Poverty and Patterns of Growth

Hasan, Rana; Quibria, M. G. Working Paper Poverty and Patterns of Growth ERD Working Paper Series, No. 18 Provided in Cooperation with: Asian Development Bank (ADB), Manila Suggested Citation: Hasan, Rana; Quibria, M. G. (2002) : Poverty and Patterns of Growth, ERD Working Paper Series, No. 18, Asian Development Bank (ADB), Manila, https://hdl.handle.net/11540/2042 This Version is available at: https://hdl.handle.net/10419/109239 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. http://creativecommons.org/licenses/by/3.0/igo ECONOMICS AND RESEARCH DEPARTMENT ERD WORKING PAPER SERIES NO. 18 Rana Hasan and M. G. Quibria August 2002 Asian Development Bank Poverty and Patterns of Growth ERD Working Paper No. 18 POVERTY AND PATTERNS OF GROWTH Rana Hasan and M.G. Quibria August 2002 Rana Hasan is a Fellow (Research Program) at the East West Center. M. G. Quibria is Advisor with the Operations Evaluation Department, Asian Development Bank. This paper draws on research carried out for the Asian Development Bank Institute project, Poverty and Policy: What Do Data Tell Us?. Asian Development Bank P.O. Box 789 0980 Manila Philippines 2002 by Asian Development Bank August 2002 ISSN 1655-5252 The views expressed in this paper are those of the author(s) and do not necessarily reflect the views or policies of the Asian Development Bank. Foreword The ERD Working Paper Series is a forum for ongoing and recently completed research and policy studies undertaken in the Asian Development Bank or on its behalf. The Series is a quick-disseminating, informal publication meant to stimulate discussion and elicit feedback. Papers published under this Series could subsequently be revised for publication as articles in professional journals or chapters in books. Contents Abstract vii I. Introduction 1 II. Empirical Framework and Data 2 III. Results 4 A. How Does Aggregate Growth Correlate With Poverty Reduction? 4 B. Does the Sectoral Composition of Growth Matter? 5 IV. Conclusion 7 References 8 Abstract We use a recently constructed cross-country data set on absolute poverty to examine whether there is regional and sectoral variation in the relationship between poverty and economic growth. We find that the povertygrowth linkage is strongest in East Asia and that this linkage is essentially driven by growth in the industrial sector. By contrast, in Latin America, South Asia, and Sub-Saharan Africa, agriculture has had a greater impact on poverty reduction. We argue that these results should not be interpreted to mean that all regions other than East Asia need to emphasize agriculture to reduce poverty. Rather, these countries—especially labor-abundant ones such as those of South Asia—should attempt to improve their policy and institutional environments that stand in the way of their exploiting their comparative advantage in labor-intensive industries and bringing about a rapid reduction in poverty. I. INTRODUCTION C ross-country studies of poverty show a close link between aggregate economic growth and poverty reduction (see Quibria 2002 for a review of this literature). A set of recent studies attempts to further extend the growth-poverty relationship to include the impact of sectoral growth on the incidence of poverty. These studies argue that while aggregate growth matters, some patterns of growth—particularly agricultural growth—are more effective in reducing poverty. Using data from India, Ravallion and Datt (1996) examine the impact of sectoral growth on poverty reduction. They find that growth in the primary sector is more effective in reducing poverty than growth in the secondary sector, which has no impact on poverty either for the rural or the urban sector. Kakwani (2001) reports similar findings for the Philippines. He notes that while a one percent increase in growth in agriculture reduces the incidence of poverty by a little more than one percent, the corresponding figures for industry and services are substantially lower at around a quarter to a third of one percent. These writings have spawned a kind of “agricultural fundamentalism”, which advocates that agriculture should be accorded the highest priority for reducing poverty. Indeed, such fundamentalism was most ardently stated by Mellor (2000, 3), who argued: “There has been a tendency to generalize that economic growth reduces poverty when in fact it is the direct and indirect effect of agricultural growth that accounts for virtually all the poverty decline.” In this note, we shall argue that the above “elasticity” results—which provide a quantitative codification of the growth-poverty linkage—are, indeed, very context-specific. The experience of India cited above, for example, is in contrast with the experiences of the East Asian miracle economies. During the period from the 1960s through the mid-1990s, when the East Asian economies achieved their spectacular success in growth and poverty reduction, the process was essentially propelled by a rapid increase in the production and export of laborintensive manufacturing (ADB, 1997). Policy differences between India and the miracle economies of East Asia may explain the differential impact of industrial growth on poverty reduction. The latter were not only far more open to trade, they also had fairly flexible labor markets. Industrial development in India, on the other hand, has taken place in the context of restrictive trade and industrial policies that not only inhibited the growth of labor-intensive manufacturing but also encouraged inefficient import-substituting, capital-intensive industries. Furthermore, formal labor markets in India have been encumbered by many rules and regulations that were originally intended to protect the well being of the workers but appear to have ended up in limiting employment growth (see, for example, Fallon and Lucas 1993). Thus, the lackluster growth of the industrial sector and its ability to influence poverty significantly in India may well be an artifact of its policy and institutional environments. More 1 ERD Working Paper No. 18 POVERTY AND PATTERNS OF GROWTH generally, a “low” elasticity between growth and poverty reduction may well be a reflection of the constraining effects of trade, industrial and labor market policies in particular countries than the inherent limitation of the industrial sector to contribute to poverty reduction. In this note, we use a recently constructed panel data on absolute poverty (Hasan, Quibria, and Kim—henceforth HQK—2002) to examine whether the relationship between poverty and growth—aggregate as well as sectoral—varies across the regions of the developing world. Our empirical results suggest considerable regional variations. While we do not examine the reasons behind these regional differences in a detailed manner here, we argue that there is evidence to suggest that part of the variation may be due to differences in the policy environments in which economic activity takes place in these economies. II. EMPIRICAL FRAMEWORK AND DATA We examine the relationship between growth and poverty in terms of the simple estimating equation: lnPit = α + β ·ln Yit + ui + ε it, (1) were Pit denotes poverty and is defined as the fraction of the population having consumption below a predefined level of expenditure, or poverty line, in country i and at date t, Yit denotes per capita income, and ui and εit denote error terms. The first error term, ui, captures countryspecific but time-invariant errors in measuring poverty—perhaps due to different methodologies and practices in the surveys used to measure poverty across countries, for example—while the second term, εit, captures the residual errors in measuring poverty. Because we are also interested in examining the relationship between poverty and sectoral growth, we also estimate the following equation: lnPit = α’ + β A·ln Yit A + β I·ln Yit I + β S·ln Yit S + ui + ε it, (2) where Yit A, Yit I, and Yit S denote output per capita in the agricultural, manufacturing, and services sectors, respectively, and all other variables are defined as in equation 1.1 We estimate both equations using country fixed effects. Our data requirements are relatively simple. We obtain data on per capita incomes (real GDP per capita in 1996 PPP dollars) from the Penn World Tables (PWT), Version 6 (Heston et al. 2001). Output in each of the three sectors is in turn derived by multiplying real GDP by the share of sector value added reported in the World Development Indicators (World Bank 2001).2 1 Note that Yit = Yit A + Yit I + Yit S. 2 The World Development Indicators does not contain data for Taipei,China. We use country sources for Taipei,China data. 2 References Rodriguez, F., and D. Rodrik, 2000. “Trade Policy and Economic Growth: A Skeptic’s Guide to the Cross-National Evidence.” In B. Bernanke and K. Rogoff, eds., Macroeconomics Annual. Cambridge, MA: MIT Press for National Bureau of Economic Research. Sala-i-Martin, X., 2002. The World Distribution of Income. Working Paper, Columbia University. Timmer, P., 1997. How Well Do the Poor Connect to the Growth Process? CAER II Discussion Paper No. 17, HIID, Harvard. World Bank, 2001. World Development Indicators 2001. Washington D. C. 9 ERD Working Paper No. 18 POVERTY AND PATTERNS OF GROWTH 10 Appendix Table. Poverty: Two Dollars-a-Day First Year Last Year # of Region and Economy Year Poverty Gini Index Year Poverty Gini Index Obs East Asia and Pacific People’s Republic of China 1980 83 29 1998 37 40 18 Indonesia 1976 76 34 1996 9 36 10 Korea, Rep. 1965 40 36 1985 6 35 10 Malaysia 1970 45 51 1992 12 48 7 Philippines 1961 49 52 1997 25 46 7 Taipei,China 1964 46 33 1979 1 28 10 Thailand 1969 58 44 1992 27 54 8 Latin America and Caribbean Brazil 1960 67 56 1997 14 52 19 Chile 1968 16 46 1994 12 55 7 Colombia 1964 49 65 1996 21 57 9 Costa Rica 1961 20 49 1996 16 47 11 Dominica 1989 18 50 1996 15 49 2 Dominican Republic 1989 23 51 1996 21 49 2 Ecuador 1968 39 38 1995 25 44 4 El Salvador 1965 61 55 1996 18 52 4 Guatemala 1987 31 58 1989 33 60 2 Honduras 1968 61 62 1996 51 54 6 Jamaica 1975 28 46 1996 11 36 8 Mexico 1963 34 58 1995 10 54 7 Panama 1979 27 49 1997 17 49 6 Paraguay 1991 5 40 1995 24 59 2 Peru 1985 15 46 1997 16 46 4 Trinidad and Tobago 1981 7 42 1992 1 40 3 Venezuela 1962 31 43 1996 14 49 11 South Asia Bangladesh 1963 62 37 1995 46 34 13 India 1960 83 33 1997 47 38 27 Nepal 1977 93 55 1996 71 37 5 Pakistan 1964 78 38 1996 30 31 13 Sri Lanka 1963 65 47 1995 8 34 9 Sub-Saharan Africa Ethiopia 1981 93 32 1995 95 40 2 Ghana 1987 61 35 1997 54 33 6 Guinea 1991 29 47 1994 17 40 2 Ivory Coast 1985 28 41 1995 35 37 6 Kenya 1992 75 57 1994 71 45 2 Lesotho 1986 47 56 1993 56 58 2 Madagascar 1960 57 54 1993 79 43 2 Mali 1989 74 37 1994 82 50 2 Mauritania 1993 68 50 1995 59 39 2 Niger 1960 52 34 1995 78 51 3 Nigeria 1985 61 39 1997 82 51 6 Senegal 1960 57 60 1994 57 41 2 South Africa 1993 75 59 1994 76 60 2 Tanzania 1964 102 56 1993 95 38 2 Uganda 1989 86 44 1993 88 39 3 Zambia 1976 76 52 1996 83 50 4 Source: Hasan, Quibria, and Kim (2002). 11 PUBLICATIONS FROM THE ECONOMICS AND RESEARCH DEPARTMENT ERD WORKING PAPER SERIES (WPS) (Published in-house; Available through ADB Office of External Relations; Free of Charge) No. 1 Capitalizing on Globalization —Barry Eichengreen, January 2002 No. 2 Policy-based Lending and Poverty Reduction: An Overview of Processes, Assessment and Options —Richard Bolt and Manabu Fujimura January 2002 No. 3 The Automotive Supply Chain: Global Trends and Asian Perspectives —Francisco Veloso and Rajiv Kumar January 2002 No. 4 International Competitiveness of Asian Firms: An Analytical Framework —Rajiv Kumar and Doren Chadee February 2002 No. 5 The International Competitiveness of Asian Economies in the Apparel Commodity Chain —Gary Gereffi February 2002 No. 6 Monetary and Financial Cooperation in East Asia—The Chiang Mai Initiative and Beyond —Pradumna B. 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Rana, December 1993 No. 6 Environmental Challenges in the People’s Republic of China and Scope for Bank Assistance —Elisabetta Capannelli and Omkar L. Shrestha, December 1993 No. 7 Sustainable Development Environment and Poverty Nexus —K.F. Jalal, December 1993 No. 8 Intermediate Services and Economic Development: The Malaysian Example —Sutanu Behuria and Rahul Khullar, May 1994 No. 9 Interest Rate Deregulation: A Brief Survey of the Policy Issues and the Asian Experience —Carlos J. Glower, July 1994 No. 10 Some Aspects of Land Administration in Indonesia: Implications for Bank Operations —Sutanu Behuria, July 1994 No. 11 Demographic and Socioeconomic Determinants of Contraceptive Use among Urban Women in the Melanesian Countries in the South Pacific: A Case Study of Port Vila Town in Vanuatu —T.K. Jayaraman, February 1995 No. 12 Managing Development through Institution Building — Hilton L. 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Das, October 1999 No. 21 Occupational Segregation and the Gender Earnings Gap —Joseph E. Zveglich, Jr. and Yana van der Meulen Rodgers, December 1999 No. 22 Information Technology: Next Locomotive of Growth? —Dilip K. Das, June 2000 OCCASIONAL PAPERS (OP) 16 1. Improving Domestic Resource Mobilization Through Financial Development: Overview September 1985 2. Improving Domestic Resource Mobilization Through Financial Development: Bangladesh July 1986 3. Improving Domestic Resource Mobilization Through Financial Development: Sri Lanka April 1987 4. Improving Domestic Resource Mobilization Through Financial Development: India December 1987 5. Financing Public Sector Development Expenditure in Selected Countries: Overview January 1988 6. Study of Selected Industries: A Brief Report April 1988 7. Financing Public Sector Development Expenditure in Selected Countries: Bangladesh June 1988 8. Financing Public Sector Development Expenditure in Selected Countries: India June 1988 9. Financing Public Sector Development Expenditure in Selected Countries: Indonesia June 1988 10. Financing Public Sector Development Expenditure in Selected Countries: Nepal June 1988 11. Financing Public Sector Development Expenditure in Selected Countries: Pakistan June 1988 12. Financing Public Sector Development Expenditure in Selected Countries: Philippines June 1988 13. Financing Public Sector Development Expenditure in Selected Countries: Thailand June 1988 14. Towards Regional Cooperation in South Asia: ADB/EWC Symposium on Regional Cooperation in South Asia February 1988 15. Evaluating Rice Market Intervention Policies: Some Asian Examples April 1988 16. Improving Domestic Resource Mobilization Through Financial Development: Nepal November 1988 17. Foreign Trade Barriers and Export Growth September 1988 18. The Role of Small and Medium-Scale Industries in the Industrial Development of the Philippines April 1989 19. The Role of Small and Medium-Scale Manufacturing Industries in Industrial Development: The Experience of Selected Asian Countries January 1990 20. National Accounts of Vanuatu, 1983-1987 January 1990 21. National Accounts of Western Samoa, 1984-1986 February 1990 22. Human Resource Policy and Economic Development: Selected Country Studies July 1990 23. Export Finance: Some Asian Examples September 1990 24. National Accounts of the Cook Islands, 1982-1986 September 1990 25. Framework for the Economic and Financial Appraisal of Urban Development Sector Projects January 1994 26. Framework and Criteria for the Appraisal and Socioeconomic Justification of Education Projects January 1994 27. Guidelines for the Economic Analysis of Projects February 1997 28. Investing in Asia 1997 29. Guidelines for the Economic Analysis of Telecommunication Projects 1998 30. Guidelines for the Economic Analysis of Water Supply Projects 1999 SPECIAL STUDIES, COMPLIMENTARY (SSC) (Published in-house; Available through ADB Office of External Relations; Free of Charge) No. 1 Estimates of the Total External Debt of the Developing Member Countries of ADB: 1981-1983 —I.P. David, September 1984 No. 2 Multivariate Statistical and Graphical Classification Techniques Applied to the Problem of Grouping Countries —I.P. David and D.S. Maligalig, March 1985 No. 3 Gross National Product (GNP) Measurement Issues in South Pacific Developing Member Countries of ADB —S.G. Tiwari, September 1985 No. 4 Estimates of Comparable Savings in Selected DMCs —Hananto Sigit, December 1985 No. 5 Keeping Sample Survey Design and Analysis Simple —I.P. David, December 1985 No. 6 External Debt Situation in Asian Developing Countries —I.P. David and Jungsoo Lee, March 1986 No. 7 Study of GNP Measurement Issues in the South Pacific Developing Member Countries. Part I: Existing National Accounts of SPDMCs–Analysis of Methodology and Application of SNA Concepts —P. Hodgkinson, October 1986 No. 8 Study of GNP Measurement Issues in the South Pacific Developing Member Countries. Part II: Factors Affecting Intercountry Comparability of Per Capita GNP —P. Hodgkinson, October 1986 No. 9 Survey of the External Debt Situation in Asian Developing Countries, 1985 —Jungsoo Lee and I.P. David, April 1987 No. 10 A Survey of the External Debt Situation in Asian Developing Countries, 1986 —Jungsoo Lee and I.P. David, April 1988 No. 11 Changing Pattern of Financial Flows to Asian and Pacific Developing Countries —Jungsoo Lee and I.P. David, March 1989 No. 12 The State of Agricultural Statistics in Southeast Asia —I.P. David, March 1989 No. 13 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 1987-1988 —Jungsoo Lee and I.P. David, July 1989 No. 14 A Survey of the External Debt Situation in Asian and Pacific Developing Countries: 1988-1989 —Jungsoo Lee, May 1990 No. 15 A Survey of the External Debt Situation in Asian and Pacific Developing Countrie s: 1989-1992 —Min Tang, June 1991 No. 16 Recent Trends and Prospects of External Debt Situation and Financial Flows to Asian and Pacific Developing Countries —Min Tang and Aludia Pardo, June 1992 No. 17 Purchasing Power Parity in Asian Developing Countries: A Co-Integration Test —Min Tang and Ronald Q. Butiong, April 1994 No. 18 Capital Flows to Asian and Pacific Developing Countries: Recent Trends and Future Prospects —Min Tang and James Villafuerte, October 1995 STATISTICAL REPORT SERIES (SR) 17 Edited by S.Ghon Rhee & Yutaka Shimomoto, 1999 $35.00 (paperback) 9. Corporate Governance and Finance in East Asia: A Study of Indonesia, Republic of Korea, Malaysia, Philippines and Thailand J. Zhuang, David Edwards, D. Webb, & Ma. Virginita Capulong Vol. 1, 2000 $10.00 (paperback) Vol. 2, 2001 $15.00 (paperback) 10. Financial Management and Governance Issues Asian Development Bank, 2000 Cambodia $10.00 (paperback) People’s Republic of China $10.00 (paperback) Mongolia $10.00 (paperback) Pakistan $10.00 (paperback) Papua New Guinea $10.00 (paperback) Uzbekistan $10.00 (paperback) Viet Nam $10.00 (paperback) Selected Developing Member Countries $10.00 (paperback) 11. Guidelines for the Economic Analysis of Projects Asian Development Bank, 1997 $10.00 (paperback) 12. Handbook for the Economic Analysis of Water Supply Projects Asian Development Bank, 1999 $15.00 (hardbound) 13. Handbook for the Economic Analysis of Health Sector Projects Asian Development Bank, 2000 $10.00 (paperback) 1. Rural Poverty in Developing Asia Edited by M.G. Quibria Vol. 1: Bangladesh, India, and Sri Lanka, 1994 $35.00 (paperback) Vol. 2: Indonesia, Republic of Korea, Philippines, and Thailand, 1996 $35.00 (paperback) 2. External Shocks and Policy Adjustments: Lessons from the Gulf Crisis Edited by Naved Hamid and Shahid N. Zahid, 1995 $15.00 (paperback) 3. Gender Indicators of Developing Asian and Pacific Countries Asian Development Bank, 1993 $25.00 (paperback) 4. Urban Poverty in Asia: A Survey of Critical Issues Edited by Ernesto Pernia, 1994 $20.00 (paperback) 5. Indonesia-Malaysia-Thailand Growth Triangle: Theory to Practice Edited by Myo Thant and Min Tang, 1996 $15.00 (paperback) 6. Emerging Asia: Changes and Challenges Asian Development Bank, 1997 $30.00 (paperback) 7. Asian Exports Edited by Dilip Das, 1999 $35.00 (paperback) $55.00 (hardbound) 8. Mortgage-Backed Securities Markets in Asia SPECIAL STUDIES, ADB (SS, ADB) (Published in-house; Available commercially through ADB Office of External Relations) 1. Informal Finance: Some Findings from Asia Prabhu Ghate et. al., 1992 $15.00 (paperback) 2. Mongolia: A Centrally Planned Economy in Transition Asian Development Bank, 1992 $15.00 (paperback) 3. Rural Poverty in Asia, Priority Issues and Policy Options Edited by M.G. Quibria, 1994 $25.00 (paperback) 4. Growth Triangles in Asia: A New Approach to Regional Economic Cooperation Edited by Myo Thant, Min Tang, and Hiroshi Kakazu 1st ed., 1994 $36.00 (hardbound) Revised ed., 1998 $55.00 (hardbound) 5. Urban Poverty in Asia: A Survey of Critical Issues Edited by Ernesto Pernia, 1994 $18.00 (paperback) 6. Critical Issues in Asian Development: Theories, Experiences, and Policies Edited by M.G. Quibria, 1995 $15.00 (paperback) $36.00 (hardbound) 7. From Centrally Planned to Market Economies: The Asian Approach Edited by Pradumna B. Rana and Naved Hamid, 1995 Vol. 1: Overview $36.00 (hardbound) Vol. 2: People’s Republic of China and Mongolia $50.00 (hardbound) Vol. 3: Lao PDR, Myanmar, and Viet Nam $50.00 (hardbound) 8. Financial Sector Development in Asia Edited by Shahid N. Zahid, 1995 $50.00 (hardbound) 9. Financial Sector Development in Asia: Country Studies Edited by Shahid N. Zahid, 1995 $55.00 (hardbound) 10. Fiscal Management and Economic Reform in the People’s Republic of China Christine P.W. Wong, Christopher Heady, and Wing T. Woo, 1995 $15.00 (paperback) 11. Current Issues in Economic Development: An Asian Perspective Edited by M.G. Quibria and J. Malcolm Dowling, 1996 $50.00 (hardbound) 12. The Bangladesh Economy in Transition Edited by M.G. Quibria, 1997 $20.00 (hardbound) 13. The Global Trading System and Developing Asia Edited by Arvind Panagariya, M.G. Quibria, and Narhari Rao, 1997 $55.00 (hardbound) 14. Rising to the Challenge in Asia: A Study of Financial Markets Asian Development Bank, 1999 Vol. 1 $20.00 (paperback) Vol. 2 $15.00 (paperback) Vol. 3 $25.00 (paperback) Vols. 4-12 $20.00 (paperback) SPECIAL STUDIES, OUP (SS,OUP) (Co-published with Oxford University Press; Available commercially through Oxford University Press Offices, Associated Companies, and Agents) 18 SERIALS (Co-published with Oxford University Press; Available commercially through Oxford University Press Offices, Associated Companies, and Agents) 1. Asian Development Outlook (ADO; annual) $36.00 (paperback) 2. Key Indicators of Developing Asian and Pacific Countries (KI; annual) $35.00 (paperback) JOURNAL (Published in-house; Available commercially through ADB Office of External Relations) 1. Asian Development Review (ADR; semiannual) $5.00 per issue; $8.00 per year (2 issues)