Economic Growth and Poverty Reduction – Growth Work For the Poor

1. Introduction

The question of whether economic growth leads to poverty reduction is a subject of major contention today. The neo-liberal view to this issue is that growth is good for the poor, and that poverty can be alleviated through economic growth. In this essay, I argue that unless the poor participate meaningfully in the economy and the constraints that hinder their participation are removed, growth on its own cannot help in poverty reduction. The state should also play a major role in making the poor benefit from growth by pursuing pro-poor policies. In the subsequent paragraphs, I define what pro-poor growth is; spell out the constraints to pro-poor growth and what can be done to make growth benefit the poor.

2. Definition of concept: pro-poor growth

According to Ravillion and Datt (1991:19), pro-poor growth can be defined as ‘growth that involves and benefits the poor’. In other words, pro-poor growth requires the maximum participation of marginalized groups in all sectors. Ravallion and Datt further argue that pro-poor growth is, inter alia, characterized by what they call ‘deliberate transfers to the ultra poor who are not able to lift themselves out of poverty. In essence, the argument that they are advancing is that the poor need help or intervention in order for them to benefit from growth. This means that pro-poor growth is a deliberate intervention to make the poor benefit from growth rather than leaving the poor to the fate of the ‘invisible’ hand of the market. It has to do with setting an enabling environment in which the poor have the opportunity to participate meaningfully in the economy.

According to Kydd et al (2001:10) pro-growth will occur when the following conditions exist:

  • Price or productivity increases in tradable products with high average share in the poor’s expenditure.
  • Price and productivity increase in tradable products with high labour inputs by the poor.
  • Changes in technology or reduced barriers of entry, allowing the poor to engage in production of non-tradables which they could not previously engage in or
  • Gains in the significant numbers of non-poor, which lead to expanded demands for goods or services, produced by the poor as a result of upstream or expenditure linkages.

It is important to note that not all growth is pro-poor. Here are some of the characteristics or aspects of growth which are not pro-poor:

  • Disparities in wealth distribution
  • Increases in rural poverty
  • Growth that ignores agricultural development despite the role that it plays in poverty alleviation
  • Lack of investment in health and education, which play a critical role in poverty alleviation
  • Failure to mitigate inequalities and lack of programmes aimed at addressing the needs of the poor.

As Acocella (1998:162) notes, it is critical to remember that growth does not always lead to human development. Growth may occur without any significant impact on human development, especially with regard to the poor. Acocella further argues that real development or growth occurs when there is improvement in the well being of people. Growth that does not lead to improvement in the welfare of people cannot be said to be developmental in nature. Genuine growth, as Ferro et al (2002:4) note, should lead to human development, and this entails ‘empowering the poor to contribute to and benefit from this growth’. It is clear that pro-poor growth does not occur automatically without the implementation of the right policies that will be instrumental in facilitating its manifestation. There are polices and practices that may hinder pro-poor growth from taking place. I examine a few in the next section.

3. Constraints to pro-poor growth

For pro-poor growth to occur in any society, it is important to ensure that all the barriers that prevent the poor from reaching their goals are removed. Failure or reluctance to deal with such barriers may frustrate the progress of poor people and may ultimately hinder any poverty reduction strategy from successfully addressing the issue of poverty. Here are some of the constraints that can negatively affect pro-poor growth:

3.1 Inequality and lack of access to market

It is difficult to pursue pro-poor policies in countries characterized by inequality. Stewart (1995:209) argues that it is difficult to develop pro-poor policies in inegalitarian societies. He gives an example of inegalitarian societies such as Ghana, Mexico and Philippines. Where he argues that growth has not made any impact on the poor. These societies are contraste with Indonesia ‘with a more egalitarian structure to start with and a more pro-poor pattern of growth’.

Other examples given are East Asian societies. Which due to their effective policies of dealing with inequality were able to reduce the level of poverty in a dramatic way. This means that there is a relationship between poverty and inequality. May (2002:2) also shows that policies of inequality pursued by the apartheid government in South Africa were not good for poverty reduction. As they excluded certain groups from participating in the economy of the country. The propagation of inequality led to ‘loss of assets such as land and livestock and simultaneously the denial of opportunities to develop these assets through limiting access to markets, infrastructure and education.

The problem with inequality is that it results in social exclusion where certain groups are denied opportunities or services. The exclusion of the poor from participating meaningfully in the economy can negatively affect their well being. In an economy where inequality is low, the poor will tend to get a higher share of the benefits from growth as compared to an economy which is characterize by a high degree of inequality. As Ravallion and Datt (1997:7) show, ‘inequality in the ownership of physical and human assets are likely to influence the prospects of poor people to participate in economic growth’. Policies that are pro-poor will ensure that the poor have access to markets and infrastructure. It is clear that in cases where there is no equality amongst the different socio-economic classes. Reliance on market forces and the invisible hand of Adam Smith to meet basic needs is merely wishful thinking.

3.2 Fiscal constraints

Governments, especially in the developing countries are finding it hard to pursue pro-poor growth policies and approaches for poverty alleviation due to fiscal constraints. Structural Adjustment programmes are in most instances making matters worse. The reality is that governments are usually face with the challenge of having to reduce expenditure in social services. Which are suppose to benefit the poor. This means that less money is spent on important services such as health, education and other basic services. Cuts in government expenditure directly affect the poor (Howard 2001:57). However, it is important to note that the state is face with global challenges and constraints in its attempt to pursue policies that are good for poverty alleviation. There is global pressure for the state to take a less ‘directive’ role in the economy.

3.3 Reducing the role of the state

The liberalization of markets which goes with globalization is among other things advocating for the rolling back of the state. The repeal of restrictions on prices and on quantities moved and stored. As Howard (2001:57) rightly notes, the ‘liberalization of financial markets increases poverty and inequality’. As part of globalization, governments are force to liberalize their markets. However, the critical question is whether liberalization of markets benefit the poor. There are mixe reactions to this. There are those who view globalization as beneficial to the poor. Especially with regard to opportunities it offers for trade and new markets. On the other hand there are those who view it as harmful.

As Levinson (2001:11) shows, globalization ‘benefits the poor in some countries and harm those in other countries’. Although there is a general call for ‘rolling back the state’, in order to give way to the markets to work (if ever they work). The state has a role to play especially pertaining to things that individuals cannot do for themselves. It is common especially among the poor to find people who cannot participate in the labour market due to old age, infirmity, chronic illness or otherwise incapacitated, socially excluded or discriminated. The poverty of such people according to Streeten (1995:253) cannot be remove or alleviated by relying on the market. But by deliberate ‘pressure for social services and transfer payments and elimination of discrimination’. The emphasis on reducing the role of the state in the economy can have negative impact on pro-poor growth.

For pro-poor growth to take place. The state should play a crucial role in the redistribution of resources and opportunities through the transfer of assets. Prioritization of the poor in public spending and in managing market liberalization to protect the livelihoods of vulnerable people. As Ferro et al (2002:19) point out, ‘government is an instrument of the people in the development process’. Hence government can play a crucial role in pro-poor growth by developing the right policies for addressing poverty.

4. What can be done to benefit the poor?

The following are some of the things that can be done to benefit the poor:

  • There is need to focus on development of human capital. Especially among the poor in order to prepare them to participate meaningfully in the economy.
  • The poor must have better access to markets, especially with regard to credit
  • There is need to correct biases against the poor in public spending, taxation trade and regulatory environment.

5. Conclusion

Pro-poor growth policies are essential for the meaningful reduction of poverty. The 2015 target of halving income poverty can only be achieve if countries can adopt pro-poor growth strategies. It would be difficult to attain the 2015 target without ‘pro-poor shift in distributional patterns’ (Mutume 2000). Something must be done to improve the position of the poor by providing opportunities that will make access to markets easier for them. Worth noting is that even in cases where markets work. They may not always work in favour of the poor given the constraints discussed above.

If these constraints are not dealt with or remove. Growth will have no meaningful impact on the lives of the poor. There is need to learn from past failures regarding the relationship between growth and poverty alleviation. Sen (1986, cited in Sachs 1991:292) illustrate this clearly. ‘Country after country has learned the hard way that the so called trickle down theory is fallacious, that growth can be immiserizing. That famines also happen in periods of boom when people’s entitlement does not allow them to buy and/or produce the food necessary to keep them alive’