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International Development & Poverty Reduction

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Inequality versus Poverty Alleviation?  One of the Major current debates - does economic growth necessarily require growing inequality?

• Does economic growth lead to reduced poverty?
• recent history (1980 - 1998) suggests that total numbers in absolute poverty is pretty stationary (1.2bn people with incomes less than $1/per day, as estimated on a consistent basis by the World Bank - declining since 1980 by 200m people), so proportion is falling (from 31% to 20% of the world's population over 18 years) since world population is still rising. This is a pretty spectacular counter-argument to those who suggest that globalisation condemns more people to poverty and only benefits the rich.
• Average Incomes per head between countries is becoming more, not less, equal (when weighted by population), though rapid growth in both India and China are largely repsonsible for this - excluding these two very l;arge countries alters the conclusion - with no obvious trend since 1980.  However, what is the ground for excluing 40% of the world's population? (60% in 1980)
• Income inequality may have tended to increase within countries in the recent past, though the basis of these estimates is disputed.  The World Bank's experts (David Dollar and Aart Kraay  (Foreign Affairs)) estimates that world-wide income inequality peaked in the 1970s, and that the gap between a randomly selected individual and the world average income per head is now (1995) 78%, roughly were it was in 1950, while the peak in 1970 was 88%.
• However, the evidence can be contested and scholars can be found who can argue persuasively that inequality is growing rather than declining
• Notwithstanding, it seems incontestable that fewer peope (even if still an unacceptably large number) now die or are threatened with absolute starvation than was the case in the 1950s - when awefully huge numbers did actually die of starvation.
• In any event, maybe the extent of world poverty is unacceptable to civilised hearts and minds - 85% of world income goes to 20% of the population, and 6% to 60%.  The absolute gap between rich and poor is still rising, despite the proposition that relative poverty levels are falling (the poor countries tending to grow faster, from low bases, than the rich - so the relative gap is falling, although the absolute gap is still rising)
• But what is the proposed solution to this?  Even with a perfectly equal distribution of income, normal individual life-cycle savings and borrowings would result in 40% of the population owning 60% of the wealth.
• Should the rich donate sufficient of the their earnings to the poor to ensure absolute equality?  What would be the consequences for incentives and penalties to try and do better?  In any event, if the rich will not voluntarily increase their aid donations, what is the solution?
• However, a significantly more equal world might be more stable, peaceful and thus prosperous.
• Although one can quarrel with the numbers, and claim that we do not really know how many poor there are, it does seem clear that more rapid economic growth for the poorer regions is the only practical way of reducing poverty - given that the rich are not going to increase their aid donations substantially (unless successfully balckmailed by "terrorism", perhaps)
• Does liberalisation, deregulated markets, prudent macroeconomics (fiscal balance and low inflation) necessarily produce growth?  Or are these exhibitions those of the successful countries, whose growth is otherwise explained by diffusion of technical capacity and adaptation?  It seems clear that agricultural protection has been employed by most developed countries in the interests of income equalisation (protection of declining industries), and only when countries become substantially rich are they willing to even contemplate reducing this protection.
• Biggest Policy challenge is to accelerate economic growth in poor countries and backward regions
• Open markets and foreign direct investment both make important contributions to such growth
• Self-sufficiency and protection does not help such growth.
• But do these propositions necessarily mean that full and complete liberalisation of markets is necessarily always a good thing (what about encouraging domestic and local industries?) or necessarily the top priority (there are other things which are necessary to achieve growth)
• One enduring characterisation of the debates about development is the contrast between:
• Dependence - underdevelopment a consequence of external exploitation, asset stripping or colonisation etc. (underdevelopment caused by inappropriate and inequitable distribution of gains from development and trade between the rich and the poor) - a common view amongst those who feel especially guilty about the good fortune of their birth - and typically leads to beliefs that development, at least as practiced by the western world, depends on inequality and demands that ineaqualities be widened rather than narrowed
• Inherent/Internal - underdevelopment a consequence of tyranny, poor governance, market failures, lack of appropriate market institutions and rules, fraud & corruption etc. (underdevelopment essentially problems of economic efficiency (resource allocation) - market failures, many caused or exacerbated by government or policy failures) - a common view amongst those who feel that an apparently natural human ambition for more gilt (income and wealth) can be turned to the common good, if properly governed.
• Economic Fact: economic development requires at least temporary inequality - the profit motive, rewarding innovation through temporary excess profits, is a necessary (though not sufficient) engine of economic development - economies need entrepreneurs.  If we choose to tax away these profits and higher incomes, we remove the economic incentive to innovate, and must replace it with some other incentive, or it won't happen. But any incentive to be different, and take risks will necessarily create inequality, at least for a time (until others catch up).

What is the Development Process?

Streeten (What Price Food?: Agricultural Price Policies in Developing Countries, Macmillan, 1987) encapsulates the necessary elements of an effective economic system for the production and distribution of food under the 6 I headings:

• Innovation technology, especially irrigation, varieties of crops and livestock, and appropriate management practices;
• Incentives the right prices for outputs and inputs;
• Inputs need to be available and accessible, including credit);
• Infrastructure transportation and storage, as well as properly functioning markets, including the management of risk);
• Institutions - the rules and procedures and accepted practices rather than the specific organisations, especially for: laws of contract, lack of fraud, marketing and land ownership & operation and property rights - (the social infrastructure, if you like);
• Information - the extension of techniques as well as marketing information and credit availabilities.

Peter Hazell, International Food Policy Research Institute, Washington, presents a brief but highly relevant and articulate summary of the problems facing the world in
securing food supplies without compromising the environmental base on which it depends in the Introduction to a Special Issue of the journal: Agricultural Economics
(Elsevier) on Agricultural Growth, Poverty, and the Environment, Vol 19, Nos 1-2, September, 1998. In summary:

• Hunger and malnutrition persist, often because past agric. growth was insufficient or failed to benefit the poor (exacerbated by national mismanagement and, in extremis, civil conflict).
• Increases in popn. growth and per capita incomes -> increasing demand -> continued increases in agric. productivity, against evidence of some slowing in this.
• Growth in productivity and limited prospects for expansion of cropped and irrigated areas.
• Environmental problems could check this increase in productivity further, as well as imposing health, welfare and environmental costs both nationally and
• Internationally: where environmental issues generally fall into two categories: over-intensification (typical of developed countries); over-population relative to existing agricultural technology and practice, leading to depletion of natural resource and expansion into more fragile areas (frequently in LDCs)

"Continued agricultural growth will be a necessity, not an option, for most developing countries. .... These three goals (growth, poverty alleviation and environmental
sustainability) are not necessarily complementary, and cannot be taken for granted. But a high degree of complementarity is more likely to be achieved when agricultural
development is: a) broadly based and involves small and medium sized farms; b) market driven; c) participatory and decentralised; d) driven by productivity enhancing
technological change that does not degrade the resource base."

The post-war history of international development assistance can be roughly described as falling into the following phases:

1950s - 1960s: generating the requirements for agricultural growth as the 6 Is above.

1970s - 1980s: focus shifted to reduce poverty and food insecurity, and added six 'equity modifiers' to the 6 Is for growth, as follows;

• Broad-based development - small and medium farms critical, since economies of scale at farm level are limited (especially in labour rich and capital poor economies), means prioritising smaller farms for inputs, credit, technology, marketing
• Land reforms - where productive land is too concentrated amongs plantations or larger farms
• Invest in Human capital - education, clean water, health, family planning and nutrition
• Women important in the development process and warrant targeted programmes
• Particiaption of all in development is critical
• Rural non-farm economy needs promotion and development

• Priority to backward regions and resource poor areas (where the threat of over-use is greatest)
• R&D should concentrate on broader aspects of land management at watershed and landscape levels, as well as environmental impacts and effects at farm and field levels
• Secure property rights over land and natural resources, making full use of indigenous practices and systems (incluidng either privatising common property resources, or strengthening community rights and management systems
• Resolve externalities through taxes on polluters or degraders (where free market prices may well not be optimal for resource sustainablity)
• Devlolve and improve public or common management and institutional systems
• Correct price distortions (remove subsidies on inputs, though make sure the input supply is effective and competitive)
• Monitor resource use and degradation, and educate population on the effects

• A stable State (government), coupled with prudent macroeconomic management - fiscal responsibility and monetary stability & security.
• Security of the person and of property
• Widespread literacy and numeracy
• Basic health
• Adequate infrastructure
• Minimum of bureaucratic red-tape and lack of corruption
• Broad acceptance of market forces
• Financial system capable of transfering savings to effective uses
• Possibly some inequality in income and asset distribution (with the rich investing more, in more concentrated and managed form, than the poor)?

• Traditional view that industrialisation led and farming followed (as in Western Europe??)
• Non agricultural sectors expanding, sucking labour out of subsistence farming and rural areas and into factories
• Industrialisation providing the technology for commercial farming to feed the workforce with far fewer people
• A more historically balanced view is that
• agricultural technical and productivity change, (Jethro Tull's seed drill in the UK) allows fewer people to feed more non farm people
• but only if coupled with +/- serious land reform, in which previously subsistance farmers leave the land to commercial agriculture
• and with market development (at least first in the rural areas where most people live) in other sectors than agriculture, increasing the demand for purchased food from the commerical farms and providing the pull factors to encourage people to give up subsistance farming (requires secure and relatively stable markets)
• leads to the the development of an 'industrial' domestic agriculture (few people and large marketable surplus), also led to an industrialisation and commercialisation of the countryside.
• the industrial revolution (substituting steam for animal and human power, and mineral reosurces and engineering for timber) leads to further commercialisation and concentration of industry in larger scale and mainly urban factories
• {where the development process in the New World was also different in the exploitation of 'virgin' lands - denied the present generation of LDCs and economies in transition}
• What does seem clear is that, in most cases, development involves fewer people earning a full time living from farming, and more people earning livings from other things.  Agriculture is a declining industry in the development process, but can only be so if it becomes more productive.  The only exception is in those regions and countries which develop a substantial food export capacity - allowing agriculture to be a leading rather than declining sector.
• What is also apparent from a general view of history is that people (especially when supported by democracy) are not willing to leave the declining sector to the mercy of the market, but seek to support their ancestral heritage (small and subsistence farmers) as and when they become rich and secure enoug to do so - farm support policies are ubiquitous amongst developed countries.
• It is also clear that market price support and protection (based on production) are by far the most obvious and popular forms of such support.  If the world (through the URAA and the WTO) have now decided that these forms of support are not to be allowed,  then there is a serious challenge to policy makers and advisors to provide some equivalently obvious and apparent system of support and transfer to the declining sectors in developing and transition economies.  It is not clear that policy analysis and development is yet up this challenge.

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