PER CAPITA GDP IS EQUAL TO THE GROWTH IN THE AVERAGE
STANDARD OF LIVING.
THIS SAYS LITTLE ABOUT:
•
THE FACT THAT THE STANDARDS OF LIVING OF THE MAJORITY OF WORKING
PEOPLE — ‘POOR’ AND ‘NON-POOR’ ALIKE — DEPEND ON HOW OUTPUT GROWTH
DIVIDES BETWEEN PRODUCTIVITY GROWTH AND EMPLOYMENT GROWTH AND, IN
TURN, ON HOW AND TO WHAT EXTENT PRODUCTIVITY GROWTH TRANSLATES
INTO A GROWTH IN LABOUR EARNINGS.
MEASURING AGGREGATE OUTPUT GROWTH
VERSUS
MEASURING GROWTH IN THE AVERAGE STANDARD OF LIVING
•
GDP MEASURES AGGREGATE VALUE ADDED OF DOMESTIC PRODUCTION
(CONSUMER GOODS, INVESTMENT GOODS AND EXPORTS); TO MEASURE ITS
GROWTH OVER TIME, GDP IS CALCULATED AS CONSTANT PRICES TO CORRECT FOR
CHANGES IN PRICES.
– THE APPROPRIATE DEFLATOR IS THE IMPLICIT GDP DEFLATOR, WHICH SHOWS THE
GENERAL RATE OF INFLATION (OR DEFLATION) OF DOMESTIC OUTPUT.
•
TO MEASURE REAL CHANGES IN STANDARDS OF LIVING IT IS THE PRICES OF
CONSUMER GOODS THAT MATTER.
– THE APPROPRIATE DEFLATOR IS THE CONSUMER PRICE INDEX
KEY PREMISE: DO NOT ASSUME THAT THESE TWO DEFLATORS MOVE HAND IN
HAND. THIS ASSUMPTION, HOWEVER, IS ROUTINELY MADE!
PRELIMINARY SUMMARY
•
GDP GREW AT 7.4% PER ANNUM AND POPULATION GROWTH WAS ± 2.4% PER
ANNUM, WHICH MEANS THAT GDP PER CAPITA GREW APPROXIMATELY AT 5% PER
ANNUM.
•
THE INFLATION RATE FOR THE IMPLICIT GDP DEFLATOR WAS 7.5% PER ANNUM AS
AGAINST 9.8% FOR THE CONSUMER PRICE INDEX, A DIFFERENCE OF 2%.
•
THE POTENTIAL GROWTH IN THE AVERAGE STANDARD OF LIVING, THEREFORE,
SHOULD BE CORRECTED FOR THIS DIFFERENTIAL BETWEEN INFLATION RATES:
HENCE, AT MOST 5% - 2% = 3% PER ANNUM
CAVEAT:
THIS IS A VERY CRUDE MEASURE OF THE RISE IN THE AVERAGE STANDARD OF LIVING SINCE (1) IT
ASSUMES THAT THE SHARE OF CONSUMPTION IN AGGREGATE REMAINED CONSTANT AND, IMPORTANTLY,
(2) THAT THE GROWTH IN GDP ALSO REFLECTS THE GROWTH IN GROSS NATIONAL INCOME. IF, AS IS
LIKELY IN MOZAMBIQUE, PROFITS CONSTITUTE A SIGNIFICANT SHARE OF VALUE ADDED (PARTICULARLY, IN
MEGA PROJECTS) AND ARE REPATRIATED ABROAD, THE GROWTH IN GDP DOES NOT GO HAND IN HAND
WITH THE GROWTH IN NATIONAL INCOME.
FOOD VERSUS NON-FOOD INFLATION
LOOKING AT THE GENERAL RATE OF INFLATION IN CONSUMER PRICES IS
UNSATISFACTORY, HOWEVER, BECAUSE OF THE FOLLOWING REASONS:
– CONSUMPTION PATTERNS AMONG PEOPLE (HOUSEHOLDS) DIFFER
DEPENDING ON WHETHER THEY ARE POORER OR RICHER.
– MORE SPECIFICALLY, THE PROPORTION OF INCOME SPENT ON FOOD DECLINES
AS INCOME INCREASES (WHICH IS KNOWN AS “ENGEL’S LAW”)
– THE CONSUMER PRICE INDEX IS CALCULATED ASSUMING THAT, ON AVERAGE,
55.46% OF HOUSEHOLD EXPENSES ARE SPENT ON FOOD.
– THIS PROPORTION IS TOO HIGH FOR THE RICH, BUT MUCH TO LOW FOR THE
POOR.
– IT IS IMPORTANT, THEREFORE, TO DECOMPOSE THE CPI INTO AT LEAST TWO
COMPONENTS – FOOD AND NON-FOOD ITEMS – AND LOOK AT THE
EVOLUTION OF BOTH.
REVISED SUMMARY
•
IF WE ARE CONCERNED ABOUT FOOD POVERTY (WHICH IS EXTRAORDINARY HIGH
IN MOZAMBIQUE), IT IS THE INFLATION RATE OF FOOD PRICES THAT MATTERS
MOST: 11.3% PER ANNUM, ON AVERAGE, AS AGAINST 7.5% FOR THE GDP
DEFLATOR – A DISCREPANCY OF 3.8%.
•
CONSEQUENTLY, EVEN IF THE MONETARY DISTRIBUTION OF INCOME REMAINS
UNCHANGED, THE DISTRIBUTION OF REAL INCOMES WILL WORSEN!
TWO CONCLUSIONS
•
AS KALECKI POINTED OUT LONG AGO,FOR GROWTH NOT TO GO AT THE EXPENSE OF THE
POOR (AS A RESULT OF FOOD PRICE INFLATION) IT IS IMPORTANT THAT FOOD BALANCE IS
MAINTAINED IN THE ECONOMY THROUGH INVESTMENT IN THE PRODUCTION OF FOOD.
•
AS ATKINSON AND LUGO (2010) POINTED OUT, IF POVERTY IS MEASURED ON AN ABSOLUTE
BASIS, THE MEASUREMENT OF INEQUALITY SHOULD ALSO BE IN ABSOLUTE TERMS, AND NOT
RELATIVE TERMS (LIKE THE GINI COEFFICIENT).
DOMESTIC FOOD PRODUCTION APPEARS TO BE HIGHLY VARIABLE WITH LOW OVERALL GROWTH
GROWTH RATES: 2002 – 2008
FOOD PRODUCTION:
2.2% PER ANNUM
PRODUCTIVITY INDEX: - 2.7% PER ANNUM
SOURCE: POVERTY AND WELL-BEING IN MOZAMBIQUE: THIRD NATIONAL POVERTY ASSESSMENT 2010 (OCT).
EMPLOYMENT AND THE COST OF WAGE GOODS
TO SAFEGUARD AND IMPROVE THE REAL DISTRIBUTION OF INCOME REQUIRES A
REDUCTION IN INEQUALITY AS MEASURED ON AN ABSOLUTE BASIS (AND NOT IN
RELATIVE TERMS). PERHAPS THE SINGLE MOST IMPORTANT DETERMINANT OF
INCLUSIVE GROWTH BY REDUCING ABSOLUTE INEQUALITY IS THE GROWTH IN
EMPLOYMENT AT REAL WAGES THAT SECURE A DECENT STANDARD OF LIVING.
IN THIS RESPECT, IT IS IMPORTANT TO MAKE THE DISTINCTION BETWEEN THE REAL
WAGE AND THE PRODUCT WAGE:
–
THE REAL WAGE IS A MEASURE OF STANDARD OF LIVING AND IS OBTAINED BY DEFLATING THE
NOMINAL WAGE BY THE INDEX OF PRICES OF WAGE GOODS (= CONSUMER PRICE INDEX OF BASIC
NECESSITIES).
–
THE PRODUCT WAGE IS A MEASURE OF PROFITABILITY (IN PARTICULAR, OF VIABILITY OF LABOUR
INTENSIVE PRODUCTION) AND IS OBTAINED BY DEFLATING THE NOMINAL WAGE BY THE PRICE OF
OUTPUT.
–
IF THE PRICE OF NECESSITIES – FOOD, IN PARTICULAR – RISES FASTER THAN GENERAL OUTPUT
PRICES, EITHER REAL WAGES HAVE TO FALL OR THE VIABILITY OF LABOUR-INTENSIVE PRODUCTION
IS ERODED. OFTEN, WHAT HAPPENS IS A COMBINATION OF BOTH WITH REAL WAGES BEING PARTLY
PROTECTED IN THE FORMAL SECTOR (RESTRAINING ITS EMPLOYMENT EXPANSION) WHILE FALLING
IN THE INFORMAL SECTOR.
THANK YOU FOR YOUR ATTENTION