The Global Social Challenge: Session II (2013-400-SPP4205) Richard Bluhm February 17, 2014 How does poverty react to income growth and changes in distribution? Introduction The questions we’ll try to answer in this session: I I I I I I Is growth always good for the poor? What is pro-poor growth? How do we empirically measure pro-poor growth? How much of poverty alleviation is due to growth? How much of poverty alleviation is due to redistribution? What influences pro-poor growth? Let’s brainstorm: How would you define pro-poor growth? Two definitions from the literature Absolute definition I I Growth that reduces poverty. Period. The growth process is pro-poor if and only if poor people benefit in absolute terms, as reflected in an appropriate measure of poverty (Ravallion 2004). Relative definition: I I Growth that disproportionately reduces poverty. Growth is pro poor if any distributional shifts accompanying economic growth favor the poor, meaning that poverty falls more than it would have if all incomes had grown at the same rate (Ravallion 2004). Three sources of pro-poor growth According to Kraay (2006) these are 1. rapid growth in average incomes 2. a high sensitivity of poverty to growth in average incomes; and 3. a poverty-reducing pattern of growth in relative incomes. I Which can actually also be broken up further into a) distributional change and b) a high sensitivity of poverty to distributional change. This implies a decomposition equation with four components. Poverty decompositions I At the micro-level, we can decompose poverty into changes in incomes and changes in inequality up to some error (Datt & Ravallion, 1992; Kakwani, 1993) Ht − Ht−1 = ∆Ht =H(¯ yt /z, Lt−1 ) − H(¯ yt−1 /z, Lt−1 ) + H(¯ yt−1 /z, Lt ) − H(¯ yt−1 /z, Lt−1 ) + ζt I where H is the poverty headcount ratio, y¯ is mean income, z is the poverty line, and L denotes the Lorenz curve. At the cross-national level, we typically don’t have each unit record but only grouped data or just the Gini coefficient. Calculus of poverty decompositions I Let the poverty line (z) be fixed (absolute) and assume the poverty headcount ratio is follows a two-parameter distribution, so that H(¯ yt /z, Gt ) = H(¯ yt , Gt ) ≡ Ht . A first-order Taylor expansion gives dHt ≈ Ht ∂Ht y¯t ∂¯ yt H t | {z Growth where I dHt Ht d¯ I yt y¯t I d¯ yt ∂Ht Gt dGt yt y¯ d¯ HG dGt + ε + = εH t t y¯t ∂Gt Ht Gt y¯t Gt } | {z } Distribution is the relative change in the headcount ratio y¯ is the growth rate in mean incomes and εH is the income t elasticity of poverty (recall: x% change for 1% change) dGt HG is the Gt is the change in the Gini coefficient and εt inequality elasticity of poverty Calculus of poverty decompositions II Same argument can be made with absolute changes and semi-elasticities ∂Ht y¯t dHt ≈ ∂¯ yt 1 | {z Growth where I I I d¯ yt ∂Ht Gt dGt d¯ yt dGt + = ηtH y¯ + ηtHG y¯t ∂Gt 1 Gt y¯t Gt } | {z } Distribution dHt is the absolute change in the headcount ratio H y¯ d¯ yt is the income is the growth rate in mean incomes and η t y¯t semi-elasticity of poverty (recall: unit change for 1% change) dGt HG is the Gt is the change in the Gini coefficient and ηt inequality semi-elasticity of poverty Putting it together The Growth Elasticity of Poverty Reduction 9 Figure 1.2 Decomposition of change in distribution and poverty into growth and distributional effects Back to Aart Kraay (2006) For the absolute pro-poor definition and the 1.08$ a day line, Kraay finds I I I In the short run, about 2/3 of poverty reduction are due to growth and about 1/3 is due to changes in distribution. In the long-run, it’s even 97% due to growth! The contribution of growth decreases as the poverty measure becomes more bottom sensitive. This is not set in stone. It’s an analysis of the historical contributions, which could have involved a higher contribution from distribution. The story is a little more intricate. . . Annualized Change in Log Gini (∆ ln Git ) Changes in (within) inequality and changes in incomes 0.1 0.0 -0.1 -0.25 0.00 0.25 Annualized Change in Log Mean Income (∆ ln y¯it ) I 0.50 Basically no trend; also over time, trend rate is mildly positive, so Kraay (2006) cannot find a large contribution of inequality. Properties of elasticities and semi-elasticities Elasticities: I I y¯ The income elasticity is weakly negative (εH t ≤ 0) and decreasing in average income but increasing in inequality The inequality elasticity is weakly positive (εHG ≥ 0) and t increasing in average income but decreasing inequality Semi-elasticities: I I The income semi-elasticity is weakly negative (ηtH y¯ ≤ 0). It first decreases (increases) then increases (decreases) in incomes (inequality). Bounded by zero on each side. The inequality semi-elasticity is weakly positive (ηtHG ≥ 0). It first increases (decreases) then decreases (increases) in incomes (inequality). Bounded by zero on each side. The shape of poverty elasticities 4 0 -1 Gt 0.25 0.35 0.45 0.55 0.65 0.75 0.85 0.95 3 -2 εˆH y¯ εˆHG 2 -3 1 -4 -5 0 2-2 2-1 I I 20 y¯t /z 21 22 23 2-2 2-1 20 Strictly (decreasing) increasing in incomes. Bounded on the left, unbounded on the right. y¯t /z 21 22 23 The shape of poverty semi-elasticities Gt 0.0 0.25 0.35 0.45 0.55 0.65 0.75 0.85 0.95 0.4 0.3 ηˆH y¯ ηˆHG -0.2 0.2 -0.4 0.1 0.0 -0.6 2-2 2-1 I I 20 y¯t /z 21 22 23 2-2 2-1 20 y¯t /z 21 22 Very non-linear when we look at absolute changes. Bounded on the left and right. Estimates of income elasticities 1981–1989 EAP ECA LAC MNA SAS SSA -0.991 (0.030) -4.358 (0.555) -2.284 (0.243) -2.176 (0.203) -0.548 (0.053) -0.831 (0.027) Time period 1990–1994 1995–1999 -1.029 (0.033) -2.892 (0.309) -2.374 (0.257) -2.116 (0.188) -0.629 (0.048) -0.437 (0.039) -1.237 (0.055) -2.700 (0.277) -2.425 (0.271) -2.024 (0.168) -0.810 (0.030) -0.436 (0.040) 2000–2004 2005–2010 -1.139 (0.043) -2.846 (0.304) -2.349 (0.258) -1.966 (0.161) -1.024 (0.032) -0.592 (0.035) -1.578 (0.101) -3.304 (0.384) -2.985 (0.366) -2.501 (0.246) -1.192 (0.046) -0.632 (0.033) 23 Estimates of inequality elasticities 1981–1989 EAP ECA LAC MNA SAS SSA 0.732 (0.105) 3.219 (0.510) 1.687 (0.186) 1.607 (0.197) 0.405 (0.093) 0.614 (0.087) Time period 1990–1994 1995–1999 0.760 (0.101) 2.136 (0.307) 1.753 (0.198) 1.563 (0.198) 0.464 (0.097) 0.322 (0.055) 0.914 (0.113) 1.994 (0.283) 1.791 (0.199) 1.495 (0.196) 0.598 (0.095) 0.322 (0.060) 2000–2004 2005–2010 0.841 (0.108) 2.102 (0.296) 1.735 (0.189) 1.452 (0.185) 0.756 (0.107) 0.437 (0.066) 1.165 (0.144) 2.440 (0.353) 2.205 (0.269) 1.847 (0.253) 0.880 (0.127) 0.467 (0.069) 2000–2004 2005–2010 -0.583 (0.042) -0.225 (0.015) -0.355 (0.026) -0.463 (0.043) -0.572 (0.036) -0.440 (0.015) -0.552 (0.051) -0.134 (0.010) -0.194 (0.013) -0.313 (0.024) -0.585 (0.044) -0.459 (0.015) Estimates of income semi-elasticities 1981–1989 EAP ECA LAC MNA SAS SSA -0.568 (0.034) -0.031 (0.008) -0.374 (0.028) -0.405 (0.034) -0.418 (0.023) -0.532 (0.024) Time period 1990–1994 1995–1999 -0.573 (0.036) -0.214 (0.015) -0.348 (0.025) -0.422 (0.037) -0.458 (0.019) -0.354 (0.020) -0.585 (0.046) -0.260 (0.020) -0.334 (0.024) -0.447 (0.042) -0.526 (0.022) -0.353 (0.020) Estimates of inequality semi-elasticities 1981–1989 EAP ECA LAC MNA SAS SSA 0.419 (0.053) 0.023 (0.007) 0.276 (0.046) 0.299 (0.041) 0.309 (0.056) 0.393 (0.050) Time period 1990–1994 1995–1999 0.423 (0.053) 0.158 (0.015) 0.257 (0.043) 0.311 (0.040) 0.338 (0.055) 0.261 (0.037) 0.432 (0.055) 0.192 (0.019) 0.247 (0.043) 0.330 (0.041) 0.389 (0.052) 0.261 (0.040) 2000–2004 2005–2010 0.431 (0.054) 0.166 (0.017) 0.262 (0.045) 0.342 (0.044) 0.423 (0.054) 0.325 (0.042) 0.408 (0.053) 0.099 (0.012) 0.143 (0.029) 0.231 (0.025) 0.432 (0.055) 0.339 (0.043) What does this mean for poverty reduction? Elasticities: I I Depend on the initial level of income and inequality Very popular measure of the sensitivity of poverty but somewhat misleading: richer countries appear to become ever better at reducing (absolute) poverty Semi-elasticities: I I I Depend on the initial level of income and inequality Much more useful to think of the percent of population lifted out of poverty, more policy relevant! Highlight the non-linearity much better (are more intuitive?) Different returns to each component depending on location on the curves! A strangely relative perspective If we define poverty as relative not absolute poverty, and a rising tide lifts all boats, then growth should lead to a one-to-one increase in incomes of the poor. Dollar and Kraay (2002) “Growth is good for the poor” JEG (very controversial study!) I I I I Test the relationship between growth of income shares of the poorest quintile and GDP per capita growth Strongly confirm one-to-one relationship even after accounting for reverse causality Find no other systematic relationships, except a weak negative effect of government size and high inflation Say very little about initial locations and changes in inequality Incomes of the poor and average incomes Is this robust? What do we learn? Robust? I I There are many flaws with they data used but . . . Dollar, Kleineberg and Kraay (2013) repeat the analysis with better data; they find the same. What do we learn? I I I I By looking at relative poverty they conflate the effects of growth and inequality It only proves that growth is distribution-neutral it does not show that growth is pro-poor on average Should have been titled “growth does not affect inequality” Has nothing to do with absolute poverty reduction! Better definitions of pro-poor growth Why don’t we simply compute the growth rates of each quintile/ percentile over time? Ravallion and Chen (2003) propose the following: Let yt (p) the income of the pth quantile, then the growth rate in income of the pth quantile is gt (p) = (yt (p)/yt−1 (p)) − 1 (for one period). L0t (p) (γ + 1) L0t−1 (p) t slope L0t (p)) and More generally, let gt (p) = − 1 where where Lt (p) is the Lorenz curve (with µt is the mean and γt = (µt /µt−1 ) − 1 is the growth rate in the mean. Very easy to estimate in Stata if you have at least two household surveys for the same country. Visually intuitive (next slide). GIC for China 1990-1999: is this pro-poor? GIC for China 1993-1996: or, is this pro-poor? The pro-poor rate of growth Based on the graph we can come up with many relative definitions (e.g. growth of the poor must be higher than the rest). Ravallion and Chen (2003) define pro-poor growth as the mean growth rate of the poor divided by the poverty headcount ratio: PPGt = Z Ht−1 gt (p)dp/Ht−1 0 I I I absolute interpretation: it’s the growth rate in the mean scaled up or down according to whether the distributional changes were pro-poor relative interpretation: higher than mean growth = pro-poor, lower than mean growth = not pro-poor turns out the PPGt is just the negative change in the Watts index of poverty divided by the initial headcount GIC with Stata * get required software net install gicurve, replace /// from(http://www.adeptanalytics.org/download/ado) * get example data local url1 "http://siteresources.worldbank.org/" local url2 "INTPGI/Resources/342674-1223471357039" use "‘url1’/‘url2’/ugahh05.dta", clear save ugahh05, replace use "‘url1’/‘url2’/ugahh02.dta", clear * compute GIC (normally use pw, here aw needed!) gicurve using ugahh05 [aw=iwe], var1(welfare) /// var2(welfare) yperiod(3) np(200) ci(500 95) ginmean /// hcindex(38.82) title("Uganda 2002/03-2005/06") /// ytitle("Growth rate") legend(off) xline(38.82) Results −5 0 Growth rate 5 10 15 Uganda 2002/03−2005/06 0 20 40 60 80 100 Percentiles I Pro-poor growth 4.44, growth in mean 3.61, z is at 38.82 Extensions and other measures Kakwani (2000) defines pro-poor growth as “any distributional shift accompanying economic growth that favors the poor”. Basically targets inequality. This has some problems: I I In a contraction the rich may be hit harder, does that qualify as pro-poor growth? In a growth spurt everyone may gain but the rich a little more, is that not pro-poor? Son (2003) proposes a poverty growth curve (PGC). Growth is pro-poor, if the generalized Lorenz curve (Lt (p) × µt ) shifts up. Kakwani and Son (2008) discuss the poverty equivalent growth rate (PEGR). It’s “the growth rate that will result in the same level of poverty reduction as the present growth rate if the growth process had not been accompanied by any change in inequality”. Is growth typically pro-poor? I Kraay (2006) and many other have shown: yes, in the absolute sense. Growth is the main driver behind poverty reduction. I However, in the relative sense growth is typically distribution-neutral. Neither pro-poor, nor pro-rich. I The (semi)elasticity perspective gives a complicated picture: I I I In extremely poor countries growth takes precedent. Period. Reductions in inequality matter a lot for high-inequality countries and have a double dividend (direct effects and indirect effects through growth). Very different picture depending on whether we target relative changes in the headcount or changes in the percent of population that is poor. Stylized facts about the past I Fact 1: I I Fact 2: I I Economic growth tends to be distribution-neutral in developing countries, in that inequality increases about as often as it decreases in growing economies. Measures of absolute poverty tend to fall with economic growth in developing countries. Fact 3: I The higher the initial level of inequality or the greater the increase in inequality during the growth spell, the higher the rate of growth that is needed to achieve any given (proportionate) rate of poverty reduction. What influences pro-poor growth? Most of the variation in changes in poverty can be attributed to growth in average incomes, suggesting that policies and institutions that promote broad-based growth should be central to the pro-poor growth agenda. Most of the remainder of the variation in changes in poverty is due to poverty-reducing patterns of growth in relative incomes, rather than differences in the sensitivity of poverty to growth in average incomes. Cross-country evidence provides relatively little guidance as to the policies and institutions that promote these other sources of pro-poor growth. (Kraay 2006) Conclusions on ‘pro-poor growth’ In the long-run: I I I Growth matters more than anything else for poverty reduction. We need to understand the sources of sustained growth (and absence of crises). Can we have high long-run growth with high inequality? In the short-run: I I I Growth is a blunt instrument. Reductions in inequality will almost always help. (Semi)elasticity perspective shows that effect of growth depends on inequality. Huge unused potential from true/relative pro-poor growth. Short discussion: Tutorial prep - Are growth policies really pro-poor? References are available in your reading list and the rest on request.

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