When growth drives poverty down
March 10, 2016 21:57:03
October 20, 2017 19:16:21
Bangladesh has a solid history of poverty reduction which it can boast of. Admittedly this has largely been induced by income growth. From a feeble 4.0 per cent or less in the 1980s, the GDP (gross domestic product) growth rate hovered around an average of 6.3 per cent for more than a decade. One of the goals of the 7th Five-Year Plan (SFYP) is to substantially reduce extreme poverty. They are people living below lower poverty line - estimated to be 12 per cent of the population or roughly 20 million people. A glance through the Plan document helps highlight three dimensions of development relating to poverty condition over time. First, since 1990, both poverty and extreme poverty have declined substantially and extreme poverty decreased quite dramatically - almost halved between 1991 and 2010 in both rural and urban areas. Second, the rate of extreme poverty reduction has been faster in the decades of 2000 than 1990s - again in both rural and urban areas - by about 17 and 7.0 percentage points respectively. And finally, structure of poverty changed as chronic poverty was remarkably reduced.
Extreme poverty is estimated to have afflicted about 13 per cent of the population. The SFYP targets to trim it down to about 9 per cent by 2020. From the past experience, the following are the drivers of improvement in extreme poverty. Since a significant share of the extremely poor households is dependent on agricultural wages for livelihoods, any increase in real wages is likely to benefit them the most. In the meantime, there has been exodus of labour from agriculture due to rapid growth of manufacturing and services as well as migration. In consequence, the labour market was tightened in the recent decades of 2000s leading to increased real agricultural wages. The rice wage per day remained stagnated for most part of 1980s, increasingly modestly in 1990s from 3.5 kg in 1991 to 4.5 kg in 1999/2000. The real breakthrough came in the second half of the 2000s with rice wage per day rising to 8-10 kg in the 2008-13 period.
The tightening of the labour market that we mentioned above in 2000s passed through three channels: (a) relocation of farm labour to rural non-farm sector evidenced by a rise in non-farm income to total income, growth of remittance income and expansion of demand for a range of services; (b) relocation of rural labour to urban activities through the 'pull' effects of urbanisation through creating employment opportunities for the extreme poor in labour-intensive construction and transport services. It is amply shown by the rise in the share of urban population, economic growth unleashed by urban and peri-urban centres and (c) by the jobs for the poor in manufacturing sector, especially in RMGs.
Another important factor that reduced extreme poverty is migration. It worked for the extreme poor in two ways: first, directly by enabling them to take advantage of non-farm activities taking place within the country (internal migration), and second, in the face of fund constraint, to out-migration in foreign countries. The indirect effect of labour shortage in agriculture was wage rise. It means high agricultural wage growth in high remittance areas and low growth in low remittance areas. For the agricultural labourers who have limited financial resources to go abroad, it is the indirect effect of international migration through the channel of labour market that is of great significance. The wage growth tends to be faster in villages experiencing high growth in overseas remittances.
The SFYP document reckons that another key factor behind successes in extreme poverty reduction has been the institutionally transformative growth - not only accelerating growth of per capita income but also magnified poverty-reducing effects of economic growth. This worked through progressive emergence of labour market institutions for the poor and the poorest. For example, the share of causal labour in peak season has been replaced by contractual arrangements with higher wages than the other. The change in labour contractual arrangement has been one of the most important changes in rural transformation. Contractual arrangements not only result in increased wages but also more freedom for labour. It has increased the bargaining power of labour. Although micro-credit is alleged to bypass the extreme poor, empirical evidences show that one-fourths to one-thirds of micro-credit recipients are extreme poor. Besides, many NGOS - such as BRAC - have developed special credit programmes for the extreme poor. No less important is social security programmes despite alleged limitations in implementation. The National Safety Nets pogrammes have tremendously helped the extreme poor. In fact, more resources should be allocated to this end.
Growth matters even for the extreme poor as do markets. Rise in economic growth and access to markets are important sources of poverty reduction as poor households can sell their labour and produced products. The most important message is that the economic growth rate needs to be beefed up to impinge a large impact on extreme poverty reduction. The poverty elasticity to gap in lower poverty line is usually higher (1.19) than upper poverty line (0.93). This implies that the extreme poor are likely to be benefited more in response to GDP growth rate. The reasons are perhaps not far to seek. Since construction, transport and service sectors are important components of GDP and these components absorb the extreme poor more, economic growth is likely to benefit them. Thus when the target is set at 10 per cent for extreme poor and19 per cent for upper poverty line by 2020, the assumption is that economic growth rate will be 7.0 to 8.0 per cent during the plan period against 6.5 per cent in 2015. This is a tall order as far as Bangladesh's recent performance on economic growth is concerned.
The writer is a Professor of Economics at