Economic Growth, Development and Poverty
Fairbrass, Stephen, Teaching Business & Economics
In 1997 one of the first acts of the incoming Labour government in the UK was to establish a new Department for International Development (DFID), replacing the former Overseas Development Administration. In November of that year the government published the first White Paper on international development in over 22 years, "Eliminating World Poverty: A Challenge for the 21 st Century". The White Paper sees a clear link between economic growth and poverty reduction. This article seeks to raise some questions about that link.
For many years in the field of Development Economics it was widely held that economic growth was a necessary, if not sufficient, condition for 'development', and that 'development' was necessary for the reduction of poverty. (Defining 'development' was problematic, and contestable, and it is not my intention to try to resolve that problem here.) The belief that growth was 'necessary' tended to overshadow the recognition that it was not 'sufficient'.
Debate focussed on the best means of achieving growth and little close attention was given to how growth would lead through development to the reduction of poverty. Such theory as was developed assumed that wealth would somehow 'trickle down' to the poor, but the mechanisms of how this would happen were not well explained. There were sceptics. For example, Dudley Seers said "national income is itself an inadequate yardstick of development ... national income targets are not very relevant ... we need instead targets for poverty, employment and income distribution" (1969). Seers' point was that targeting growth, and hoping that poverty reduction would occur, was likely to be less effective than targeting poverty reduction directly.
Despite some 50 years of fairly steady global economic growth (although in some parts of the world, notably large areas of sub-Saharan Africa, there have been long periods of little or indeed negative growth), poverty is still a major global problem. Elkins (1992) argues that in the 'developing world', "economic growth is supposed to have been leading inexorably to the abolition of poverty ...... the reality has been quite different. There is little evidence that absolute poverty is generally on an established downward trend". Elkins quotes UNICEF figures which estimate that 15 million children die each year from absolute poverty, and that 20% of the global population are not able, on a regular basis, to satisfy their most basic human subsistence needs. Leys (1994) says "by the beginning of the 1990s most people in sub-Saharan Africa were poorer than they had been 30 years before. Of the population of about 500 million, nearly 300 million are living in absolute poverty."
Not only is there persistent absolute poverty, but the gap between rich and poor is growing. The UNDP Human Development Report for 1999 shows that the income gap between the richest fifth of the world's population, and the poorest, was 74:1 in 1997, up from 30:1 in 1960.
Controversially (because it appears to contradict UNDP and other evidence), in a widely reported research paper published by the World Bank last year, Dollar and Kraay (World Bank, 2000) are claimed to have conclusively 'proven' that economic growth benefits the poor. In particular they state that when a country experiences economic growth the incomes of the bottom 20% tend to rise at the same percentage rate as those of everybody else. Their self-- admitted 'preliminary and incomplete' findings are deconstructed by Richard Douthwaite (Douthwaite, 2000), who shows, inter alia, that many of the figures given for the income of the poor are questionable estimates, and that there is no attempt to examine the distribution of income within the bottom 20% (some 1.2 billion people let us not forget) which itself is likely to be extremely uneven, with the bulk of any increase in income going to the richest of that quintile. He further comments that, in any event, to reduce relative poverty it is necessary that the real incomes of the poor grow at a faster percentage rate than those of the rich. …