GROWTH can generate virtuous circles of prosperity and opportunity. Strong growth and employment opportunities improve incentives for parents to invest in their children’s education by sending them to school.
This may lead to the emergence of a strong and growing group of entrepreneurs, which should generate pressure for improved governance. Strong economic growth therefore advances human development, which, in turn, promotes economic growth that is the most powerful instrument for reducing poverty and improving the quality of life in our developing country.
Both cross-country research and country case studies provide overwhelming evidence that rapid and sustained growth is critical to making faster progress towards the Sustainable Development Goals (SDGs) -and not just the first goal of halving not only the global but particularly the national proportion of people living on less than $1 a day.
But under different conditions, similar rates of growth can have very different effects on poverty, the employment prospects of the poor and broader indicators of human development. The extent to which growth reduces poverty depends on the degree to which the poor participate in the growth process and share in its proceeds.
Thus, both the pace and pattern of growth matter for reducing poverty; a successful strategy of poverty reduction must have at its core measures to promote rapid and sustained economic growth.
The challenge for policy is to combine growth-promoting policies with policies that allow the poor to participate fully in the opportunities unleashed and so contribute to that growth. This includes policies to make labour markets work better, remove gender inequalities and increase financial inclusion.
Future growth will need to be based on an increasingly globalised world that offers new opportunities but also new challenges. New technologies offer not only ‘catch-up’ potential but also ‘leapfrogging’ possibilities.
New science offers better prospects across both productive and service sectors. Future growth will also need to be environmentally sustainable. Improved management of water and other natural resources is required, together with movement towards low carbon technologies by both developed and developing countries.
With the proper institutions, growth and environmental sustainability may be seen as complements, not substitutes. We ought to work for inclusive growth through a number of programmes and continue to spend heavily on health and education, which have a major impact on poor people’s ability to take part in growth opportunities.
More and better research on the drivers of growth will be needed to improve policy. But ultimately the biggest determinants of growth in a country will be its leadership, policies and institutions.
Historically nothing has worked better than economic growth in enabling societies to improve the life chances of their members, including those at the very bottom.
The central lesson from the past 54 years of political independence and development research and policy is that economic growth is the most effective way to pull people out of poverty and deliver on their wider objectives for a better life.
Growth helps people move out of poverty while research that compares the experiences of a wide range of developing countries finds consistently strong evidence that rapid and sustained growth is the single most important way to reduce poverty.
A typical estimate from these cross-country studies is that a 10 per cent increase in a country’s average income will reduce the poverty rate by between 20 and 30 per cent. The central role of growth in driving the speed at which poverty declines is confirmed by research on individual countries and groups of countries.
For example, a flagship study of 14 countries in the 1990s found that over the course of the decade, poverty fell in the 11 countries that experienced significant growth and rose in the three countries with low or stagnant growth.
Among these 14 countries, the reduction in poverty was particularly spectacular in “Vietnam, where poverty fell by 7.8 per cent a year between 1993 and 2002, halving the poverty rate from 58 per cent to 29 per cent.”
Other countries with impressive reductions over this period include “El Salvador, Ghana, India, Tunisia and Uganda, each with declines in the poverty rate of between three and six per cent a year.”
Driving these overall reductions in poverty was the rebound in growth that began for most of the countries in the mid-1990s. The median GDP growth rate for the 14 countries was “2.4 per cent a year between 1996 and 2003”. Numerous other country studies show the power of growth in reducing poverty including Tanzania:
Such calculations need to be interpreted with care given the multitude of variables involved. Even if inequality increases alongside growth, it is not necessarily the case that poor people will fail to benefit – only that they will benefit less from growth than other households.
The positive link between growth and poverty reduction is clear. The impact of the distribution of income on this relationship – in particular, whether higher inequality lessens the reduction in poverty generated by growth – is less clear.
Initial levels of income inequality are important in determining how powerful an effect growth has in reducing poverty. But contrary to widespread belief, growth does not necessarily lead to increased inequality.
While some theoretical research suggests a causal relationship between growth and inequality (and vice versa), the consensus of the latest empirical research is that there is no consistent relationship between inequality and changes in income.
The experiences of developing countries in the 1990s and 2010s suggest that there is a roughly equal chance of growth being accompanied by increasing or decreasing inequality.
In many developing countries, rates of inequality are similar to or lower than in developed countries. A series of studies using cross-country data all suggest that growth has neither a positive nor a negative effect on inequality.
Controlling for initial inequality of assets such as land and education, income inequality no longer seems to play a role in expanding or reducing the opportunities for growth.
But asset inequality itself may be important because owning an asset that can be used as collateral can expand access to financial markets. Such access is likely to be growth-enhancing when it allows more households the opportunity to invest – which is especially important in economies where the average firm size is small.
Reducing asset inequality is a challenge, as it concerns the stock of wealth rather than the flow of income. Redistribution of assets may have an adverse effect on the incentives to save and invest, which may more than counteract the positive effects of more equitable asset ownership.
Moreover, it is often politically contentious, and may be destabilising.
MUHARRAM MACATTA is a retired civil servant, a graduate in liberal arts, majoring in economics and political science.
He served as a director of internal and international trade, import and export section, with the then ministry of commerce and industries, which later became to be the ministry of commerce and cooperative; and served as principal marketing officer assigned to several marketing boards.
He established state motors corporation and also founder regional offices; and first director of the Saba Saba International trade Fairs.