Institute of Policy Studies of Sri Lanka Sri Lanka: State of the Economy 2005 Post-Tsunami Economic Issues

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13. Pro-poor Growth 13.1 Introduction Rapid and sustained growth is a necessary condition for poverty alleviation efforts but economic growth alone is not always a sufficient condition. Other factors, such as initial conditions and institutions, by influencing distribution contribute to poverty reduction. Thus, pro-poor growth is a critical element in a poverty reduction strategy as it factors in the distributional dimension. This policy brief assesses what is meant by pro-poor growth, including the conceptual adequacy and practical issues of defining poverty for pro-poor growth; analyses the different approaches adopted to measure pro-poor growth; and discusses the required policies and institutions to achieve pro-poor growth.

13.2 What is Pro-poor Growth? Pro-poor growth is primarily centered on the interrelation between the three elements of growth, poverty and inequality and has been subject to various definitions. These differences are in part a reflection of the multidimensional nature of poverty itself as well as the complex and interdependent relationships between growth, poverty and inequality. The available literature suggests broadly that a measure of pro-poor growth must take into account both reductions in poverty as well as improvement in inequality.

A number of approaches are available in defining and measuring the pro-poor growth. There are two terms of pro-poor growth, namely, relative and absolute pro-poor growth. Both require that the poor be identified by specifying a poverty line, such as the international US$ 1 a day line or a national poverty line. Those below this income are considered to be the poor. The concept of relative pro-poor growth arises when economic growth benefits the poor proportionally more than the non-poor. This means that growth is pro-poor if the incomes of poor people grow faster than those of the population as a whole. On the other hand, pro-poor growth is said to be absolute if the poor receive the absolute benefits of growth equal to or more than that of the absolute benefits received by the non-poor. Under the relative definition, inequality must fall. The absolute definition,

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by contrast, looks only at the income growth of poor people, whether inequality changes or not.

There are currently debates on how exactly to define pro-poor growth. However, propoor growth has been broadly defined by a number of international organization as growth that lead to significant reduction in poverty, thereby benefiting the poor and improving their access to opportunities (e.g., UN 2000, World Bank 2000, OECD 2001). But it is not clear how significant a reduction in poverty must be and how progress in achieving pro-poor growth is to be monitored. Critical to the definition of pro-poor growth is the joint consideration of growth and its distribution. The Asian Development Bank (ADB) defines growth to be pro poor when it is labour absorbing and accompanied by policies and programmes that mitigate inequalities and facilitate income and employment generation for the poor, particularly women and other traditionally excluded groups. Pro-poor growth is the type of growth that enables the poor to actively participate in economic activity and benefit proportionally more than the non poor from overall income increase. Furthermore, pro-poor growth is primarily about the distribution of growth between, not within, lower and upper income groups. Pro-poor growth purely requires that the proportional income growth of the poor exceed the overall average income growth.

13.2.1 Definition of Poverty for Pro-poor Growth Poverty is not just an inadequacy of income to meet basic needs or the inability to spend. The poverty dimensions are rather multifaceted. It is associated with lack of assets, income, landlessness, unemployment or underemployment, illiteracy, pattern of consumption, malnutrition, high infant mortality, large family size, low productivity, low position in the social hierarchy, less access to publicly provided goods and poor infrastructural facilities and extreme vulnerability to natural calamities, disease and social conflicts.

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As shown in the triangular (Figure 13.1), the wider the definition of poverty, the richer and more meaningful it is, but the less practical it becomes to operationalize, and the more difficult it is to make quantitative comparisons. Figure 13.1 Pyramid of Poverty Concepts
Easier to operationalize and more comparable income income + assets income + assets + social consumption income + assets + social consumption + vulnerability income + assets + social consumption + vulnerability + powerlessness Conceptually richer and more inclusive Source: USAID (2004), Pro-Poor Growth: A Guide to Policies and Programmes

The pyramid of poverty concept provides an important insight into the trade-off between conceptual adequacy and practicality. The focus on pro-poor economic growth suggests that absolute income as the core indicator of poverty. Furthermore, it seems that income is a much more manageable concept to operationalize than the more complex multidimensional definitions of poverty. Income is also the central variable in absolute poverty, affecting most or all of the other factors that go into broader poverty definitions.

13.3 Measuring Pro-poor Growth The most widely using measures focusing on the different approaches to measure propoor growth are shown in Figure 13.2. The aggregate measures analyze the distributional pattern of growth regardless of the definition of pro-poor growth. The pattern of pro-poor growth can be measured using absolute and relative definition. These measures are directly related to the chosen definition.

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However the calculation is done, it has two limitations. First, averaging the income growth rates of the poor conceals income turbulence some poor peoples incomes may go down even if on average the incomes of the poor are rising. This problem is common to all standard measures of poverty. Second, a comprehensive measure of propoor growth would also need to take into account the non-income dimensions of poverty, such as access to education, health, empowerment, malnutrition, child mortality, insecurity, voicelesness, low returns to assets, risk, vulnerability, etc. With any of those measures or definitions, the major consequence is that policies must lead to active policies in favour of the poor. Pro-poor growth is, therefore, is a clear departure from the trickle-down approach that meant a gradual top-down flow from the rich to the poor. However, there are no consensuses on how to define or measure pro-poor growth.

Figure 13.2 Different Approaches to Measure Pro-poor Growth

Measuring Pro-poor Growth

Growth Elasticity of Poverty Rate of ProPoor Growth Rate of Pro-Poor Growth

Poverty Bias of Growth Absolute measures Aggregate measures Relative measures Pro-Poor Growth Index Poverty Equivalent Growth Rate Poverty Growth Curve Growth Incidence Curve The Datt-Ravallion Decomposition of Growth and Inequality

13.4 How Can Pro-poor Growth be Achieved? The poverty reduction framework is based on three pillars, namely, pro-poor economic growth, social development, and good governance. These pillars should be embedded in the social, economic, and institutional fabric in the country. The heterogeneity impact of

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growth on poverty holds important clues as to what else needs to be done by governments to promote poverty reduction, on top of promoting economic growth. A combination of growth promoting economic reforms and right social-sector programmes and policies are important to enable the poor to participate fully in the opportunities unleashed by growth. There are several elements that can contribute towards this objective: Developing human and physical assets of the poor Helping to make markets work better for the poor, especially for credit, labour and land Removing biases against the poor in public spending, taxation, trade and regulation Promoting agriculture and rural development and investing in local public goods in poor areas Providing an effective safety net as a short term palliative or key instrument for long-term poverty reduction.

Growth can effectively reduce poverty when it generates employment and income opportunities for those at the bottom end of the income distribution. Policies that make efficient use of labour the principal asset of the poor are therefore, particularly powerful pro-poor measures. Sound macroeconomic management that emphasizes fiscal prudence and good tax administration leads to sustainable public debt. It facilitates physical and social investment in education and health that benefits the poor, besides ensuring long term growth. Both urban and rural poor groups tend to have limited access to pubic infrastructure and services, but the constraints on physical access to job and product markets are bigger concerns for the rural poor. Investment in infrastructure in rural areas can therefore have a significant impact on the poor. The particular needs of vulnerable groups such as the elderly, women, children, ethnic minorities, etc including those in conflict affected areas or those displaced by natural disasters have to be taken account of to ensure they have the same access to social programmes as the rest of the population. Finally, sound governance is an important element given that it affects the

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ability to target programmes designed specifically to help the poor as they are especially vulnerable to corrupt officials.

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Box 13.1 Economic Growth and Poverty in Sri Lanka

Sri Lankas economy has indicated an improved outcome in terms of GDP growth in the two decades of reforms, sustaining an average per capita GDP growth of over 3 per cent per year. However, poverty reduction over the period has seen only a modest decline while there is evidence more recently to suggest a rise in income inequality and sharply unequal poverty trends across sectors and regions. In fact, perceptions of inequity in access to the benefits of market driven policies is argued to have been a contributory factor in heightening social and political tensions in the country in the latter part of the 1980s that prompted the adoption of targeted poverty alleviation programmes from the 1990s. Sri Lanka suffers from a lack of comparative statistics to assess change in poverty status accurately over time. Nevertheless, there is evidence to suggest that the incidence of poverty reduced by about 2 percentage points over the period 1985 to 1995. However, population growth meant that the absolute number of poor did not decrease over time. More recent data indicate that the national poverty headcount ratio showed a modest decline from 26.1 per cent in 1990-91 to 22.7 per cent in 2002. However, there are significant inequities in poverty reduction across sectors and provinces of the country. During the decade 1990-91 to 2002, the poverty gap between the urban sector and the rest of the country widened, while there was also a significant increase in poverty in the estate sector.1 Sri Lanka is also characterized by significant regional differences in poverty with the Western Province which accounts for nearly 50 per cent of GDP in the economy registering by far the lowest rates of poverty. There is evidence to suggest that over the past decade, Sri Lanka has witnessed an increasing tendency towards wider regional disparity in the incidence of poverty. Although numerous qualitative studies have been undertaken in the conflict-affected areas, there is no official estimate of the extent of poverty in the North and Eastern Provinces as they have been excluded from national consumptions surveys in the past two decades. Increasing inequality over the decade is also reflected by the Gini coefficients. The increased by almost 24 per cent for the country as a whole between 1990-91 and 2002, including an increase of 19 per cent for the urban sector and 30 per cent for the rural sector. Analysis of the links between poverty reduction, growth and

A decrease in income earners per estate household during the period is likely to explain part of the increase in poverty in this sector.
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inequality suggest that had inequality not increased during the decade, Sri Lanka would have experienced a significantly greater reduction in poverty.

13.4 Conclusion While there appears to be no clear consensus on how to define or measure pro-poor growth, pro-poor growth is implicitly understood to require that the proportional income growth of the poor exceed the overall average income growth. It can be measured, but with several limitations. There is, however, a broader consensus on the types of policies that may be required to be in place to achieve pro-poor growth mainly, sound macroeconomic management, efficient use of labour, appropriate investments in health, education and infrastructure; political and social security, sound institutions, etc. Continuous monitoring of progress and evaluation of specific pro-poor growth policies and programmes will form a crucial input for effective domestic and international efforts against poverty.

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