Developing Countries Detrimental to Economic Growth?
Economics: Is a Policy of Poverty Reduction in
Developing Countries Detrimental to Economic Growth?
The prevalence of poverty has always been a persistent problem especially in developing countries; and the rising concern towards poverty reduction has been evident in the Millennium Development Goal (MDG). For pro-growth policy makers, the most effective tool to reduce poverty in the developing countries is economic growth. The Department for International Development recognizes the critical role of rapid and sustained growth in fostering faster progress in the attainment of the MDG. Growth can generate virtuous circle of prosperity and opportunity. Strong growth and employment opportunities improve incentives for parents to invest in their children’s education by sending them to school. This may lead to the emergence of strong and growing groups of entrepreneurs, which should generate pressure for improved governance. Strong economic growth therefore advances human development, which in turn promotes economic growth (DFID, n.d.). Along with the different policies that promote economic growth are the policies that aim to reduce income inequality and poverty.
As to the question “Is a policy of poverty reduction in developing countries detrimental to economic growth?” in my perspective, a policy that aims to reduce poverty of the people of the economy is not unfavorable to growth of the economy.
A successful strategy of poverty reduction must have at its core measures to promote rapid and sustained economic growth. The challenge for policy is to combine growth-promoting policies with policies that allow the poor to participate fully in the opportunities unleashed and so contribute to the growth. This includes policies to make labour markets work better, remove gender inequalities and increase financial inclusion (DFID n.d.).
Recently, Asian countries like India and African countries that are developing are implementing policies that would raise economic growth and make growth more inclusive. To be inclusive, future growth will need to be based on an increasingly globalized world that offers new opportunities but also new challenges. New technologies offer not only ‘catch-up’ potential but also ‘leapfrogging’ possibilities. New science offers better prospects across both productive and service sectors. Moreover, future growth will also need to e environmentally sustainable. Improved management of water and other natural resources is required, together with movement towards low carbon technologies by both developed and developing countries. With the proper institutions, growth and environmental sustainability may be seen as complements, not subsitutes.
Acording to Chibba (2008), evidence based, sound institutions, and sensible macroeconomic policies are required in developing countries but are not sufficient to tackle poverty and promote pro-poor growth. Incremental and complementary solutions to address global and national poverty reduction goals require paying attention to the potential and positive impact of political economy, technology-based solutions, market-based approaches, private-sector development and related interventions that are linked to inclusive development and financial inclusion.
In the study made by Fosu (2010), adopting the appropriate pro-poor growth strategies requires some understanding of idiosyncratic country attributes. After all, policies are by and large country-specific, and the present study does indeed find that there are substantial differences in the abilities of countries to translate economic growth to poverty reduction, based on their respective inequality and income profiles. By shedding light on this transformation process by country these findings, at least, provide a ‘road-map’ for undertaking country studies to uncover the underpinning idiosyncratic factors. Understanding such country-specific profiles is crucial in crafting polices for most effectively achieving poverty reduction globally.
Roemer and Gugerty (1997) recognized in their study that arguments are often made against the proposition that economic growth reduces poverty. First, the Kuznets curve hypothesis proposed by economist Simon Kuznets in 1955 holds that as incomes grow in the early stages of development, income distribution would at first worsen and then improve as a wider segment of the population participated in the rising national income. If income distribution became dramatically less equal with growth, poverty might not be declining. Roemer and Gugerty (1997) found that income distribution does not change dramatically in most even over relatively long periods of time. In addition, the data indicate that the Kuznets hypothesis does not seem to hold for most individual countries that are currently developing.
Second, the obvious depth and persistence of poverty has created doubts about the ability
of economic growth to reduce poverty; these doubts are especially prevalent among development professionals working directly with the poor in developing countries. In addition, stabilization and structural adjustment measures that are prescribed to promote growth are widely perceived to deepen poverty, particularly in the short run, casting further doubt on the wisdom of attacking
poverty through faster growth. While there is little empirical evidence on the relationship between structural adjustment and poverty alleviation, this paper demonstrates that the policies promoted by structural adjustment, namely openness to the world economy and sound fiscal and
macroeconomic management, do tend to reduce poverty through their effects on growth.
Unfortunately, other than through the effect of raising incomes, few data are available to address
the relationship between economic growth and the welfare of the very poorest members of
society.
Is poverty reduction good for growth?
Again, yes, in general. It is hard to think of countries where a large decrease in the absolute number of people living in poverty has not been accompanied by faster growth.
Just as we can imagine growth occurring without any reduction of poverty, we can also imagine a strategy of poverty reduction that relies exclusively on redistributing wealth from the rich and the middle classes to the poor. In principle, a country pursuing redistributive policies could reduce poverty even if its total income did not grow. But we would be hard pressed to find real-world examples. Policies that increase the incomes of the poor—such as investments in primary education, rural infrastructure, health, and nutrition—tend to enhance the productive capacity of the whole economy, boosting the incomes of all groups (Rodrik 2000).
Should economic reform strategies have a poverty focus?
Yes, for at least three reasons. First, in considering social welfare, most people, and democratically elected governments in particular, would give more weight to the well-being of the poor than to that of the rich. The economy's growth rate is not a sufficient statistic for making welfare evaluations because it ignores not only the level of income but also its distribution. A policy that increases the income of the poor by one rupee can be worthwhile at the margin, even if it costs the rest of society more than a rupee. From this perspective, it may be entirely rational and proper for a government considering two competing growth strategies to choose the one that has a greater potential payoff for the poor, even if its impact on overall growth is less assured.
Second, even if the welfare of the poor does not receive extra weight, interventions aimed at helping the poor may still be the most effective way to raise average incomes. Poverty is naturally associated with market imperfections and incompleteness. The poor remain poor because they cannot borrow against future earnings to invest in education, skills, new crops, and entrepreneurial activities. They are cut off from economic activity because they are deprived of many collective goods (such as property rights, public safety, and infrastructure) and lack information about market opportunities. It is a standard tenet of economic theory that raising real average incomes requires interventions designed to close gaps between private and social costs. There will be a preponderance of such opportunities where there is a preponderance of poverty.
Third, focusing on poverty is also warranted from the perspective of a broader, capabilities-oriented approach to development. An exclusive focus on consumption or income levels constitutes too narrow an approach to development. As Nobel Laureate Amartya Sen has emphasized, the overarching goal of development is to maximize people's ability to lead the kind of life they value. The poor face the greatest hurdles in this area and are therefore the most deserving of urgent policy attention (Rodrik 2000).
References
Ames, Brian, et al (2001). Macroeconomic policy and poverty reduction. Retrieved from http://www.imf.org/external/pubs/ft/exrp/macropol/eng/ on October 17, 2013.
DFID (n.d.). Growth: building jobs and prosperity in developing countries. Department for International Development. Retrieved from http://www.oecd.org/derec/unitedkingdom/40700982.pdf on October 18, 2013.
Fosu, Augustin Kwasi (2010). Growth, inequality, and poverty reduction in developing countries: recent global evidence. Centre for the study of African economies. Retrived from http://www.csae.ox.ac.uk/workingpapers/pdfs/csae-wps-2011-07.pdf on October 17, 2013.
Gottschalk, Ricardo (2000). Growth and poverty reduction in developing countries: how much external financing will be needed in the new century. Retrived from http://www.pep-net.org/fileadmin/medias/pdf/recommended_readings/RicardoGottschalk-GPNEEDS6.pdf on October 18, 2013.
Rodrik, Dani (2000). Growth versus poverty reduction. Finance and Development. International Monetray Fund. Retrived from http://www.imf.org/external/pubs/ft/fandd/2000/12/rodrik.htm on October 17, 2013.
Roemer, Michael and Gugerty, Mary Kay (1997). Does economic growth reduce poverty? Retrieved from http://pdf.usaid.gov/pdf_docs/PNACA656.pdf on October 18, 2013.
