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UNDP RBA
MDG Based Planning
Dar-es-Salaam
Feb 27 – 3 March 2006
Training Modules
Module 1:
Pro-Poor Growth:
Equity and Poverty Reduction
[abridged copy distributed]
This module defines pro-poor growth as:
Growth is pro-poor when the incomes of the
poor rise proportionately more than the incomes
of the non-poor.
If the income share of the poor (headcount) is H and the
growth rates for the poor and non-poor are gp and gnp,
then aggregate growth is:
g = Hgp + (1 – H)gnp
Growth is pro-poor when
gp > gnp
Necessary conditions for Pro-poor Growth are
1. Political stability and government commitment to
poverty reduction;
2. Resources to increase public expenditure,
especially public investment (fiscal space), via
•
•
•
•
•
development assistance
debt relief
domestic revenue
restructuring (including cancellation) of domestic debt
domestic borrowing
3. Overcoming orthodox policy ideology
(aka ‘sound policy’, ‘good business climate’, ‘realistic policies’)
Overcoming the Ideological Blinders
of Policy Making
There are two broad theoretical approaches to
macroeconomic analysis. A price determined
economy, which either in a unique full
employment general equilibrium, or prevented
from achieving that by private or public price
‘distortions’.
An economy is demand determined when output is
limited by one or more of the components of
aggregate demand: consumption, private
investment, government expenditure, or exports.
Policy making is ideological when one or the other
of these frameworks is used contrary to empirical
evidence to support its basic presumption.
Example:
ODA conditionality sets a numerical limit to the fiscal deficit
(however defined), on the arguments that a larger deficit
would
1) increase borrowing rates and crowd out private
investment;
2) would create inflationary pressures.
Ideological or technical argument?
To be true, the argument requires:
1. the economy is at full employment (if not any type
of expenditure can increase without impact on
interest rates;
2. the structural component of inflation is minor;
3. the deficit is funded by ‘printing money’, and there
is a stable relationship between the quantity of
money and the price level (Fisher’s Law)
This example demonstrates
a general theoretical point:
A price determined economy is either in a
unique full employment general
equilibrium, or prevented from achieving
this by private or public price ‘distortions’.
A demand determined economy is one
whose output is limited by one or all of the
components of aggregate demand:
consumption, private investment,
government expenditure, or exports.
In brief, a demand determined economy is inside
its production possibilities frontier. As a result:
• Relative prices are not ‘efficient’ (they are not the prices
that would prevail if the economy realised its potential).
• Government interventions cannot be judged as
‘distortionary’ compared to prices prevailing in their
absence;
Therefore, each government action (or inaction) must be
judged pragmatically, not on the basis of an abstract,
irrelevant full employment general equilibrium
benchmark.
The economic justification of the UNDP’s
approach to economic policy and poverty
reduction is that economies are demand
determined.
Otherwise, inequality and poverty would
reflect allocative efficiency, so that
interventions to promote equity would be
‘distortionary’.
The demand determined framework
•
predicts and accounts for unemployment, it
concludes some inequalities to be inefficient,
and it calls for effective public sector intervention
to achieve social objectives.
•
fosters the social objective of poverty
reduction through sustained growth by the public
sector providing the residual stimulus to
maintain the economy near its productive
potential. In the short & medium run this
involves counter-cyclical policies, and in the long
run investment that increases aggregate supply.
A pro-poor growth programme based on the demand
determined framework would have the following
components:
1. an expansionary fiscal budget, consistent with the rule
that the overall deficit not exceed public investment;
2. an accommodating monetary policy that tolerates
moderate inflation to achieve higher growth, by
a) targeting the ‘Golden Rule’ real interest rate (equal to
the sustainable growth rate of per capita income),
b) expansion of the money supply to accommodate
growth and monetary deepening, and
c) providing subsidised credit for poverty reduction
programmes; and
3. a managed exchange rate that is expansionary by
promoting tradeables.
Growth and Distribution
for Poverty Reduction
A robust rate of growth is a necessary condition to
achieve the MDG targets in sub-Saharan countries.
However, growth alone, at historically high rates for each
country, will mean that most sub-Saharan countries will
not achieve the MDG targets.
Thus, the redistribution of income at the margin (propoor growth as defined above) is also necessary
condition for most sub-Saharan countries to achieve the
MDG targets by 2015.
If feasible, redistribution
always
beats growth.
Redistribution at the margin (pro-poor growth) is
a more effective, faster, and cheaper method of
reducing poverty and achieving the MDG targets
than raising the growth rate with unchanged
income inequality (all the more if inequality is
increasing).
Poverty Reduction and GDP Growth
for Degrees of Inequality
d = 1.2
10.0
9.0
% poverty reduction
8.0
7.0
d = 1.3
6.0
RWG
5.0
d
DNG
RCY c
4.0
b
3.0
a
d = 1.4
2.0
1.0
.0
.0
2.0
4.0
6.0
8.0
10.0
GDP growth rate
Note: A larger value for d (Pareto coefficient) indicates greater inequality.
Brief explanation:
• Each time period, pro-poor growth increases the
elasticity of poverty reduction with respect to growth, for
all subsequent time periods;
• The elasticity of poverty reduction is increased for every
feasible rate of growth;
• Therefore, an redistribution of income at the margin of
any percentage will always reduced poverty more than
an increase in growth of the same percentage; for
example, in Zambia redistribution of one percent of
personal income would reduce income poverty by as
much as an increase in growth of three percent.
Poverty reduction through pro-poor growth should
always be cheaper in resource requirement than
increasing the growth rate.
Proof through general example:
Stylised country characteristics:
1. Elasticity of poverty with respect to growth = .5
(Gini coefficient of .35 - .40)
2. Incremental capital output ratio = 3.5
(Rather low estimate)
The necessary increment in net investment to increase
poverty reduction by one percentage point (growth by 2
percentage points)
DIn = 7 (= 3.5 x 2)
Therefore,
if the cost
of redistributing ONE
percentage point of GDP
is less than
SEVEN percent of GDP,
pro-poor growth is cheaper in real resources than
increasing the growth rate.
Designing effective redistribution
The effectiveness of a redistribution
measuring is determined primarily
by the social structure of the
society.
Broad categories of measures
• Current expenditure & taxation
a. progressive (or, at least, nonregressive) tax structure;
b. direct public provision of goods &
services (e.g., school meals, general
medical care)
• Capital expenditure
a. social infrastructure (schools, hospitals)
b. regionally targeted infrastructure;
c. economic infrastructure
- social cost reducing
- export promoting
- asset creating
Concluding Comments
The development agenda that focuses on MDGs
requires fostering policies of redistribution if it will prove
successful.
Required is a growth policy that incorporates equity as a
fore-thought, rather than an after-thought.
This implies shifting the policy debate so that the costs
and limits of growth are viewed as sceptically as the
costs and limits of redistribution.