Growth, equity, and poverty eradication

Growth, poverty, and equity

Writing two and a half thousand years ago, the Greek philosopher Aristotle observed that wealth 'is evidently not the good we are seeking; for it is merely useful for the sake of something else'. In other words, growth is simply one means to the end of improving human well-being, which is the ultimate purpose of development in its broadest sense. This is a seemingly obvious distinction, but it is one that is prone to be forgotten: growth is an indispensable tool for achieving development, but only if we direct growth to providing the 'something else' that Aristotle wrote about. This book considers the ends to which growth is a means, and how growth might best be directed to meeting those ends.

Poverty eradication makes good economic sense, as well as being a moral imperative. Poverty is not inevitable, and, while the target of eradicating extreme poverty is ambitious, it is far from impossible. The experience of the last 50 years demonstrates this clearly. Sustained and largely equitable economic growth took place both in the industrialised North and in the developing countries of the South between the 1950s and the late 1970s. This laid the foundations for rapid improvements in material wellbeing, and gave hundreds of millions of people a standard of living that would have been astonishing to their grandparents. During the lives of the last two generations, the reduction in levels of material deprivation, sickness, and early death in the developing world is historically unprecedented, and all too often overlooked. There is no good reason why these on-going improvements in living standards should not be consolidated and extended to benefit the millions of people who continue to live in poverty.

In almost every country in the last 50 years, income poverty has been reduced and morbidity and mortality rates have been dramatically lowered. Even in the poorest regions, life expectancy has increased by more than a decade, and child mortality has been halved in the last 50 years. Meanwhile, for the first time in human history, the majority of people are being given the opportunity to learn to read and write. Rising wealth and the growth of the state have been decisive factors in these achievements. Average per capita income in developing countries has increased threefold since 1950, and considerably faster in East Asia, and this has allowed states to tax more, and spend more on infrastructure and services with a high public-goods content.

Much has been done towards meeting the goal of poverty eradication, but huge sections of the world's population continue to be excluded from the benefits of growth. The 550 million people living in the 49 Least Developed Countries (LLDCs) have suffered reversals in living standards in the last decade, and in many countries in sub-Saharan Africa school enrolment, life expectancy, and nutritional intake are at approximately the same levels as 25 years ago. Women and children in particular have often failed to benefit from economic growth; they account for a disproportionate section of the world's poor people. In every society, people's opportunities to participate in growth in ways that enhance their well-being are restricted, because of marginalisation, ill health, a lack of education, and poverty.

In short, despite the progress made in the last 50 years, the scale of unmet human need remains enormous. One third of the population of the developing world continues to live in extreme poverty; more than 100 million children of school age are denied the right to an education; and every day 35,000 children under the age of five die from preventable diseases. The persistence of such extreme poverty, at the close of a century of unparalleled progress, is an indictment of the way in which the post-1945 vision of a globally shared freedom and prosperity has been betrayed.

There is a fundamental obstacle to more rapid poverty eradication and the completion of this unfinished agenda. This barrier is inequality. We live in a world fissured by huge and unprecedented disparities in wealth and opportunity. Moreover, these disparities have been growing ever more rapidly in recent years. In 1960, the wealthiest fifth of the world's population had an average income some thirty times larger than the world's poorest fifth. In 1990 the 'income-share ratio' stood at 60:1. Today it stands at 78:1. Much of this wealth is concentrated in the hands of a tiny group of individuals. The richest ten people in the world share a net wealth that is 1.5 times the national income of the world's least developed countries, home to 750 million people. At the same time, one third of the population of the developing countries — 1.3 billion people — struggle to survive on less than $1 a day, and the numbers of poor people continue to grow.

Inequalities between developed and developing worlds, and within societies, mean that poverty is being reduced more slowly than is necessary if the international commitment, made at the United Nations Social Summit in 1995, to halving the incidence of poverty by 2015 is to be achieved. Inequality has two effects on poverty levels: it slows economic growth, and it makes a given rate of economic growth less effective in reducing poverty. While equity and economic growth are mutually reinforcing, inequality is socially destabilising, bad for growth, and of its nature restricts the capabilities of marginalised groups. Conversely, equitable access to markets, political power, and social provision, on the basis of needs, is the fastest and most effective route to poverty eradication. So there are moral and economic cases for growth with equity. For example, successful land-reform programmes have shown that, in terms of production costs and resource allocation, smallholder farming is highly efficient. More equal societies are also more likely to foster entrepreneurial behaviour, and less likely to generate rentier elites. And more equal societies are likely to invest more heavily in 'human capital'.

Recent trends in the distribution of wealth call for a renewed commitment to equitable development, which is clearly directed towards improving human well-being. This will require both a more even distribution of assets and opportunities than exists at present, and for more resources to be committed to national and international poverty-eradication strategies. The issue of how to mobilise resources for poverty eradication, or 'development finance', is a crucial one for states and for civil society, and will be considered later in the book. At present, most of the world's poorest countries lack the resources to meet the basic needs of the majority of their people.

Yet there is nothing inevitable about under-funding and under-provision of development strategies in poor countries. The fact that many poor countries have achieved marked improvements in living standards at low cost reinforces the point that determining the size and distribution of available resources, the 'resource envelope', is in large part a political decision. This is nowhere better illustrated than by the failure of the peace dividend since the end of the Cold War to support poverty eradication. If the resources mobilised in the 1980s by the industrial powers in a bid for geo-political supremacy had been matched in the 1990s by an equally concerted bid to eradicate absolute poverty, the task before us today would not appear so daunting.

Two clear challenges face the world at the beginning of the twenty-first century. First, to achieve sustained economic growth; and second, to realise the potential developmental gains of that growth. These two objectives must be pursued simultaneously if poverty eradication is to be achieved. As recent history in much of East Asia demonstrates, distributional, environmental, and political concerns cannot be postponed until growth has taken place, if improvements in material well-being are going to be sustainable. A proactive strategy on the part of the state is needed to ensure that growth with equity takes place, delivering lasting development to the millions of people who are currently denied it.

Definitions of poverty

Being clear at the outset about what we mean when we talk about poverty is crucial to establishing criteria of success and failure for any poverty-eradication strategy. Defining poverty is not simply, or primarily, a semantic exercise. Rather, it is an instrument of action. Yet definitions of poverty vary widely, and are often used interchangeably. Any discussion about poverty, and poverty eradication, needs to begin with agreement on the definitions, or discourse, being used.

Most commonly, 'poverty' refers to income poverty, and 'the poor' are those people living below an income line. Similarly, a poor country is one that has a low average per capita Gross National Product (GNP). But it is simplistic to see poverty as being determined only by low income. While there is a strong correlation between income and human-development indicators, income poverty does not fully account for low human development. While most high-income countries have high levels of human development, and most low-income countries have low levels of human development, there are plenty of exceptions: wealthy countries which have failed to distribute the benefits of economic growth equitably, and poor countries which have been remarkably successful in using limited resources equitably and efficiently. Some examples are discussed below.

Therefore, while income is closely associated with human development, other factors are involved in determining levels of human development. GNP growth is a measure of production income and expenditures, not the standard of living, which covers a broader range of goods, including good health, education, and social inclusion. GNP is only a partially useful indicator of the standard of living, because money is only one means by which we meet our needs. An important conclusion to draw from this is that poverty eradication is not simply about shunting x% of the population over an arbitrarily defined income-based line.

Instead of being measured by per capita GNP, which in fairness was never designed to be used as an indication of human well-being, poverty is best defined as the state of being in which we are unable to meet our needs. However, 'needs' are not simply the basic material necessities for subsistence. So the concept of 'needs' includes the notion of what is conventionally regarded as necessary to lead one's life as an integrated member of a particular society. In short, poverty is dynamic. Need is defined very differently across different cultures and generations, as technology and changing values alter perceptions of the prerequisites of an acceptable standard of living.

In The Wealth of Nations, Adam Smith, the eighteenth-century Scottish economist, recognised the importance of this point when he defined the ability to appear in public 'without shame' as a major criterion of individual human welfare. To take an example from our own time, in Los Angeles the capacity to meet one's basic needs probably necessitates owning a car and an answer-phone, since without these commodities one is likely to have great difficulty either competing in the labour market or getting access to basic services. In rural Mozambique, a sufficient plot of cultivable land and access to a local market may be the basis of economic viability and a major determinant of social inclusion.

Basic needs extend beyond material goods to include intangibles such as the need to be valued, or treated with dignity, or to be free to participate politically, culturally, and economically in one's society. Commodities such as money are by and large means by which we are able to meet those needs. Jean Drèze and Amartya Sen have defined poverty in terms of constraints on capabilities (the freedom to achieve or meet our needs) and functionings (those things we want or need to achieve). Poverty eradication, therefore, is best approached as an exercise in raising people's capabilities, or enhancing freedoms. The corollary of this approach to development is that empowerment — helping people in poverty to acquire the tools they need to meet their needs — is the long-term solution to poverty.

Of course, our ability to meet our needs changes, and is dependent on a range of variables such as health, climate, the state of the wider economy, and the level of corruption in government. This means that 'the poor' are a constantly changing and heterogeneous group of people, moving across a spectrum of relative degrees of welfare and deprivation, rather than comprising a monolithic section of society. For example, people in poverty move further below the poverty line in times of drought or conflict, when meeting basic needs suddenly becomes more difficult than was previously the case. In some societies, where a large proportion of the population lives close to the poverty line, even minor economic downturns or upturns can lead to dramatic changes in poverty levels. For example, in every Latin American country except Argentina and Uruguay, between 10 and 15% of the population live on incomes of between 0.9 and 1.25 times the value of the poverty line. That the proportion of people vulnerable to poverty is greater than the total number of people currently living in poverty draws attention to the need for poverty-eradication strategies to address the vulnerabilities of the 'non-poor', as well as the vulnerabilities of people living in poverty.

Market liberalisation in an African country undergoing an International Monetary Fund structural adjustment programme captures another dimension of the relationship between poverty and external variables. While market liberalisation may benefit smallholder farmers who have access to storage facilities and good roads, poverty reduction among this group of farmers may be partially or fully offset by rising poverty among smallholder farmers for whom the loss of state purchasing arrangements has left them vulnerable to low prices from a single buyer – a condition known as monopsony. This case illustrates a second important lesson for policy makers: when poverty rises, or falls, it is not necessarily rising or falling for every social or regional group. Positive aggregate trends often mask the negative experiences of particular social groups.

Institutions and poverty

Our ability to meet our basic needs depends not only on external variables, but also on our position in society. All societies differentiate between people by gender, class, caste, age group, religion, ethnicity, and race. These differentiations imply a hierarchy of opportunity, and the ability of a person to meet his or her basic needs is heavily influenced by an inherited 'opportunity set' based on the social groups to which he or she belongs. Aggregate approaches to poverty conceal these inequalities. For example, an indigenous child in the southern Mexican state of Chiapas is twice as likely to die before the age of five as is a child in Mexico City, 50% less likely to complete a primary education, and ten times more likely to live in a house without running water. This 'opportunity set' of the Chiapas child translates in adulthood into starkly different employment opportunities and wage levels: a child born in the wealthy northern state of Nuevo Leon will enter a labour market on leaving school that offers average wages almost double those in the south. Therefore, policy makers are required to learn a third lesson: the 'capability constraints' of disadvantaged social groups need to be understood and challenged if poverty eradication is to take place.

The most disadvantaged social groups in a society, such as lower-caste widows in India, face capability constraints on two fronts: firstly, in securing an income; and secondly in converting that income into 'functionings' — those things that they want or need to achieve. This is because economic outcomes in India are mediated by overlapping gender and caste relations. Low-caste women have very limited access to education; widows (and low-caste widows especially) have little access to credit and labour markets; widows are usually unable to re-marry, and this increases vulnerability; and a woman does not usually inherit her husband's property. There is a complex set of institutional factors underlying the widow's poverty, and eradicating poverty requires these institutional biases – whether related to labour markets or the education system or marriage laws — to be overcome. Institutions reflect the interests of more powerful and vocal social groups, and equity requires a shift in power relations as well as resources.

Inequalities within households illustrate the importance of addressing institutional biases as part of any poverty-eradication strategy. Traditionally economists have assumed that households are single-preference actors — in other words, that a household makes decisions about the allocation of time and resources in the same way as an individual does, rather than as a group of individuals with their own (often conflicting) needs and preferences. This approach fails to acknowledge the bias in the intra-household division of labour, or in the distribution of household resources. The unequal distribution of household resources has important implications for poverty-eradication strategies, in that poverty is often concealed within a household that is above the poverty line.