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INCLUSIVE GROWTH AND POLICIES: THE SOUTH ASIAN EXPERIENCE Thangavel Palanivel Chief Economist for Asia-Pacific UNDP, New York Growth is Inclusive When… • It takes place in sectors in which the poor work (e.g., agriculture) • It occurs in relatively backward areas • It uses the factors of production that poor possess (e.g., unskilled labour) • It keeps prices of food and other basics relatively low Message 1: Growth is accelerating, but it is concentrated in certain sectors and areas. Consequently inequality has increased and poverty reduction slowed down South Asia’s growth is not only high, but also accelerating over the period GDP Growth Accelerating 10 Per capita GDP Growth Accelerating 10 1970s 1980s 1990s 2000s 8 1970s 8 1980s 1990s 6 6 2000s 4 4 2 2 0 South Asia 0 South Asia East Asia Africa Latin America -2 East Asia Africa Latin America Despite accelerated economic growth, there is a slowdown in poverty reduction Annual rate of poverty reduction slowed down in India and South Asia Growth elasticity of poverty declined in India and South Asia 1.4 1981-90 East Asia Africa China Change in Poverty rate ( $1.25 a day) 2 0 India 1.0 0.8 -2 0.6 -4 0.4 -6 1981-90 1990-99 -8 -10 1999-2005 1.2 (%) South Asia 1990-99 1999-2005 0.2 0.0 South Asia East Asia Africa China India Poverty reduction performance varied across countries and period Conflicting picture emerges between national and international poverty estimates Change in Poverty incidence (National Povertyline) BGD IND NEP PAK SRL CMB CPR INS LAO MAL MON PHI THA VIE Change in Poverty Incidence ($1.25 a day) 6 1970s 1980s 1990s 2000s 6 0 -3 -6 -9 Annual change (%) Annual change (%) 3 3 0 -3 -6 -9 -12 -12 -15 -15 1980s 1990s 2000s • There is a huge variation in the relationship between growth and poverty (growth elasticity of poverty) across countries and time period • Growth patterns and policies matter; not just growth Growth Elasticity of Poverty (based on national poverty line) Growth Elasticity of Poverty (based on $1 a day) 2.0 2.0 1.5 1980S 1970s 1980s 1.5 1990s 2000s 1.0 1.0 0.5 0.5 -0.5 0.0 BGD IND NEP PAK SRL CMB CPR INS LAO MAL PHI THA VIE 0.0 -0.5 -1.0 -1.0 -1.5 -1.5 1990S 2000S Message 2: Growth elasticity of poverty varies across countries and periods due to 1. Changes in the pattern of growth affect income distribution which in turn influence the relationship between growth and poverty 2. Initial levels of inequality also determine the strength of the nexus between growth and poverty Growth in Certain Sectors or Areas is More Pro-Poor Agricultural growth in China and India (1980s), industrial growth in Malaysia and Thailand (1970s & 1980s), and services growth in India and Brazil (2000s) Sectoral Growth in South Asia Sectoral GDP Growth 12 1970s 1980s 1990s 2000s 12 8 1970s 1980s 1990s 2000s Agr Ind % % 8 Bangladesh India Nepal Ser Ind Agr Ser Ind Agr Ser Ind Agr Ser Ind Agr 0 Ser 0 Ind 4 Agr 4 Pakistan Sri Lanka Agr Ind South Asia Ser East Asia Ser Inequality in South Asian countries increased substantially since 1990. Inequality Level 60 In East Asia, there is a mixed picture. Inequality declined in Malaysia, Thailand and Philippines, while it increased in China, Indonesia and Vietnam. Gini Index for South Asian Countries 50 45 40 BGD IND SRL NEP PAK 35 50 Bottom 20% % 40 Top 20% 30 20 Bottom10% 10 Top10% 0 Gini Index East Asian Countries 50 45 40 35 30 30 25 25 20 1981 1985 1989 1993 1997 2001 2005 CPR INS MAL PHI THA VIE 20 1981 1986 1991 1996 2001 2006 Inequalities increased in South Asia but there is a need to distinguish between good and bad inequalities Horizontal inequality is also high in South Asia % of women own land • South Asia’s Gini coefficients are not high compared to other regions, yet there are huge social disparities in health and education indicators • Regional inequalities also high • Inequality within urban areas is higher than that of rural areas • Women own only 7% of farms in Asia versus 18% in Africa; Source: UNDP Message 3: Employment is growing but low labour productivity gains limit the creation of decent employment opportunities; almost half the workers in South Asia are ‘working poor’ Many countries experienced a deceleration in employment growth Annual Average Employment Growth 4.0 Average annual employment growth rate 4.0 1991-1999 2000-2008 1990s 3.0 % % 3.0 2.0 2.0 1.0 1.0 0.0 0.0 ILO KILM database ILO KILM database 2000s Economic growth has been less “employment-intensive” Inverse relation between employment growth and productivity growth -hence the possibility of trade-off; an ideal employment elasticity will be about 0.7- 0.8 Employment Elasticities Employment Elasticity 1 1.2 0.9 1992-96 0.8 1996-00 0.7 2000-04 0.6 2004-08 1991-99 1.0 0.8 0.6 0.5 0.4 0.4 0.3 0.2 0.2 0.1 0.0 0 S Asia SE Asia E Asia L America Africa 2000-08 Employment elasticities declined due to shift from labour-intensive to technology and capitalintensive industries Structure of Manufacturing Output changing towards technology-intensive 70 60 1980 2000 % 50 40 30 20 10 0 SA EA LA Labour based Source: Palanivel (2005) SSA SA EA LA Technology based SSA SA EA LA Resource based SSA Economic Reforms and Policy Environment favour Capital & Technology Intensive Growth • Economic reforms and transition (e.g., China) • Incentive structure favour capital-intensive production (e.g., tax holidays to promote FDI, cheap credits) • Capital deepening in the face of labour shortage (example: Malaysia since the 1990s) • Difficulties faced by labour intensive industries (e.g., rigid labour laws, lack of access to credit by SMEs) South Asia needs to accelerate labour productivity growth Average annual labour productivity growth rate % Labour productivity level is low in South Asia compared to other regions, which limits the creation of decent employment opportunities 12 10 8 6 4 2 0 1991-00 Source: ILO labour productivity in 2009 Annual growth of labour productivity in South Asia is relatively high 25 20 8 1991–2000 15 2000–09 6 10 % Thousands in 2005 PPP $ 2000-08 4 5 2 0 S Asia E Asia SE Asia L SS America Africa World 0 S Asia E Asia SE Asia L SS Africa World America Due to large scale underemployment and low productivity 45% of the global working poor live in South Asia. Working Poverty Rates Working poor rates are high in Bangladesh, Nepal and India compared to Pakistan and Sri Lanka $2.00 working poor 60 40 20 0 2005 2005 2003 2004 2007 BGD IND NEP PAK SRL Others Share in Total Employment 800 Million % of total employment Working Poor ($1.25 a day) by Regions 600 400 200 Africa 80 Latin America South-East Asia East Asia 60 % 1000 $1.25 working poor 80 1999 2009 40 20 0 0 1999 2003 2008 2009 Source: ILO Global Employment Trends 2011 South Asia South Asia East Asia South-East Latin Asia America Africa Source: ILO Global Employment Trends 2011 Agriculture contributes less than 20% of GDP in South Asia, but the sector still employs around 50% of the working population Structural Changes in Employment and Output in South Asia 100 EMP-1980S GDP-1980S EMP-2000S GDP-2000S 80 % 60 40 20 0 Agri Indu Serv Agri Indu Serv Agri Indu Serv Agri Indu Serv Agri Indu Serv BGD IND NEP PAK SRL Message 4: High food and fuel prices reduce purchasing power of the poor more severely than the rich High food prices reduce purchasing power of the poor more than the rich Higher food prices decreased poor households’ purchasing power by 24 % in Asia, while for rich households this decline was just 4%. Message 5: Given the diverse impacts of growth on poverty, it is clear that growth alone won’t reduce poverty. Growth and propoor social policies will accelerate poverty reduction Coverage of Social Protection is low (%) South Asia is moving, albeit slowly, to strengthen social protection e.g., India’s MGNREGS; Bangladesh’s CCT for girl’s education and Pakistan’s Benazir Income Support Programme 0 Bangladesh Bhutan Cambodia China Fiji India Indonesia Lao PDR Malaysia Maldives Mongolia Nepal Pakistan Philippines PNG Sri Lanka Viet Nam 20 40 60 80 100 Unem/under employed Elderly Health Care Why does South Asia Need Stronger Social Protection? • Poverty & hunger are still high, share of elderly is increasing rapidly, disintegration of family & community networks, increased frequency of economic shocks/natural calamities or health crises /pandemics • Poor have high vulnerability to risks and lack access to instruments to mitigate and cope with them • Current social assistance programmes are fragmented and not well targeted Investing More in Basic Services • Public Spending on education and health is low in South Asia compared to other regions • For health services, a very high proportion of private expenditure is ‘out-ofpocket’ Health expenditure in Public spending on education (% of GDP) 2007 (% of GDP) 1990 2008 Total Public Private East Asia & Pacific 2.5 2.7 4.1 1.9 2.2 Latin America & Caribbean 2.8 3.9 7.1 3.4 3.7 South Asia 2.6 2.9 4.0 1.1 2.9 Sub-Saharan Africa World 3.2 3.8 4.1 4.6 6.4 9.7 2.6 5.8 3.8 3.9 Source: World Bank Invest more to improve Agricultural Productivity Government Support to agriculture declined; level & share of ODA to agriculture also declined – from $8 to $3.4 billion; 18% to 3.5% Agricultural Public Investment as % of Total Government Expenditure by Regions 16 1980 14 1990 2002 12 10 Good rural infrastructure, modern seeds, fertilizer, irrigation, R & D and farmer training are necessary for robust agricultural productivity & growth 8 6 4 2 0 AFRICA ASIA Source: UNDP LAC Developing countries Conclusions • High economic growth alone does not ensure rapid poverty reduction. • Sound economic and social policies help achieve inclusive growth – Develop human and physical assets of poor people – Foster a inclusive financial system – Promote growth in key sectors (agriculture and rural development) – Provide an effective safety net and strengthen social protection