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"Pro-Poor Growth" - adjusting the rhetoric to the reality. Don Sillers, USAID/EGAT/PR

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"Since the late 1990s, the term “pro-poor growth” has attained a prominent place in the vocabulary of the development community. This note argues that the net effect of this term’s appearance has......

"Since the late 1990s, the term “pro-poor growth” has attained a prominent place in the vocabulary of the development community. This note argues that the net effect of this term’s appearance has been to reduce the prevailing quality of thinking, by directing attention away from the real issues connecting growth and poverty reduction. As matters stand, continuing to use the term “pro-poor growth” is harmful for at least three reasons:" (Open to know which ones)

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  • 1. “Pro-Poor Growth” - Adjusting the Rhetoric to the Reality Don Sillers, USAID/EGAT/PR Since the late 1990s, the term “pro-poor growth” has attained a prominent place in the vocabulary of the development community. This note argues that the net effect of this term’s appearance has been to reduce the prevailing quality of thinking, by directing attention away from the real issues connecting growth and poverty reduction. As matters stand, continuing to use the term “pro-poor growth” is harmful for at least three reasons:  First, different authors apply the phrase to at least two fundamentally different concepts – one focused on changes in distribution, the other on net impacts on poor people. The co- existence of these two meanings produces much ambiguity and miscommunication. The distribution-focused concept seems to have emerged as the more prevalent – an unfortunate outcome, for reasons detailed below.  Second, the emotionally loaded wording tends to seduce listeners into believing that “pro-poor” growth is not only desirable but is the only acceptable form of growth. After all, what kind of moral monster would admit to opposing “pro-poor growth,” or conversely to supporting anti-poor growth? Casual listeners are far more easily persuaded to adopt the position that “growth is good only if it is pro-poor” than to sort through exactly what this statement means and what trade-offs are at stake.  Third, the distribution-focused concept of “pro-poor growth” distracts attention from public policy choices that can actually affect the lives of the poor – the rate and sustainability of economic growth, and the degree to which poor people are able to take advantage of the opportunities created though growth – and directs attention instead to distributional issues where public policies often have only limited impact, especially in the short run and especially vis-à-vis far more powerful trends in global technology and the terms of trade. The bottom line is that continued use of the phrase “pro-poor growth” does more harm than good. Under these circumstances, AID could strike a blow for clear thinking about growth and poverty reduction through either of two courses of action: (1) eliminating “pro-poor growth” from our own vocabulary, using more specific phrases to describe more specific phenomena, and going out of our way to explain to others why they should do the same; or (2) consciously and consistently using “pro-poor growth” in its less popular but more meaningful sense of “growth that benefits the poor,” using a different phrase to talk about changes in income distribution, and again trying to promote a similar shift in usage among the rest of the development community. Problem 1: Ambiguity Ever since the development community began using the phrase “pro-poor growth,” there has been general agreement that it must be a good thing, alongside active debate over just what it means. As several contributors to this debate have noted, it is quite difficult to identify a precise definition. For example, the World Development Report 2000/01: Attacking Poverty uses the phrase freely, but never provides a clear definition of the concept. However, two “families” of definitions can be identified: Preliminary Draft – For Comment Only 11/24/10 8:25 a11/p11
  • 2. 2 Distribution-focused definitions. One family of definitions focus on changes in the distribution of income that accompany growth over a particular time period. From this perspective, the essence of “pro-poor growth” is that the poor benefit more than others. Kakwani and Pernia (2000) offer a typical definition along these lines: “Thus, growth will be pro-poor when … the poor benefit proportionally more than the nonpoor, i.e., growth results in a redistribution in favor of the poor.” The same authors recognize that economic growth can enable poor households to escape from poverty, even when the distribution of income remains unchanged or moves against the poor: they define either of these outcomes as “trickle-down growth.” Somewhat confusingly, Kakwani and Pernia also apply the label “pro-rich growth” to describe the same situation. According to this set of definitions, growth must either be “pro-poor” or “pro-rich:” it cannot be both. Thus, from this perspective the “pro-poor-ness” of growth depends exclusively on changes in the distribution of income. Poverty-outcome-focused definitions. The second family of definitions focus on changes in the incomes (or consumption) of initially poor households over a particular time period. From this perspective, “pro-poor growth” is simply growth that benefits the poor; it need not benefit the poor more than others. Ravallion and Chen (2001) offer one clear definition of this type: “… ‘pro-poor growth’ is the mean growth rate [in the income or consumption] of the [initially] poor…” Rather than restricting attention to changes in distribution, this measure concentrates on overall outcomes for initially poor households, “for the purpose of monitoring the gains to the poor from economic growth…” Ravallion and Chen argue that their measure represents an improvement over one used by Dollar and Kraay (2000): the growth rate in mean consumption or income of the poorest quintile of the population.1 For present purposes, the similarities between these two measures are much more important than their differences: both focus on outcomes for poor households. Figure 1 illustrates the key distinction between these two concepts. In this figure, the origin represents the starting position for a particular country at the outset of a “growth episode” of some duration. Each arrow represents two aspects of such a growth episode: the percentage change in national real consumption, measured along the horizontal axis, and the percentage change in the real consumption of the poorest 10 percent of households, measured along the vertical axis.2 In this figure, the northeast and southwest quadrants represent the overwhelming majority of real-world experience, as documented by Deininger and Squire (1996) and others: overall growth accompanied by growth in the consumption of the poor, and overall economic deterioration accompanied by further immiseration of the poor. The empirical record demonstrates that the consumption of the poor only rarely moves in a different direction from national consumption, and then only when measured over a brief transitional period. As a result, it is reasonable to concentrate on the northeast quadrant, where all episodes of overall growth that can reasonably be described as “pro-poor” are plotted. 1 Ravallion and Chen note that the Dollar-Kraay concept can run into problems to the extent that households initially living above the mean of the bottom quintile experience income growth which allows them to move into the second quintile: the mean income of the bottom quintile falls, even as the incidence of poverty has declined. It is not clear whether this situation is empirically important. 2 The poorest 10% are highlighted purely for the sake of specificity; attention could equally be drawn to the poorest 20% or 40%, or to those households initially living under the $1-a-day or $2-a-day poverty lines.
  • 3. 3 In the distribution-focused view, the pro-poor-ness of a particular growth episode depends on what happens to the income distribution. In figure 1, growth with unchanged distribution is represented by an arrow lying along the 45° line. All arrows drawn counter-clockwise from the 45° line (e.g., D and E) represent “pro-poor growth” according to this view; all arrows drawn on or clockwise from the 45° line (e.g., A, B or C) represent “trickle-down” or “pro-rich” or “anti- poor” growth, regardless of how well the poor do over the corresponding growth episode.3 Moreover, among growth episodes counted as “pro-poor” according to this view – that is, among growth episodes in which the income share of the poor increases relative to the non-poor – Kakwani and Pernia rank pro-poor-ness solely on the basis of the distributional change involved. For example, they count episode E as more pro-poor than episode D, despite the much larger benefits that accrue to the poor during episode D. This last point highlights a key source of confusion created by using the phrase “pro-poor growth” in this manner: by defining “pro-poor- ness” as purely a function of distributional changes, these definitions necessarily sever any real connection between pro-poor-ness and growth. In this view of “pro-poor growth,” the word “growth” is simply along for the ride. This point suggests a potential source of increased clarity: revising the terminology so that statements that purport to say something about growth actually do so, while statements that actually say something about distributional change use words that make this explicit. The poverty-outcome view classifies the same growth episodes differently. In this view, the pro- poor-ness of growth depends entirely on whether it increases the welfare of the poor, and by how much. In terms of figure 1, the critical piece of information about any particular growth episode is the vertical component of the arrow representing it: all growth episodes in the northeast quadrant are counted as “pro-poor,” but to different degrees. Episode A is more pro-poor than episodes D or E, because faster overall growth during episode A has provided greater net gains to the poor than the slow growth and pro-poor redistribution seen during D or E. In this view, episodes B and D are counted as equally pro-poor, despite the fact that the distribution of income has moved in different directions. Finally, growth episode C is counted as the most pro-poor of all, because the very rapid growth experienced during this period has outweighed the shift in income distribution against the poor, yielding the largest net gains for initially poor households. This pattern is empirically important because it characterizes the stylized facts behind the rapid decline in absolute poverty seen in recent decades in China and India, arguably the most rapid reduction in absolute poverty in human history. Likewise, growth episode A merits attention because it roughly corresponds to the average growth experience of those developing countries included in the Deininger-Squire data set, by virtue of having meaningfully comparable data on income distribution at the beginning and end of a particular growth episode: based on this large sample of growth episodes, the “average” story is that distribution changes little, so that growth in the income or consumption of the poor depends overwhelmingly on the rate of overall growth. Neither of these very different concepts of “pro-poor growth” has yet driven the other out of the marketplace of ideas. A Google search on the phrase “pro-poor growth” uncovered examples of documents using the phrase in each of these two, fundamentally different senses, although those using some form of the distribution-focused definition seemed to be in the majority. Likewise, a 3 This figure also highlights the peculiar “yes/no” aspect of the distribution-focused view: growth episode A is defined as “trickle-down” because the poor benefit exactly as much as the average, whereas an imperceptible rotation counter-clockwise would transform this episode into “pro-poor growth.”
  • 4. 4 (completely unscientific) poll among thoughtful non-specialists found some who thought “pro- poor growth” should mean “growth that’s good for the poor,” and others who thought it should mean “growth that’s especially good for the poor.” Again, the distribution-focused concept seemed to hold a slight majority. Based on this evidence, it appears that the development community continues to face a situation in which a widely used phrase is used in two completely different, mutually inconsistent ways. Such confusion cannot be good for clear thinking about policies, programs, and institutional reforms. In the interests of clarity, the label “pro-poor growth” should be attached to at most one of these competing concepts, while a different label should be developed to refer to the other. The next section suggests an even better solution – discard the term entirely, and adopt new terms that mean what they sound like they mean. Problem 2: Subverting Analytical Clarity with Emotional Language Virtually all members of the development community are keenly aware of the misery and degradation suffered by the many millions of people living in absolute poverty in the developing world. Many became involved in development in the first place out of a sense of personal commitment to reducing poverty, and continue to regard poverty reduction as the ultimate goal of their professional efforts. Their fervor is further strengthened by the extreme divergence seen among developing countries in recent decades: while economic success in some countries has enabled millions of people to escape from absolute poverty, stagnation or decline in other countries has caused many others to fall deeper into poverty, with no visible prospects for escape. The manifest evidence that mass poverty is not inevitable makes its persistence in some countries seem all the more outrageous. This sense of personal moral commitment to helping the poor predisposes many members of the development community to approach the subject of poverty reduction from an emotional, rather than an analytical angle. Under these circumstances, describing a particular pattern of growth as “pro-poor” makes it too easy to convince listeners that such a growth pattern must be a good thing – indeed, that it must be the only acceptable form of growth – even without a clear understanding of the relevant tradeoffs. Similarly, describing a particular growth pattern as “trickle-down” or “pro-rich” or “anti-poor” growth relies on the listener’s emotional inclination to reject any such pattern of growth, before – or instead of – considering how the fortunes of different members of society might be changing during such a growth episode. Given the predisposition of the audience, it can be safely assumed that many will automatically associate “pro-poor growth” with “good growth” and anything else with “bad growth.” “Pro-poor growth” is an example of what philosophers call a “persuasive definition,” in which emotionally charged language is used to influence attitudes toward a concept. In some such cases, the words are used in a manner that bears little relation to their ordinary usage. The most notorious example of this practice is the special meaning Marx attached to the word “exploitation,” under which any firm that pays wages to its workers while still making a profit, is by definition exploiting those workers (Little, 1982). The stakes involved with “pro-poor growth” are not as high, but the problem is the same: people hear the words and are persuaded to act against “exploitation,” without understanding the special way in which that word is being
  • 5. 5 used. Likewise, people hear the phrase “pro-poor growth” and are persuaded that it must be not only a good thing but a necessary thing, even without a clear understanding of what it means. As emphasized in the previous section, at least two fundamentally different concepts of “pro- poor growth” currently exist within the development community. The implication of this section is that the label should be thrown out entirely, and replaced with alternative terminology that carries less emotional baggage. In particular, it would be possible to take advantage of the fact that the net change in the income or consumption of the poor over a particular time period can be decomposed into a portion reflecting the change in the overall economic pie, and a second portion reflecting any change in the share of the poor in that pie. By using the labels “pro-poor” and “anti-poor” exclusively to describe changes in the distribution of income, while describing changes in overall income simply as more or less “rapid,” any net changes in the position of the poor could be summarized clearly and unambiguously. The final section considers options for alternative terminology. Unfortunately, the term “pro-poor growth” may already have taken root too deeply for this first- best solution to be practical. If so, the second-best solution would be to promote the more analytically meaningful notion of “pro-poor growth,” and correspondingly to suppress the more misleading notion. The following section makes the case for adopting the poverty-outcome notion of “pro-poor growth.” Problem 3: Distracting Attention from the Real Policy Choices The preceding sections concentrate on the rhetorical problems created by the phrase “pro-poor growth,” including ambiguity and emotionality. Up to this point, no strong conclusion has been drawn regarding the relative merits of the two families of definitions. In contrast, this section argues that the distribution-focused definition is especially misleading – in particular, that this terminology actively undermines clear thinking about the real policy issues affecting the poor. To see why this is the case, recall the point made near the end of the last section – that any change in the economic position of initially poor households can be decomposed into two components: one reflecting growth in the national economy over the period in question, and a second reflecting any change in the income distribution that affects those initially poor households relative to the national mean. In principle, the poor might benefit from a shift in income distribution that gave them a larger share of national income, even if that income was stagnant. Conversely, the poor could benefit from receiving a constant share of a growing national income, or even from a smaller slice of the economic pie as long as the pie itself was growing rapidly enough. However, in reality the implied symmetry between growth and redistribution is purely illusory; in reality, the potential to achieve rapid and sustainable progress against poverty through faster economic growth is far greater than through changes in the distribution of income. This asymmetry is true for the policy choices facing governments, and even more true of the policy advice offered by donors, who have virtually no chance of persuading host governments to take steps narrowly aimed at changing the income distribution. Figure 2 helps illustrate these points. In this figure, each observed change from the initial position is decomposed into two components: (1) a distribution-neutral change in mean real consumption, represented by an arrow lying along the 45° line; and (2) a change in the initial
  • 6. 6 pattern of distribution either for or against the poor, represented by a dotted arrow running up or down from the 45° line. For example, growth episode B can be decomposed into a distribution- neutral growth component (from the origin to point B′), along with a shift in the income distribution against the poor (from B′ to B.) Figure 2 illustrates several points about the analytics of poverty reduction: First, improvements in the income and/or consumption of the poor can arise from growth with no change in distribution; moreover, the faster the growth, the better for the poor: growth to point A along the 45° line is better for the poor than slower growth to point B′ or E′. The same point applies for any given change in distribution: faster growth is better for the poor (C vs. B). Second, for any given rate of overall growth, a change in the pattern of distribution can strengthen or weaken the net gains to the poor: relative to the same degree of distribution-neutral growth, a pro-poor change in distribution can further improve the situation of the poor (D′ to D), whereas a shift in distribution against the poor can reduce their net gains (F′ to F), or even, in principle, result in net losses for the poor (G′ to G). Third, considering only the interests of the poor, an adverse change in distribution can be offset through faster growth. Thus, growth episode B leaves the poor in the same situation as growth episode D. Some form of the growth-redistribution decomposition shown in figure 2 is referenced by virtually all participants in the pro-poor growth debate, regardless of which side of the debate they stand. Still, while undoubtedly helpful for illustrating analytical points about the potential sources of poverty reduction, this decomposition contains a drawback: it can mislead readers into conceiving of growth episodes (and the policy choices behind them) as two-step sequences: a distribution-neutral growth step along the 45° line, followed by a subsequent redistribution step. Taking this naïve view one step further, it is easy to conclude that developing countries have policy levers at their disposal that would permit them to choose a rate of overall growth, and separately choose a desired degree of income redistribution. In terms of figure 2, it is tempting to imagine that the host country can choose a “growth policy” package that takes it to a point like D′, while meanwhile choosing a separate “distribution policy” package that will produce a further improvement in the situation of the poor (to D) or else cause the poor to give up some of the gains that they would otherwise have won (to F). If things were really this simple, it would of course always make sense to encourage the host country to choose growth with pro-poor redistribution rather than growth with a distributional shift against the poor. However, few if any real-world policy choices work this way. Rather, most real policy choices jointly affect the rate of growth and the resulting distributional outcomes. In terms of the figure, it is the solid-headed arrows (B, C, etc.) that are the fundamental outcomes of policy choices, whereas distribution-neutral growth (B′, C′, etc.) and growth-neutral redistribution (B′ to B, etc.) are purely analytical devices. In this more realistic setting, the host country’s ability to fine-tune the direction of the net outcome tends to be far more limited. To the extent that achieving a pro- poor shift in the income distribution requires a large sacrifice in potential growth (for example, choosing E over B, in a situation where D is not a feasible option), very few host countries are
  • 7. 7 likely to choose this option. It is true that in some countries, populist coalitions have occasionally achieved political dominance and chosen low-growth, redistributive policy options, but they have rarely “sold” these options to the public in these terms and such strategies have usually been reversed once the growth consequences have become clearly visible. In recent years, even populist governments (e.g. Lula in Brazil) have recognized that maintaining a growth-friendly policy environment is a precondition for achieving actual gains for their poor constituencies. [Venezuela, Zimbabwe] Just as important for present purposes, there is little reason to expect that the host country will rank the available options in the same way as might foreign donors or foreign NGOs, especially those ideologically committed to pro-poor redistribution as an end in itself. Under the right political-economic conditions, a host country may adopt economic reforms promoted by donors or other external parties, to the extent that those reforms offer a means to achieve gains for all, whether or not the poor share proportionally in those gains. In fact, such external policy advice may be accepted where it offers a means to achieve long-term, continuing income gains for society as a whole, even if it involves a temporary setback for the poor in the short-term. In contrast, there is little or no precedent for a host country adopting external policy advice directly aimed at shifting the distribution of income to the poor. A donor peddling a reform package specifically aimed at achieving a pro-poor distributional shift is setting itself up for failure, especially if that shift can only be achieved by sacrificing potential growth. This point underlines the third problem with “pro-poor growth” noted in the introduction to this paper: that when donors convince themselves that growth must be (distributionally) pro-poor to be acceptable, their attention can easily be diverted from areas where they can make a useful contribution to development, toward a narrow concentration on areas of extreme political sensitivity for the host country, where their advice is likely to have little or no positive impact. How might an ideological commitment to support only growth strategies that provide disproportionate benefits to the poor divert attention from real-world opportunities to reduce poverty? Consider globalization. Though segments of the NGO community categorically reject any move toward international integration, all serious scholars recognize that participating in global markets offers poor countries opportunities for absorbing productivity-enhancing technologies, and thus to accelerate growth, that are difficult or impossible to achieve in other ways.4 The East Asian “tigers” seized this opportunity in the 1960s, and were rewarded not only with greatly accelerated growth, but a substantial narrowing of the wage gap between skilled and unskilled workers that probably sufficed to produce disproportionate benefits for the poor. However, the experience of more recent globalizers has been different. In China, rapid growth in international trade and investment since the mid-1980s has helped spur rapid growth in average incomes and rapid reduction in the incidence of poverty. China’s growth has been strongly pro- poor in the sense of providing large absolute gains for the poor, which have allowed enormous numbers to escape from absolute poverty.5 However, in relative terms the reverse has been the 4 As Dani Rodrik (2002) has noted, “No country has developed successfully by turning its back on international trade.” There remains a serious debate over whether globalization plays an essential or merely a supporting role in a successful development strategy, along with many more specific issues about sequencing of different reforms, etc. 5 According to the World Bank’s estimates, the share of China’s population under the $1-a-day line was nearly halved between 1990 and 2000 (31.5% to 16.1%), a drop of 156 million people. (Global Poverty Monitoring
  • 8. 8 case: there has been a large increase in the wage premium commanded by more educated workers, especially those with a college education (Zhang and Zhao, 2002; Park, Zhao, Zhang, and Song, 2002). Meanwhile, provinces along the coast have done considerably better than those in the interior, which have been less affected by inflows of foreign direct investment and less able to seize export opportunities. The result has been a sharp increase in wage inequality, at least within urban China (the only areas for which data are available.) In sum, China’s growth experience since the mid-1980s has closely resembled growth episode C in figures 1 and 2. The contrast with the experience of the 1960s seems to reflect the emergence of new technologies that place a strong premium on skills: workers with the skills needed to use new communications technologies, to use those technologies to search the global market for new economic opportunities, and to communicate effectively in English all command large wage premia. More generally, it appears that global technological change in recent decades has been strongly “skill-biased,” tending to inflate the wages of workers with greater skills over those with fewer skills (Berman, 2000). As a result, new globalizers experience at least a temporary tendency for the poor and less skilled to gain less than the non-poor. Nevertheless, as China’s experience clearly shows, the absolute benefits for the poor can be quite dramatic. Whether China’s growth experience has embodied “pro-poor” growth or “pro-rich,” “anti-poor,” “trickle-down” growth depends on the notion of “pro-poor-ness” adopted. Under the poverty- outcome definition of pro-poor-ness, what counts is the enormous gains experienced by millions of initially poor households, and China’s experience richly deserves being praised as pro-poor. In contrast, under the distribution-focused definitions, what counts is the fact that someone else did even better, so China’s growth record must be disparaged as one of “trickle-down.” Was there a more attractive option? Could China have chosen a different growth strategy that would have yielded similarly strong gains for the poor, yet avoided the observed shift in the income distribution in favor of the non-poor? If so, no one has identified such an option. No one has identified an alternative set of technologies sitting on the shelf that would have brought such dramatic gains in income, yet reversed the relative gains to the more and less highly skilled. Rather, had China considered only growth strategies that included a pro-poor shift in the income distribution, it would have had to forgo the absolute gains provided through modern communications technology and stronger links to international markets, and thus settled for a much slower growth rate and a much slower reduction in absolute poverty. That choice might seem attractive to well-fed anti-globalizers in the West, but it is not at all clear that those with a direct stake in the outcome would make the same choice. Finally, any suggestion by outsiders that China should have forgone rapid growth in order to avoid the observed shift in the income distribution would have been rejected by Chinese political leaders as an outrageous interference in China’s internal affairs, condemned as a ploy to keep China poor and weak. Of course, it is possible to identify complementary policy changes that might plausibly offset at least some of the observed shift in the income distribution, enabling the poor to receive a greater share in the benefits of growth. For example, reducing or eliminating restrictions on migration from poorer interior provinces to booming coastal provinces would help reduce one source of increased inequality. Likewise, shifting more of the burden of education funding from households to the public budget might help create greater equality in educational attainment Database, at www.worldbank.org/research/povmonitor)
  • 9. 9 within the labor force, and thus allow more workers to benefit directly from the increased returns to skill. However, it is highly unlikely that either of these steps would have sufficed to reverse the observed shift in the income distribution. For example, reduced restrictions on internal migration would have reduced the wage gap between coastal and interior provinces but could obviously not have eliminated that gap, because the wage gap is what drives migration in the first place. Likewise, it is precisely the emergence of high returns to skills that has motivated greatly increased demand for higher education;6 without that strong payoff to additional schooling, far fewer households would found it worthwhile to keep their children in school so long, with or without public funding. Finally, without the increased returns to skill created through globalization, even the most vigorous shift in public education funding would likely have expanded the share of the college-educated only very gradually, by inducing more students to stay in school longer. In actuality, precisely because of the changed incentives created by globalization, a substantial number of those already employed have responded by going back to school to get a college education.7 Any notion that China should have or would have delayed its embrace of global markets for several decades while it transformed the skill mix of its population, and thus put all households in the position to benefit equally and immediately from the new opportunities, is simply wishful thinking, because in that case neither the increased funds needed to pay for that transformation nor the changed incentives needed to motivate it would have occurred. In sum, there is no reason to believe that China had a live option to achieve similarly rapid progress in reducing absolute poverty, without a contemporary shift in the distribution of income against the poor. Future decades may offer the opportunity to shift the distribution back toward the 45° line, as the changed incentives created through globalization filter through the system. Without going into equivalent detail, the case of India provides important points of overlap with the Chinese example. Though slower and more tentative than China’s, India’s embrace of global markets and increased reliance on market forces at home since the early 1990s has represented a similarly dramatic shift in development strategy. India’s GDP growth has accelerated markedly, though not so strongly as China’s. As a result, the share of the population living on less than a dollar a day at PPP has fallen from 41 percent in 1992 to around 28 percent in 1999-2000 (Deaton, 2002). Changes in household survey methodology and other problems make it difficult to pin down changes in distribution with any precision, but virtually all scholars agree that India experienced a large increase in inequality over this period. Inequality increased between states (the south and west did much better than the north and east), between urban and rural areas, and within urban areas (Deaton and Dreze, 2002). Educational gaps appear to have played an important role in producing these different outcomes (Park et al., 2002). Those at the top of the income distribution did enormously well: tax returns suggest that the real income of the top 1 percent of households increased by half over the 1990s, while those in the top 0.01 percent nearly tripled their real incomes over the same period (Banerjee and Piketty, 2003). In sum, if we think of growth episode C in the figures as illustrating China’s recent experience, then we could think of B as representing India’s: slower but still highly respectable progress in raising 6 Household data cited by Park et.al. 2002 report a more than doubling in the share of the urban Chinese labor force with a college education or above between 1988 and 1999, from 12.1% to 26.8%. 7 Personal communication, Albert Park, University of Michigan.
  • 10. 10 average income and in reducing absolute poverty, similarly accompanied by a widening in income inequality. The Indian experience raises some of the same questions about alternatives as in the Chinese case. Beginning in 1991, could India have chosen a different development strategy that would have provided a similar acceleration in poverty reduction, while simultaneously achieving a pro- poor shift in the distribution of income? Nothing in its previous record, nor in the specific pattern of growth seen in the 1990s suggests that this is the case. When India chose to begin opening to the global market and to begin actively absorbing and exploiting advanced technologies, some states and some people were in a better position to take advantage of the opportunities created thereby. It is just possible that some other combination of policies and programs would have enabled those with limited skills and those living in states most cut off from foreign trade to gain an increased share of the national income while still achieving a similarly high rate of overall economic growth, but no one has suggested what this alternative might be. If a pro-poor distributional shift could be achieved only through continued rejection of foreign trade, investment, and technology, it is reasonable to presume that the overall rate of growth and the rate of absolute poverty reduction would have been considerably lower – a situation like episode E rather than episode B. Again, it is not at all clear that any substantial number of the millions of Indians who have emerged from absolute poverty over the past decade would have viewed this as “pro-poor” in any relevant sense. As in China, the opportunities created during the 1990s would have been even more broadly shared had India previously done a better job of providing its entire workforce with a decent basic education. It is now in a position to begin making up for past failures, though this is more difficult in India due to the dominance of state governments in education. In contrast, it is much harder to make the case that India could have done more for its poor population by delaying economic liberalization for the decade or more needed to transform the educational composition of its workforce. More realistically, as long as the payoff to increased education remained modest, the impetus for households and governments to make the sacrifices necessary to achieve such a transformation would likely never have emerged. As a final example, consider the case of Latin America. Broadly speaking, Latin America has faced the same skill-biased trends in global technology confronted by China and India. In recent decades, many countries in the region have tried to achieve faster growth by adopting policy reforms intended to tap into global markets more effectively. For reasons that continue to be hotly debated, the results have been relatively disappointing: even relatively vigorous reformers have achieved only modest rates of economic growth, especially when compared with East Asia or with Latin America’s own experience in the 1960s and 1970s. This is not to suggest that the reforms have not promoted growth: countries that failed to embrace reform have generally fared even worse. Another contrast between Latin America and East and South Asia lies in their relative factor abundance. Whereas China and India are quite labor-abundant compared with their trading partners, careful examination of Latin America suggests that most of the countries in the region should be viewed as resource-abundant rather than labor-abundant. On that basis, economic theory would predict that policy reforms would tend to reduce the relative wages of unskilled
  • 11. 11 workers, rather than to increase them as in the East Asia tigers.8 In addition, especially compared with China and the rest of East Asia, most of Latin America is marked by strong inequality in the distribution of schooling, meaning that a large share of the population is relatively poorly positioned to take advantage of many opportunities created by market reforms. Combined with the underlying skill-biased trend in global technology, these structural features help explain Latin America’s sluggish performance in reducing poverty since the early 1990s. In terms of figure 2, the typical growth episode in Latin America during this period can be represented by an arrow somewhere between F and G, emphasizing the slow growth and even slower poverty reduction experienced by most countries in the region. As with China and India, we must ask whether the Latin American countries could have pursued an alternative set of policies that would have allowed them to achieve better overall results in terms of growth and/or poverty reduction, while simultaneously achieving a “pro-poor” shift in the income distribution relative to the beginning of the reform period? With the benefit of hindsight, it seems clear that many countries could have achieved faster and more sustainable growth by avoiding the overvaluation that many encountered as a side effect of relying on exchange rate pegs to reduce inflation (Ffrench-Davis, 2000). On the other hand, it is not clear that any country in the region could have overcome the anti-poor shift in the income distribution seen in this period through any economically and politically feasible set of policies. The extent of the shift would almost certainly have been less severe had governments made earlier and more vigorous efforts to promote greater equality in education, but the impact of such efforts on the income distribution accumulate only very gradually, as they contribute to upgrading the skills of the overall workforce. No plausible set of educational reforms could have changed the existing skill mix over the time horizon encompassed by the economic reform period. Here again, insistence that reforms should only be undertaken as long as they result in a “pro-poor” shift in the income distribution simply distracts attention from the real policy dilemmas that countries are facing. Thus far, the analysis has emphasized educational investments as the main policy lever for changing the distribution of income over time. This emphasis is by no means casual, but rather incorporates the emerging view that poverty reduction ultimately depends on two sets of complementary reform efforts: those aimed at raising the sustainable rate of growth, and thereby the emergence of economic opportunities, and those aimed at ensuring that all members of society are in a position to take advantage of the opportunities created by growth (see, e.g., Squire 2003). Educational investments represent one of the principle means through which societies can equip new generations with the skills needed to benefit from new economic opportunities. Moreover, most governments have accepted, at least in principle, the argument that basic education is a basic human right, resulting in political pressure – both domestic and international – to ensure that all children receive at least a basic education of decent quality. Still, the fact remains that educational investments pay off only very slowly, as they raise the skill composition of the labor force. If so, do alternative policy measures that redistribute 8 The empirical work performed by Behrman, Birdsall and Székely (2003) for 18 Latin American countries for the period 1977-98 identifies a strong disequalizing impact from market reform during this period. Their analysis points to domestic financial reform, tax reform, and capital account liberalization as the policies contributing to greater inequality. Interestingly, increased trade openness was found to have no significant impact on inequality, while privatization contributed to reduced inequality. The authors conclude that the disequalizing effects seen in the region have mainly operated through technological progress.
  • 12. 12 existing assets offer greater potential to shift the distribution of assets and income in a pro-poor direction? Experience suggests that the answer is probably no in most times and in most countries. Part of the reason lies in political economy: those with much higher-than-average assets and incomes often exercise strong influence over the policy-making process, and naturally oppose the adoption of policies that would redistribute their own assets and income on a large scale. Even when populist governments take power, many financial assets prove internationally mobile through capital flight, while the potential to redistribute through income and property taxes is typically limited by a whole range of problems, including poor record-keeping, evasion, and corruption (Newbery and Stern, 1987). Similarly, many efforts to redistribute income on the expenditure side run encounter severe problems including diversion of funds, targeting according to political rather than poverty criteria, and capture by non-poor households (see, for example, Park, Wang, and Wu 2001 on China and Olken 2003 on Indonesia). Finally, consider land redistribution. There is a respectable argument that a country in which agricultural land is divided relatively evenly into “family farms” will achieve higher productivity than an otherwise similar country where, for historical reasons, ownership of land is highly unequal.9 In principle, this insight points to the possibility of achieving increased productivity through fully compensated land redistribution funded through the tax system. Whether or not this process should be seen as redistribution depends largely on the incidence of the taxes raised to finance it. However, this point simply returns us to the one made in the preceding paragraph: getting rich households to pay taxes to buy land to give to poor households requires an unusual set of political-economic circumstances that is rarely seen in practice. More broadly, the theoretical productivity gains expected from land reallocation must be weighed against the dead- weight losses incurred by raising the taxes necessary to pay for this reallocation. Broadening the focus to uncompensated land distribution raises a different set of issues. The big success stories of this type took place under circumstances that are hard to replicate in contemporary developing countries: in both Korea and Taiwan, much of the redistributed land had been recently vacated by Japanese colonists who returned to Japan following World War II, easing the political problems involved in seizing it. Meanwhile, the recent brutal suppression of political protests by native Taiwanese against the newly arrived Kuomintang government left large Taiwanese landowners in no mood to resist the (partially compensated) transfer of their land. Finally, the Japanese land reform of 1946 was directly imposed by the Allied forces of occupation. In all these cases, the political cards were all in the hands of the authorities imposing the land reform. In the more usual case, land owners wield considerable political influence of their own, allowing them to exert more vigorous opposition to uncompensated transfers of their land. In the worst case, uncompensated land transfers may spark political violence and contribute to a broader breakdown of economic and political order, as recently in Zimbabwe. Although some governments might choose to undertake such a conflict for political reasons of their own, few if any would do so in response to “free advice” offered by outsiders. 9 The argument is based on the difficulties of supervising hired labor in many aspects of the farm production process, resulting in advantages for a farm size that can be operated by members of a single family, who presumably manage themselves in line with the interests of the family unit (Binswanger and Deininger, 1997). Of course, the size of such a farm can differ enormously from one economic and agricultural setting to another.
  • 13. 13 It is of course impossible to examine every potential mechanism for redistributing assets and/or income. However, the preceding examples help illustrate the broader point: explicit redistribution of existing income or assets will almost always be intensely political, pitting the economic interests of one segment of society against another. A country may well choose to redistribute some of the gains flowing from growth-enhancing policy reforms, though such redistribution is likely to be limited in scope. If, as argued here, the dominant current trend in global technology is biased toward higher skills, most of the big opportunities for poor countries to move toward the global productivity frontier will yield disproportionately large rewards to those already possessing those skills, at least in the short to medium term. Countries that reject these opportunities may avoid a pro-rich shift in the income distribution, but only by sacrificing large and continuing absolute gains for both the rich and the poor. This point brings us full circle to the rhetoric of “pro-poor growth,” in the distribution-focused sense of growth yielding disproportionate gains for the initially poor. By framing debate about policy options in such emotionally charged terms, proponents seek to persuade developing countries to forgo those reforms with the greatest potential to accelerate growth, and thereby the greatest potential to achieve large and sustainable absolute gains for the poor. The good news is that most governments will assess the growth and distribution dimensions separately, and be more receptive to external advice aimed at boosting growth, while rejecting external advice on matters of income redistribution. In either case, the donor community would do well to avoid adopting terminology designed to promote policies that are likely to be rejected by analytically competent governments, while causing harm to those countries naïve enough to adopt them. Options for adopting more analytically informative terminology If, as suggested above, the phrase “pro-poor growth” tends to undermine rather than enhance the quality of discussion regarding poverty reduction, what options are available for engendering a “pro-clarity” shift in terminology? One way to think about this problem is to refer back to the decomposition outlined in figure 2. Whatever alternative terminology is adopted, it should permit us to distinguish among the three elements highlighted in that decomposition: • the overall change in the economic pie over the course of a growth episode (shown as movements along the 45° line); • the change in the share of that pie earned or consumed by the poor (shown as shifts up or down from the 45° line); and • the net change in the income or consumption of the poor (shown as the vertical component of the resulting arrow, along the vertical axis). In addition, the phrases used to describe these three components should be as neutral and analytical as possible. Option 1. One option – regarded by this author as first-best – is to drop the phrase “pro-poor” altogether, at least as a modifier of “growth.” Instead, growth would be described more neutrally and informatively as more or less “rapid,” as more or less “steady,” as more or less “sustained,” etc. All such references to growth would refer to changes in overall income or consumption –
  • 14. 14 movement up or down the 45° line. Meanwhile, phrases like “pro-poor” and “pro-rich” would be used exclusively to describe changes in the income distribution, in which context they are quite clear and unambiguous. This leaves the choice of appropriate terminology to describe the resulting changes in the income or consumption of the poor. My own view is that this choice becomes somewhat less critical, once the terminology applied to the other two components is rectified. For example, think back to the discussion of the sources of poverty reduction in China: describing this experience as one of “very rapid growth, accompanied by a shift in the income distribution in favor of the non-poor, but nevertheless resulting in large absolute gains in income and consumption for poor households and a dramatic reduction in absolute poverty” conveys the main elements of the situation fairly clearly, and in ways easily related to the decomposition shown in figure 2. The same framework works equally well for other scenarios: growth episode E can reasonably and clearly be described as one of “sluggish growth, together with a strong pro- poor shift in the income distribution, resulting in a moderate increase in the average incomes of poor households and gradual progress in reducing the incidence of absolute poverty.” Here again, the language provides a clear sense of how the pieces fit together. Option 2. The second option is to resign ourselves to retaining the phrase “pro-poor growth,” but consistently using it in the less popular but more analytically meaningful and more policy- relevant sense of “growth that benefits the poor.” This option has the advantage of jumping aboard an existing bandwagon, rather than attempting to attract others to a new one of our own. On the other hand, retaining the existing language largely sacrifices the opportunity to confront the deficiencies of the distribution-focused terminology, thus ensuring that the existing situation of ambiguity and confusion will persist, with proponents of different concepts of “pro-poor-ness” continuing to talk past one another. In terms of the decomposition depicted in figure 2, this terminology uses two sets of modifiers for “growth” to describe two different components of any growth episode. On the one hand, changes in overall income or consumption continue to be described as more or less rapid, suggesting movement along the 45° line. On the other hand, net changes in the income or consumption of the initially poor are described as more or less “pro-poor,” corresponding to the vertical component of each growth episode, shown on the vertical axis. The two are linked by the contemporaneous change in the income distribution, which again can be described as “pro- poor,” “pro-rich,” etc. Compared with the distribution-focused terminology, this decomposition offers a significant improvement in clarity. On the other hand, using the word “growth” to describe two of the three components of any growth episode as decomposed in figure 2, while also using “pro-poor” or similar phrases to describe two of those three components, seems to entail a loss of clarity relative to Option 1 as outlined above. On that basis, this author would cast a vote in favor of Option 1 – a full-blown shift in the terminology, eliminating “pro-poor” as a potential modifier of “growth” and applying it exclusively to describe changes in distribution. Before closing, it is worth mentioning a third option, which has arisen from analytical work conducted under USAID’s “pro-poor economic growth” activity. Different outputs from this activity appear to use the phrase “pro-poor growth” in both of the senses identified in this paper. However, these analyses also introduce the concept of a “pro-poor economic growth policies.”
  • 15. 15 The shift in attention from “growth” to “policies” is significant. Rather than focusing on the overall change in the position of the poor, or on the change in their position relative to others, this framework attempts to unbundled the various components of the policy framework, and assess the their individual impact on the rate of overall rate of growth and on growth in the income or consumption of the poor. That is, rather than worrying about overall changes, which are subject to large forces outside the control of policy makers, this framework looks for opportunities to “tweak” the overall change through selective improvements in policies. In particular, the analytical work seeks to identify policy changes that have the potential to boost the rate of economic growth while simultaneously enabling the poor to gain a larger income share – all other things held equal. The good news here is that, by concentrating on the impacts of individual policies, this framework almost automatically sticks to issues of relevance to policy makers, rather than getting bogged down in matters that are often outside the control of policy makers and even more often off limits for donors. The bad news is that the phrase “pro-poor economic growth policies” tends to fall apart in discussion, leading to more unproductive and inconclusive discussion of the meaning of “pro-poor growth” before moving on to the analytically valuable discussion of policies. References Banerjee, Abhijit and Thomas Piketty, 2003. “Top Indian Incomes, 1956-2000.” Working Paper, ENS-CEPREMAP, Paris. Behrman, Jere, Nancy Birdsall, and Miguel Székely, 2003. Economic Policy and Wage Differentials in Latin America.” Working Paper, Center for Global Development. Berman, Eli, 2000. “Does Factor-Biased Technological Change Stifle International Convergence? Evidence from Manufacturing” National Bureau of Economic Research Working Paper no. 7964. Binswanger, Hans P. and Klaus Deininger, 1997. “Explaining Agricultural and Agrarian Policies in Developing Countries.” Journal of Economic Literature, December. Deaton, Angus 2002. “Is World Poverty Falling?” Finance and Development, vol. 39 no. 2. Deaton, Angus and Jean Dreze, 2002. “Poverty and Inequality in India: A Re-Examination.” Economic and Political Weekly, September 7. Deininger, Klaus and Lyn Squire, 1996. “A New Data Set Measuring Income Inequality.” World Bank Economic Review, vol. 10 no. 3. Dollar, David and Aart Kraay, 2000. “Growth is Good for the Poor,” World Bank Policy Research Working Paper. Ffrench-Davis, Ricardo 2000. Reforming the Reforms in Latin America: Macroeconomics, Trade, and Finance. London: Macmillan/Palgrave. Kakwani, Nanak and Ernesto M. Pernia. “What is Pro-Poor Growth?” Asian Development Review, vol. 18, no. 1.
  • 16. 16 Little, I.M.D. 1982. Economic Development: Theory, Policy, and International Relations. New York: Basic Books. Newbery, David M.G. and Nicholas Stern, 1987. The Theory of Taxation for Developing Countries. World Bank. Olken, Benjamin A. 2003. “Corruption and the Costs of Redistribution: Micro Evidence from Indonesia.” Working Paper, Harvard University Department of Economics. Park, Albert, Xiaoqing Song, Junsen Zhang, and Yaohui Zhao, 2002. “The Growth of Wage Inequality in Urban China, 1988 to 1999.” Working Paper, World Bank. Park, Albert, Sangui Wang, and Guobao Wu 2001. “Regional Targeting in China.” Working Paper, University of Michigan Department of Economics. Ravallion, Martin and Shaohua Chen, 2001. “Measuring Pro-Poor Growth.” World Bank Policy Research Working Paper. Rodrik, Dani 2002. “Trade Policy Reform as Institutional Reform” in Development, Trade and the WTO: A Handbook, edited by B.M. Hoekman, P. English, and A. Mattoo. World Bank. Squire, Lyn 2003. “Comments on the study proposal by Deepa Narayan.” Presented at World Bank workshop on “Moving Out of Poverty: Growth and Freedom from the Bottom Up.” World Bank, 2001. World Development Report 2000/01: Attacking Poverty. Zhang, Junsen and Yaohui Zhao, 2002. “The Economic Returns to Schooling in Urban China, 1988-1991.” Working paper, World Bank.
  • 17. Figure 1: "Pro-Poor" Growth: Separating the Rhetoric from the Reality % Change in Real Consumption, Poorest 10% Overall growth w/ gains for poor 45° C C Overall deterioration w/ gains for poor A A B, D D B F E E 45° % Change in Mean H Real Consumption G Overall deterioration Overall growth w/ losses for poor w/ losses for poor
  • 18. 18
  • 19. 19 Figure 2: "Pro-Poor" Growth: Issues of Political and Economic Feasibility Overall growth w/ gains for poor % Change in Real Consumption, C' 45° Poorest 10% C A C A B' B, D D B D', F', G' Overall deterioration w/ gains for poor E E F E' F 45° G G % Change in Mean Real Overall deterioration Consumption w/ losses for poor Overall growth w/ losses for poor