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Home / Poverty reduction at the expense of economic growth is detrimental to the economy in the long run
Poverty reduction at the expense of economic growth is detrimental to the economy in the long run
2015-04-28Staff Report 2 by Mally Likukela* The message from recent high level Government speeches like the National Budget and the State of the Nation Address appear to place poverty eradication at the top of Government’s development agenda. While this message is applauded by many as a noble thing to do, the fear amongst many people is that it seems to come at the expense of economic growth. Looking at the National Budget allocations, one can clearly see that the allocation on the social sector by far surpasses all other allocations, and one cannot help but to notice how small the allocation to the economic sector is. In fact, the economic sector allocation of N$9.9 billion represents only 16.0 percent of the total budget compared to 42.0 percent that was allocated to the social sector. The fact that the allocation is expected to even reduce over the MTEF period, while that of the social sector will increase, confirms the diminishing importance of the economic sector in the eye of Government in relation to the social sector. This scenario has generated debate amongst analysts as many are beginning to question the wisdom behind the skewed allocation towards the social sector, at the expense of the economic sector. During the recent State of the Nation Address, President Hage Geingob spent a better part of his speech elaborating on poverty reduction strategies, leaving only a few pages to talk about economic and infrastructure strategies. As if to justify the consistent enormous allocation to the sector that was proposed by the Minister of Finance earlier on, the President also highlighted the achievements in the sector. The overwhelming focus on poverty reduction has brought to the fore pertinent questions. The key question that has emerged in the wake of these speeches is: Should government continue to pursue poverty reduction first and foremost, or should they focus on economic growth? Debates on this question have picked up pace because of its cross-cutting effects in the economy. Although experience has shown that growth and poverty reduction go largely hand in hand, the questions we should be asking are (1) What kind of policies lead to both growth and poverty reduction. (2) Would a poverty focus facilitate the adoption of such policies? These are very difficult questions to answer, so before attempting to answer these questions, we need to ask some easier ones first. Does growth benefit the poor? Generally speaking, yes. Historically nothing has worked better than economic growth in enabling societies to improve the life chances of their members; including those at the very bottom. The number of people living in poverty has dropped in most developing countries that have experienced sustained rapid growth over the past few decades. A case in point is Namibia, which over the past few years has experienced a growth of around 5 to 6 percent and as could be seen in the recently released Poverty Mapping and Namibian Index of Multiple Deprivation report, it has at the same time experienced a reduction of 11.0 percent in poverty. Does growth help people move out of poverty? Research that compares the experiences of a wide range of developing countries finds consistently strong evidence that rapid and sustained growth is the single most important way to reduce poverty. A typical estimate from these cross-country studies is that a 10 percent increase in a country’s average income will reduce the poverty rate by between 20 and 30 percent. Namibia’s recent Poverty Report confirms these findings. The central role of growth in driving the speed at which poverty declines is confirmed by research on individual countries and groups of countries. For example, a flagship study of 14 countries in the 1990s found that over the course of the decade, poverty fell in the 11 countries that experienced significant growth and rose in the three countries with low or stagnant growth. On average, a one percent increase in per capita income reduced poverty by 1.7 percent. Among these 14 countries, the reduction in poverty was particularly spectacular in Vietnam, where poverty fell by 7.8 percent a year between 1993 and 2002, halving the poverty rate from 58 percent to 29 percent. Other countries with impressive reductions over this period include El Salvador, Ghana, India, Tunisia and Uganda, each with declines in the poverty rate of between three and six percent a year. Driving these overall reductions in poverty was the rebound in growth that began for most of the countries in the mid-1990s. The median GDP growth rate for the 14 countries was 2.4 percent a year between 1996 and 2003. Does growth transform society? The positive link between growth and poverty reduction is clear. The impact of the distribution of income on this relationship – in particular, whether higher inequality lessens the reduction in poverty generated by growth – is less clear. The improvement observed in the Gini coefficient from 0.7 in the early 1990s to 0.59 in 2010 is a point in case for Namibia. Does growth create jobs? Economic growth generates job opportunities and hence stronger demand for labour, the main and often the sole asset of the poor. In turn, increasing employment has been crucial in delivering higher growth. Strong growth in the global economy over the past 10 years means that the majority of the world’s working-age population is now in employment. In Namibia, the robust growth experienced over the past years was accompanied by a noticeable reduction in the unemployment rate. Currently standing at 28.1 percent, this unemployment rate can be attributed to the strong growth experienced over the few years. How should Namibia prioritize? Growth is ultimately about investment in capital and labour and improving the productivity of these factors of production through the processes of innovation and technological absorption. The most pertinent question for countries in low-income regions, such as in sub-Saharan Africa, is therefore how to boost the low levels of investment and productivity growth that are characteristic of underperforming countries. The National Budget and development focus should be on areas that boost investments in capital and labour such as the economic and infrastructure sector. Economic and infrastructure sector Namibia should give priority to physical capital enhancing areas. Growth requires investment in physical capital – the plants, machinery, raw materials, etc. that are central to production – and investment at all scales requires financial capital. Every country that has achieved sustainable growth has managed a significant increase in the levels of both domestic and foreign investment as a percentage of GDP. Significant technology is usually embodied in capital goods such as plants and machinery that help to support a country’s move up the technological ladder. The current expenditure on the economic and infrastructure sector of around 15.7percent is not sufficient if Namibia is to realize sustainable growth. In as much as we agree that investment in education and skills can be as important as investment in machinery and plants in delivering growth, we are also aware that a trained labour force without machinery to work with is meaningless. Investors need good access to knowledge, to inputs of capital, labour and raw materials, and to markets. This requires transport infrastructure, as well as the provision of a regular supply of electricity and other utilities. In Namibia, transport and energy make up the largest proportion of indirect costs for businesses, weighing heavily on the competitiveness of firms in the countries. The commitment shown by the Minister of Finance to allocate about 7.0 percent of the total budget to finance growth-enhancing infrastructure in the logistics and energy sectors is very welcome. In conclusion: Economic growth not poverty reduction will benefit the poor more. • Mally Likukela is Manager of Economic & Market Research at Standard Bank Namibia. 2015-04-28Staff Report 2
