Given the crisis of poverty in Pakistan and a number of other developing
countries, for the first time in history economists, governments and multilateral
donor institutions are united in attempting to achieve poverty reduction
through economic growth. Most continue to believe in the conventional
wisdom that GDP growth is sufficient to overcome the problem of poverty.
By contrast, I have argued in these columns and in my published work over
the last few years, that we must address not just GDP growth but the level
and structure of economic growth that is consistent with rapid poverty
reduction. Thus it is only when the pace of poverty reduction becomes
a central concern that the content and structure of economic growth becomes
a vital consideration in designing the growth strategy. It is only then
that a deeper understanding of the relationship between growth and poverty
reduction becomes necessary. (See for example my 1994 book titled: Poverty
Alleviation in Pakistan and more recently my work embodied in the UNDP,
National Human Development Report 2003). An important aspect of the pursuit
of pro poor growth is to develop a quantitative method of measuring pro
poor growth. This had eluded those of us who were engaged in designing
and implementing strategies for poverty alleviation. Now in a seminal
paper Nanak Kakwani and Hyun H. Son (January 2004) have made the break
through in designing a simple but powerful method of measuring pro poor
growth. In this article I will briefly outline some of the features of
the Kakwani and Son measurement method, in the context of the concept
and strategy of pro poor growth.
For over two centuries it was believed that economic growth is essentially
a means of enhancing state power. Half a century ago, however, with the
emergence of newly independent countries, attention focused on economic
growth as a mechanism of shifting ‘developing’ countries out
of poverty. It was thought that growth reduces poverty and therefore all
that was required for overcoming it was to maximize the GDP growth rate.
(This was the notion of poverty reduction as a “trickle down”
effect of GDP growth). This indeed was the proposition that determined
the design of the first three five years plan of Pakistan. Even today
when the concept of pro poor growth is being propounded, the “trickle
down” theory continues to hold sway. For example, Ravallion and
Chen (2003), on the basis of their empirical work have defined pro poor
growth simply as one, which reduces poverty. Yet the real issue is not
the fact of poverty reduction (which GDP growth in most cases will achieve),
but the magnitude and pace of poverty reduction in the growth process.
The importance of the Kakwani and Son (2004) contribution lies in the
fact that in designing a method of measurement they have made the concept
of pro poor growth more precise. They define pro poor growth as one in
which a greater percentage of the increase in benefits goes to the poor
relative to the non-poor. This definition is translated into a quantitative
index, which Kakwani and Son call, “poverty equivalent growth rate”
(PEGR). They demonstrate that the proportional reduction in poverty is
a monotonically increasing function of the PEGR. i.e. The larger the PEGR,
the greater the proportional reduction in poverty. With respect to economic
policy the strategic objective is thus clarified: It is not just maximization
of the GDP growth but the maximization of the PEGR. In terms of this measure,
it is clear that in order to achieve pro poor growth we must seek to improve
the distribution of national income between poor and non-poor simultaneously
with increasing its growth rate.
The issue of the magnitude and pace of poverty reduction can be clarified
by distinguishing between two factors that reduce poverty: (1) The first
factor is the level of the GDP growth rate. (2) The second factor is enabling
a larger proportion of the increased income to go to the poor relative
to the non-poor. It is clear that given the first factor, the greater
the magnitude of the second factor, the greater is the magnitude of poverty
reduction. It is equally clear that if the distribution of income remains
unchanged then the magnitude of poverty reduction would depend entirely
on the level of GDP growth. Now we come to the tricky part. If the distribution
of income becomes more unequal over time as it has done in Pakistan’s
case, then as I have argued in these columns, a much higher target GDP
growth rate would be required to reduce poverty. This is necessary for
an accelerated GDP growth to compensate for the deterioration in income
distribution. Under these circumstances if the magnitude of the increase
in the growth rate of GDP is smaller than the targeted rate, then in fact
such a small increase in the GDP growth rate would be associated with
growing poverty. This is indeed what has happened in Pakistan’s
case over the last three years: GDP growth has increased and so has poverty.
While Kakwani and Son have made a seminal contribution by providing a
precise measure of pro poor growth in their methodology the structure
or content of growth remains a black box. Their measurement method would
simply indicate whether or not, and the extent to which the GDP growth
in a particular period is pro poor. They have not answered the question:
What are the specific factors that will change the structure of GDP growth
to lead to a higher and more equitable growth? This of course is understandable,
because the answer depends on the specific economic features of the country
we are dealing with. In Pakistan’s case I have in these columns
and in my recent published work attempted to articulate the outline of
such a growth strategy. (See for example, Restructuring Growth for Faster
Poverty Reduction, DT 3rd April 2003). It would accelerate overall GDP
growth and simultaneously enhance its poverty reduction capability.
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