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How important is redistribution for poverty reduction?

Date
Time (GMT +01) 12:00 13:30

Speakers:
Howard White, Institute of Development Studies
Chair:
Simon Maxwell, Overseas Development Institute

1. Howard White began his presentation by looking at what the World Development Report actually says about redistribution. The report mentions repeatedly that growth reduces poverty and also states that 'good policies and sound institutions' are necessary in order to achieve growth. Furthermore the report points out that the initial level of inequality is of importance for the effect of growth, and that reducing inequality is actually good for growth. Lastly, the WDR argues that growth also reduces non-income poverty measures such as health and education; and that access to these will improve more rapidly in countries experiencing growth. But whilst inequality is good for growth there is not a similar link from growth to inequality. 

2. All this is well and good, according to White, but he wished to take the discussion further and look at why distribution matters, theoretically and empirically.

3. In order to achieve poverty reduction targets, growth is required. However, White pointed out, it is the income of the poor, not the overall income, that needs to increase in order to reduce poverty. A combination of growth and redistribution will deliver more poverty reduction than a focus on growth alone. In fact, only a small amount of redistribution is required to improve quality of growth. In rejecting a relationship between inequality and growth (as in the WDR) the World Bank should also realise that inequality can be addressed at no cost to growth: thus growth with redistribution offers a win-win option.

4. A recent World Bank paper by Dollar and Kraay claims that the income of the poor increases 1:1 with the increase in overall income, and that growth is a much more efficient way of reducing poverty than redistribution. This is empirically wrong in White's opinion; the poverty reducing effect of growth has varied greatly between countries, in virtually none had the income of the poor grown at the same rate as the overall income. There are even plenty of cases where the income of the poor has fallen despite overall growth, and one need look no further than the UK for an example of this. 

5. White then went on to speak about pro-poor growth. The WDR 1990 talked about broad-based growth without offering any definition of the concept. As no-one knew what it really meant, there was a shift towards using 'pro-poor growth'; instead, without defining it in any clearer terms. Three different definitions could be used: 

For growth to be pro-poor their share of incremental income should exceed: i) their share of the population; ii) their current income share; or iii) some international norm (5.6 and 16.7 per cent for bottom 20 and 40 per cent respectively). The first definition, based on population share, implies the narrowing of the gap in average incomes, however there have been very few cases where this has actually happened. The second definition is based on income share and implies the notion that growth in general increases the income of the poor. The problem with the third definition, based on an international norm, is that according to this definition even regressive growth can be considered pro-poor.

6. Three different approaches can be used to explain the pattern of growth. Decomposition analysis divides the growth of the poor's income into three components; a growth component, a distribution component and a very small residual. Analysis shows that growth effects dominate but that distribution is more important than growth in around ¼ of cases. The regression approach is based on the notion that growth regressions are estimated separately for each income quintile. Main findings show that openness to international trade is good for all quintiles in roughly equal measure (ie. do not harm the poor). Dollar and Kraay claim that globalisation is not bad for the poor, a notion White questions, as there are a lot of issues on globalisation not included in their considerations. The pattern of growth regressions approach is based on dependent variables: incremental share and change in share. Using this approach leaves a lot unexplained; among the bad things are high initial inequality; inflation; civil liberty; possible growth trade-off, whereas among the positive things are political freedom and urbanisation. Openness to international trade seems to matter very little.

7. Concluding, White stressed that growth is good for the poor, and there is no substantial evidence for claiming that either stabilisation or globalisation is only bad for the poor. However, redistribution does matter, and a little goes a very long way. If we believe that redistribution does not undermine growth then why isn't redistribution, not growth, first on the agenda? Certainly the World Bank's own arguments, although not their policy conclusions, imply that redistribution should be central to anti-poverty strategies.

8. A number of points were made in the discussion following White's presentation. It was argued that there was a certain inconsistency in the statements attributed to the World Bank, and a clarification of these was requested. White explained that in the World Bank's explanation of inequality, growth is not a determinant, although the Bank states that reducing inequality is good for growth. Simon Maxwell posed the question 'how do we actually redistribute - by reducing the Gini co-efficient?'; In response it was claimed that a focus on Gini co-efficient would not necessarily reflect measures to increase the income of the poor. Rather than focussing on Gini co-efficient, one should be concerned with absolute as well as relative poverty, as the two are interdependent. 

10. It was suggested that maybe one should not only look at quantitative analysis in terms of patterns of growth, but also try to understand the qualitative aspects, e.g by looking at which sectors are more labour intensive. Does a trade-off between growth and redistribution exist if we make a typology of different sectors? White agreed that trade-offs might exist, and cited China as an example: In China, where growth is geographically concentrated, White had found a trade-off in some cases, but not in all. Surprisingly enough, he had found that agriculture seemed to be the most negative factor in terms of redistribution. This led to the conclusion that we need to understand changes in production, as this is an area where there has been conducted very little research. 

11. The question whether there are any other rural sectors apart from the rural construction labour markets that are pro-poor was then asked - is there any particular targeting? White replied that there is a consensus at the moment on the need to target rural infrastructure, but that rather than focusing on lacking aspects we need a combined approach looking at rural livelihood as a whole. There seems to be no lack of ideas - but a great need to facilitate the implementation of them. In Africa, the database for carrying out targeting is very much improved and provides a means for channeling money into rural communities (e.g building schools). This does not bypass local structures and can in fact be the driving force of decentralisation programmes. So we do have the means, we are just not using the knowledge we have about targeting to do it. 

12. Lastly it was pointed out that that those from service-providing NGO felt a bit left out of the discussion, and asked whether there are any governments they should not engage with? In White's opinion, there are very few cases where the situation is so extreme. For example during Apartheid, Britain gave a lot of money to South Africa through NGOs. If you think you can achieve something in a particular area, it is a worthwhile activity. 

Description

During this event, Howard White began his presentation by looking at what the World Development Report actually says about redistribution. The report mentions repeatedly that growth reduces poverty and also states that 'good policies and sound institutions' are necessary in order to achieve growth.