Economic growth versus poverty reduction: A “hollow debate”?

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The jury is still out on whether pro-poor growth is enough to reduce poverty. However, the OECD’s specialised network, POVNET, believes growth and poverty reduction should work together.

Economics is notorious for its divergent schools of thought, academic in-fights, stubborn fads and fanciful fashions. Development economics is no exception. Take the battle lines drawn between the protagonists of economic growth on the one hand and explicit poverty reduction on the other. In the last decade, the former group insisted that growth in itself would eventually lead to rising incomes, including among the poor. Not so, said the latter side, and emphasised the pattern of growth instead. For Harvard economist Dani Rodrik, writing in 2000, the discussion raging in workshops and research papers was little more than a “hollow debate” which distracted attention from serious questions about what actually works in development and how.

Mr Rodrik’s remarks reflected the mood of other researchers as they reopened the discussion on the pattern of growth and its impact on income. If one school of thought was found to be right, then the debate would be over. But poverty is still rampant, and the evidence on which policy emphasis works is mixed. Even much cited World Bank research, such as that by Craig Burnside and David Dollar on aid, growth and development, came under renewed scrutiny. Little wonder development authorities have become anxious. So has the tax-paying public: enough of the debate, they say, tell us what must be done for aid to work and poverty to fall!

Before answering, let’s recap. In the late 1990s, the prevalent strategy was to reduce poverty by targeting basic social services. Development interventions were scrutinised for measurable evidence of direct impact on the poor. This seemed sensible: after all, what was the point of growth (and how could it last) if poverty remained entrenched?

Critics scorned the likes of large infrastructure projects such as dams and white elephant airports. Engineers were criticised for their narrow-minded and technical approach and their apparent belief that infrastructure projects would more or less automatically lead to poverty reduction. The development agencies responsible for those projects also took the brunt for their lack of balance, particularly on the social front. This had a visible impact on bilateral donor spending priorities, with support for economic infrastructure and agriculture falling from close to 40% of total bilateral official development assistance (ODA) in 1995/96 to below 20% in 2002/2003.

The attention given to poverty reduction by donors and key institutions in the 1990s was of course a reflection of the experience with development at the time, and the lessons learned after a decade of ODA conditioned on economic reforms, such as controlling inflation, public debt and so on. The effects on growth from pursuing this orthodox policy agenda, known as the “Washington Consensus”, may have worked well in OECD countries, but were disappointing in most developing and transition countries. Sub-Saharan Africa, in particular, stagnated and, apart from a few cases, remained fragile with widespread poverty. Donors began to question the benefits of policies focusing on privatisation, deregulation and trade liberalisation. This experience gave them the impetus and rationale to redirect aid flows to interventions that would improve human welfare more directly.

Within donor organisations, it became increasingly evident that the battle lines between protagonists of growth on one side and poverty reduction on the other were undermining support programmes. This showed up in a lack of collaboration and communication between growth-oriented professionals and social sector specialists, or between economists and scientists, engineers and social anthropologists. These stovepipes meant synergies went unexplored.

The concept of pro-poor growth emerged, driven in part by pressure to achieve the Millennium Development Goals (MDGs), not least that of halving the proportion of people living on less than a dollar a day. The recent trend in aid has been rising, helped by fresh pledges for Africa. Meanwhile, members of the New Partnership for Africa’s Development (NEPAD), which has espoused a comprehensive approach covering economic development, human capital development and governance, have just agreed to increase their investments in African agriculture by 10%.

But how can we be sure that new aid and policies will succeed where previous policies fell short? What lessons can we draw from the hollow debate?

A close look at what can be patchy data suggests that growth, poverty and inequality are linked. One study shows that a 1% increase in per capita incomes may reduce income poverty by as much as 4% or by less than 1%, depending on the initial conditions in the country, such as the distribution of assets, ownership, and so on. Overall, most of the evidence confirms that poverty reduction depends on the pace and pattern of economic growth. But how to achieve the optimal pattern?

The answer is a hybrid: pro-poor and pro-growth approaches are mutually reinforcing and should go hand in hand. What this means for policy is spelt out in a new book by the Development Assistance Committee (DAC) of the OECD, whose member countries handle some 90% of world bilateral ODA (see references). Its forum, the Network on Poverty Reduction (POVNET), has helped to steer previously divided opinion into a new consensus that rapid and sustained poverty reduction requires pro-poor growth. This means “a pace and pattern of growth that enhances the ability of poor women and men to participate in, contribute to and benefit from growth”.

To reach this view, POVNET considered several basic questions. For a start, when is growth pro-poor? Should it necessarily be capable of raising the incomes of the poor relative to the incomes of the non-poor to boost equity, or should incomes rise in absolute terms, to help the poor purchase more goods and services? The answer is not always clear. Equity, some argue, makes growth more robust. Others point to Vietnam, which is often held up as a model of poverty reduction, but where income gaps have started to widen. POVNET agreed that both “absolute” and “relative” perspectives count.

Experts also looked for trade-offs between “pro-growth” and “pro-poor” policies. What types of growth policies help poor people most? To what extent may public spending on social services crowd out growth-oriented sectors such as infrastructure or agriculture? POVNET found that policies with a social content can be a cost-effective investment in promoting pro-poor growth. Take “Oportunidades”, the anti-poverty drive by Mexico’s government since 1997. It provides cash transfers to rural and urban households, but links them to requirements, such as regular school attendance, health clinic visits and nutritional programmes for children. That means reduced poverty and improved human capital, too.

Defining policies for agriculture has been another area of concern. Is there a future for small-scale farming, for instance, or should donors encourage rural area producers to get out of farming? Evidence presented in POVNET indicates that agricultural growth has powerful leverage effects on the rest of the economy, but emphasises that broader rural policies, in education, transport and communications, and private sector development more generally, can help generate returns in terms of higher growth. Data for provinces in China, for instance, show that from 1970 to 1997, additional public spending on agricultural research, roads and education helped to facilitate an eightfold increase in rural GDP.

Another area of debate is whether government support should be given to firms directly, by way of finance or technical support or, indirectly, by investing in support infrastructure, communications, and so on. For POVNET, the answer is to aim for “systemic change”. That means working with markets, rather than crowding them out with support. This can be seen in Uganda, for instance, where a tweak in the regulatory regime, combined with some technical facilitation from donors, triggered an explosion in radio broadcasting. This created wealth, not least from advertising, as well as a platform for women and men alike to discuss ways of improving the business and policy environment.

Is the hollow debate finally over and are those stovepipes finally coming down? It may be too early to call. For now, the pendulum seems to have swung to a more pragmatic centre. Private sector development, infrastructure and agriculture are high on the development agenda, while the role social policies play in growth, particularly in reducing poverty reduction and improving human capital, can no longer be overlooked.

Nonetheless, there are still far too many “disconnects” within and between development agencies that risk undermining efforts for better communication and co-operation. Any scaling up of development aid may consequently tempt some donors to revert to old habits, including overlooking the institutional and maintenance costs in infrastructure support until it is too late, or encouraging still more parallel delivery mechanisms for aid, rather than system-wide approaches that would co-ordinate all the players involved.

By following POVNET’s recommendations on promoting pro-poor growth, donors can avoid at least some of these pitfalls. Rather than fragmentation, there would be stronger, more coherent, policymaking. Poverty reduction would be more solid and sustainable as a result.


Ebba Dohlman and Mikael Soderback worked for the OECD Development Co-operation Directorate until 2007. Ms Dohlman is now in the OECD Office of the Secretary-General, and Mr Soderback works for the Swedish government’s development co-operation agency, Sida. Visit www.sida.se

 

References

  • OECD (forthcoming, 2007), Promoting Pro-Poor Growth: Policy Guidance for Donors, POVNET, DAC, Paris.
  • Rodrik, Dani (2000), “Growth versus poverty reduction: a hollow debate” in Finance and Development, IMF, Washington, D.C.
  • World Bank (2006), Annual Review of Development Effectiveness 2006: Getting Results, Washington, DC.
  • Burnside, Craig, and David Dollar (1997), “Aid, Policies and Growth”, Policy Research Working Paper Series 1777, World Bank, Washington, DC.
  • For more on POVNET, email: dac.contact@oecd.org  or visit www.oecd.org/dac/poverty
 OECD Observer N° 260, March 2007  



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