Sunday, July 3, 2011

Poverty, Inequality and Growth

Does the globalization improve the condition of poor? Does positive growth rate really reduce inequality?

There are volumes of literature in search of linkages between globalization and poverty. “The pro-globalization advocates argue that it led to faster growth, that it reduces poverty, and that it brought about a decrease in inequality. The anti-globalization critics argue that it led to slower but more volatile growth, that it increased poverty in most parts of the world and that there was an increase in equality” (Nayyar, 2006, p-2). However, in the literature it is claimed that ‘two sets of factors can be identified as the main proximate causes of the differing rates of poverty reduction at given rates of growth: the initial level of inequality and changing income distribution’ (Ravallion, 2004, p-14).

Moreover, the World Bank identifies six country conditions that are particularly relevant for the case study of pro-poor growth strategies which are (i) population density and its degree of urbanization, (ii) assets and income inequality, (iii) importance of agriculture, (iv) importance of climatic variability, (v) fertility and (vi) institutions (World Bank, 2005, pp 75-76).

We examined the claim of positive relationship between growth rate with reduction of poverty and inequality keeping all the above stated conditions in mind. We take two groups of countries: In group (i), there are altogether 25 states. Many of these states were Soviet Republics within former USSR. These states declared independence and initiated reform process of their planned economy in order to transform into a capitalist market economy in early nineties. In group (ii), we consider six south Asian countries.

We measure poverty and inequality for both groups prior to 1990 and after 2000. Since states in group (i) were under socialist system prior to 1990, we find that both the measures of poverty and inequality of all these countries (except six countries for which data prior to 1990 are unavailable) are appeared insignificant. On the other hand, in group-(ii) ,almost one-third of the people in this region live in poverty and experience absolute deprivation in so far as obtaining basic and minimum human necessities are concerned. However, countries of both groups show positive average growth rate during the period 1995-2004. Then how such positive growth rate achieved through globalizations improves poverty and inequality in two groups of countries those differ with initial level of poverty and inequality?

Following are the results:

In case of the countries of the first group:
a) Where growth is positive and poverty reduces along with declining inequality. This is pro-poor growth situation. Armenia is the only country, which falls within this group.

b) Where positive growth with reducing poverty and increasing inequality. This is ‘trickle down’ growth process. Three countries fall in this category, namely Azerbaijan, Macedonia and Tajikistan.

c) Where positive growth increases poverty and inequality. This is ‘immiserizing’ growth situation. It implies that the adverse effect of high inequality is such that it offsets the beneficial impact of growth on poorer section of the population. In case of former socialist state turned capitalist countries this phenomenon appears predominant though economists claim that this situation is rare. Because, remaining 20 countries fall in this category.

In case of the countries of the second group:
a) Where positive growth with reducing poverty and increasing inequality. This is ‘trickle down’ growth process. Bangladesh, India (Rural), India (Urban), Nepal and Pakistan fall in this category.

b) Where positive growth increases poverty as well as inequality. This is ‘immiserizing’ growth situation. Sri Lanka falls in this category.
Summarizing the results, it can be said that the claim that ‘growth reduces poverty and that it brought about a decrease in inequality’ has not been realized with respect to countries belonging to East Europe, Central Asia and South Asia. Moreover, positive growth due to globalization either immiserizes the poor (turns their condition from bad to worse) or trickles down benefits insignificantly irrespective of the country conditions lay down by the World Bank. Moreover, the impression that ‘immiserizing’ growth concept is rare in reality is not true. On the contrary, positive growth in socialist turned capitalist countries predominantly makes the condition of the poor worse.

Abstract of a paper submitted by Prof. Ajit Kumar Ray, NBU 

Major References:
1. Nayyar D. (2006): Development through Globalizatio?, World Institute for Development Economic Research, Research Paper No. 2006/29

2. Ravallion, M. ( 2004 ): Pro-poor Growth: A Primer, Development Research Group, World Bank, N.Y., Washington

3. World Bank (2005):Pro-Poor Growth in the 1990s: Lessons and Insights from 14 Countries, Operationalizing Pro-Poor Growth Research Program, U.K. Department for International Development, The World Bank