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are often given more menial work and males are favored in the distribution of food and other consumer goods (see Chapter 7).
7.Forty percent of the poor are children under 10, living mainly in large families. For example, in Pakistan in 1990, the poorest 10 percent of households averaged 7.7 members, of whom 3.6 were children under 10. The corresponding national averages were 6.1 and 2.2.
8.Even when living with an extended family, the elderly are poorer than other groups (Tinker, Bramsen, and Buvinic 1976; World Bank 1980i:33–35; Hendry 1988:8; World Bank 1990i; U.N. Development Program 1993; PinstrupAnderson 1994:1).
9.Many of the poor live in remote regions, beyond the gaze of the casual visitor to a village – away from roads, markets, and services or living on the outskirts of the village, thus lacking sufficient weight to influence political decisions (Jazairy, Alamgir, and Panuccio 1992:29).15 Indeed, Alan G. Hill (1978:1) contends that the wretched Sahel Africans presented dramatically on Western television screens represented the normal misery for poor populations in remote rural areas, discovered only when “the destitute collect on roadsides, in refugee camps or on the outskirts of towns and cities.”
Case Studies of Countries
INDONESIA AND NIGERIA
The contrast between the success of two populous oil-exporting countries, Indonesia and Nigeria, in reducing poverty rates, is instructive. Nigeria, independent in 1960, was under parliamentary government from 1956 to 1966, and under military government from 1966 to 1999 (except for an interim elected government, 1979–83). Indonesia, independent in 1950, was led by President Sukarno then to 1965, when he was overthrown by Major General Suharto, who was authoritarian president through his downfall in 1998.
The differences are a result of dissimilar economic growth and income distribution records ensuing largely from disparate polices. In 1973, Indonesia’s GDP per capita was $PPP1504 compared to Nigeria’s $PPP1442 (1990 PPP). By 1990, Indonesia’s GDP per capita, $PPP2516, was double Nigeria’s $PPP1242, and by 1998 triple, $PPP3070 to $1232 (1990 PPP) (Maddison 2001:215, 224). From 1973 to 1998, Indonesia’s per-capita annual growth was 2.90 percent compared to Nigeria’s −0.63 percent (inside front cover table), indicative of a fall from 1965 to 2004 in average economic welfare (including nutritional standards), the marginalization of middle-level professionals, and widespread corruption and unaccountable rakeoffs by military and political rulers, civil servants, and their clients. Despite the
15The World Bank (2001b:27) indicates that “poverty tends to be associated with distance from cities and the coast, as in China, Vietnam, and Latin America.” Many of China’s poor live in mountainous regions. “In Peru two-thirds of rural household in the poorest quintile are in the mountain region, while fewer than a tenth are in the coastal region.” In Thailand, the 1992 poverty rate in the rural northeast “was almost twice the national average.”
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authoritarianism of Suharto, and his fall from power from a financial crisis, student and worker discontent, and secessionist conflict, Indonesia’s economic development was more even by class, community, region, and urban–rural area. Indonesia pursued a strategy of labor-intensive industrialization and investment in secondary and post-secondary education (gross enrollment rates of 51 in secondary and 10 percent in tertiary education compared to rates of 34 and 4 percent, respectively, in Nigeria). Personal income concentration in Indonesia fell from a Gini of 0.46 in 1971 to 0.41 in 1976 to 0.30 in 1990 and 2000. Although Nigeria lacks income distribution data during the earlier period, information on the ratio of Nigerian industrial to agricultural labor productivity indicate an increase from 2.5:1 in 1966 to 2.7:1 in 1970 to 7.2:1 in 1975, after a fourfold increase in petroleum prices during four months in 1972–73; the ratio probably fell in the 1980s. In the late 1990s, Nigeria’s Gini, 0.56, ranked the 15th highest of 113 countries in the world (Jain 1975:55; World Bank 1982i:158; World Bank 1993b:296; Diejomaoh and Anusionwu 1981: 373–420; World Bank 2003h:64–66).
Indonesia reduced its $1/day poverty incidence from 59 percent in 1975 to 7 percent in 2000, whereas Nigeria’s incidence soared from 35 percent in 1975 to 70 percent in 1997. Indonesia even recovered from its 1997–98 financial crisis with a minimal increase in poverty (measured using a national line): poverty increased from 11.3 percent in 1996 to 18.9 percent in 1998 but declined in 1999 to 11.7 percent. A major contributor to reduced rural poverty in Indonesia was the dramatic increase in rice yields. For example, in Balearjo, East Java, from 1953 to 1985, rice yields increased from 2 to 6 tonnes of paddy per hectare for the wet season crop, whereas the daily wage rose from 2 to 4 kilograms of rice. By contrast, despite the oil boom, Nigeria’s nutritional levels barely increased from the mid-1960s to the late 1970s, with the poorest 30–40 percent of rural households and many in the new urban slums being seriously undernourished and impoverished. Average calorie intake in Nigeria, especially in the otherwise more prosperous south where diets relied heavily on roots and tubers, did not improve between 1952 and 1985. Indeed, average consumption levels in 1985 were lower than in the 1950s (World Bank 1994i:42; World Bank 2001h:163; World Bank 2003h:58–60; Sala-i-Martin 2002:41–42).
Before 1973, both countries had more than 40 percent of GNP originating in agriculture. Both countries experienced an oil boom during 1973–75 and 1979– 81. Whereas Indonesia’s agricultural output increased 3.7 percent yearly from 1973 to 1983, output in Nigeria declined 1.9 percent and agricultural exports declined 7.9 percent yearly over the same period. From 1983 to 1992, Indonesia’s agricultural output rose 2.8 percent and farm exports 6.2 percent annually; Nigeria’s agricultural production grew 4.1 percent and farm exports fell 2.9 percent annually over the same period. Furthermore, agricultural imports as a share of total imports rose from 3 percent in the late 1960s to 17 percent in the 1980s and the 1990s in Nigeria, whereas in Indonesia the share increased only from 1 percent to 4–5 percent over the same period. The fact that Nigeria’s agricultural value-added, 30 percent of GDP in 2001, is larger than Indonesia’s 16 percent reflects on Nigeria’s farm weakness, the slow growth in productivity.
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Several differences in agricultural pricing and investment explain Indonesia’s more favorable agricultural development. The real value of the Nigerian naira appreciated substantially in the early 1970s and early 1980s, depreciating relative to the dollar only under pressure in 1986, whereas Indonesia’s rupiah’s real value increased more slowly, and depreciated vis-a`-vis the dollar starting from 1978 to 1983. Additionally, Indonesia invested a substantial amount of government funds in agriculture, including a General Rural Credit Program that loaned to rural people at commercial rates, whereas less than 10 percent of the Nigerian plan’s capital expenditures were in agriculture. The attempt by Nigeria, beginning in the mid-1980s, to increase incentives and investment in agriculture had little impact (World Bank 1986a:72; Nafziger 1993:52–53). While the Food and Agriculture Organization (2003:37–38) indicates rapid growth of food-crop agriculture in the late 1990s and early years of the 21st century, Nigeria will still require sustained policy changes to reverse the effects of years of agricultural neglect.
Suharto and his advisors transformed Indonesia from hyperinflation, pervasive hunger, and unsustainable foreign debt in 1965 to subsequent infrastructure expansion and the development of staple foods, spurring a Green Revolution in rice. During the first two decades after 1966, Indonesia emphasized monetary stabilization and fiscal constraint, opened the capital account, and learned to avoid an overvalued rupiah. However, in the early 1970s, Indonesia’s national oil company, Pertamina, turned the promise of oil wealth into overextension and massive resource misallocation but eventually was rescued by economists who ensured investment in agriculture and universal primary education. Beginning in 1983, in the face of oil’s falling share in national income, Indonesia’s deregulation, privatization, banking and legal reforms, infrastructure development, low protectionism, outward orientation, and equilibrium exchange rates helped sustain rapid economic growth (Prawiro 1998).
In 1986–90, the terms of trade (price index of exports divided by the price index of imports) of Nigeria, with petroleum comprising more than 90 percent of its exports, fell to 35 to 45 percent of its 1980 oil-driven peak, spurring a four-year slump comparable to the West’s Great Depression of the 1930s; by 2001, these terms only recovered to 55 percent. The more diversified Indonesia economy, with some 35–55 of exports manufactures or nonoil primary products, continued to grow throughout the late 1980s and early 1990s, gradually reducing poverty rates (Ahluwalia, Carter, and Chenery 1979:299–341; World Bank 1990i:40–43; International Labor Organization, Jobs and Skills Program for Africa 1981; Matlon 1981:323– 372; Nafziger 1988:10; Nafziger 1993:27–28, 67–69; Nafziger 1991:155–202; World Bank 1993b:237–238, 369–370; U.N. Development Program 2003:289; and Table 7-4). Although many of Nigeria’s insecure military or civilian political elites (turning over frequently from coups), civil servants, and intermediaries for foreign capital had to rely on the state’s economic levers to build patronage networks to survive, Indonesia enjoyed greater political continuity and policy predictability, and less political intervention in economic policy decisions (Pack 1994:441–451), from the 1960s through the 1990s.
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Both countries suffered from corruption. In Indonesia, the Suharto family and their associates dominated the private sector for three decades. In Nigeria, during the 1980s and 1990s, military rulers failed to account for hundreds of millions of dollars of petroleum exports and revenues16 (Chapter 2). Transparency International (2003) rates Indonesia as 96th and Nigeria 101st among 102 ranked countries. Although Indonesia’s 1997–98 financial crisis and subsequent political instability underscore the need for fundamental reforms, vested political interests may forestall major changes in economic policies. With its predatory political leadership, uneven wealth distribution, and ethnic and religious strife, Nigeria’s constraints on policies are at least as great.
MALAYSIA, PAKISTAN, AND BRAZIL
Figure 6-11 shows the comparison in the income distributions of Pakistan, Malaysia, and Brazil. Pakistan, with low inequality, reduced its incidence of poverty from 54 percent in 1962 to 28 percent in 1996. Malaysia, with moderate inequality, decreased its poverty rate from 37 percent in 1973 to 16 percent in 1996, whereas the same rate in Brazil, with high inequality, especially between the rural northeast and the rest of the country, only fell from 50 percent in 1960 to 47 percent in 1996.
Economists break down reductions in poverty rates into the part attributable to growth and the part attributable to changes in income inequality. From 1960 to 1980, before its negative growth of the 1980s, annual growth in Brazil was 5.1 percent compared to Malaysia’s 4.3 percent. Brazil’s poverty rate during the same period fell from 50 percent to 21 percent. However, if Brazil’s inequality had fallen as in Malaysia, Brazilian poverty would have fallen by 43 percentage points rather than by 29. Thus, both the pattern and rate of growth are important determinants of changes in poverty rates (World Bank 1982i:110; World Bank 1990i:47–48).
We can illustrate how growth patterns affect poverty rates by a stylized graph comparing income distribution relative to the poverty line in Pakistan and Brazil. Figure 6-11 shows the cumulative distribution function, that is, the percentage of persons who receive no more than a particular income, expressed as a function of that income. For example, when the poverty line is set at 30, the curve on the left in each figure shows that 50 percent of the population is poor. A 50 percent increase in income will shift the distribution function to the right. The reduction in the poverty rate is 37 percentage points in the upper graph (the Pakistani case) but only 27 percentage points in the lower graph (the Brazilian case).
The difference in outcome arises from differences in the slope of the distribution function at the poverty line. If the slope is very steep, implying less inequality in the region of the poverty line, as in the upper graph showing Pakistan, a large number
16 The Pius Okigbo panel that probed the Central Bank of Nigeria reported that $12.4 billion of oil revenues had disappeared beyond budgetary oversight, 1988 to mid-1994 (Economist 1994a:50). Previous panels investigating corruption have also found billions missing. See Lewis (1994:437–445) and Schatz (1984:45–57).
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FIGURE 6-11. Different Initial Conditions: The Impact on Poverty Reduction. Source: World Bank 1990i:47–48.
of people is concentrated just below the line, and the poverty rate falls substantially. If the slope is less steep, implying greater inequality around the poverty line, as in the lower graph showing Brazil, few people are located immediately below the poverty line. In this case, the same increase in income moves only a few of the poor above the line, and the reduction in the poverty rate will be much smaller.
For example, starting from the distributions available in the early 1990s, a 10-percent increase in the incomes of the poor in Pakistan would reduce the poverty rate by about seven percentage points. Where the distribution is more unequal, as in Brazil, the corresponding figure would be only three percentage points (World Bank 1990i:47).
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SRI LANKA
From independence in 1948 to 1977, Sri Lanka, which spent about half of its recurrent governmental expenditures for food subsidy, health, and educational programs, made much progress in meeting its population’s basic needs. In the late 1960s and early to middle 1970s, about 20 percent of these expenditures (10 percent of GNP) was for food subsidies, including a free ration of 0.5–1.0 kilograms of rice per week for each person (the remainder sold at a subsidized price). Unlike its large, diverse neighbor, India, Sri Lanka’s food programs effectively fed the poor and those in rural areas. The direct ration provided about 20 percent of the calories and 15 percent of the incomes of the poorest 20 percent of the population. In contrast to programs that redistribute cash or assets, there were fewer political obstacles to food redistribution.
One percent of Sri Lanka’s population, compared to 25 percent in Bangladesh, subsisted on fewer than 1,700 calories per day in 1970. The food subsidy program reduced mortality and malnutrition greatly. The mortality rate was much lower in Sri Lanka than in Bangladesh, although when cuts in the ration and subsidy were made during periods of high food prices in Sri Lanka, mortality rates increased significantly (Iseman 1980:237–258; World Bank 1980i:62).
Yet Sri Lanka’s basic needs policies were achieved at the expense of resources needed for employment and investment. High enrollment rates and weak curricula contributed to a secondary-school-graduate unemployment rate of over 25 percent and to an overall unemployment rate of 20 percent in 1977. Additionally, low food prices hurt agricultural growth, and high business taxes and pervasive government controls discouraged investment. After 1977, governments cut food subsidies and other social spending as part of a strategy for improving farm incentives and attracting foreign investment. Additionally, the civil war beginning in the early 1980s hurt Sri Lanka’s social programs.
INDIA
In India, the constitution of 1949 and five-year plans (beginning in 1951) stressed removing injustices, abolishing poverty, and improving income distribution. Beginning in the 1950s, numerous programs were undertaken to achieve these goals, including land reform, village cooperatives, community development, credit and services for the rural poor, educational and food subsidies, minimum wages, rural employment programs, and direct provision for upgrading health, sanitation, nutrition, drinking water, housing, education, transport, communication, and electricity for the poor. As Inderjit Singh (1990:xviii) states
Those who benefited from . . . antipoverty programs were usually those who had the grassroots power. Deciding who was “poor” and therefore eligible for aid depended on the administrators of these programs, generally the rural elite. So, rather than being a neutral agent for the distribution of gains, government became a trough where different social groups fed in relation to their economic power. Many antipoverty programs in India – such as the Drought Areas Program, the Rural Works Program, and special credit programs – delivered the greater share of their benefits to the richer, not the poorer, segments of society.
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But overall progress was limited: Income shares for the poor dropped from the 1950s through the late 1970s, whereas, according to government studies, no appreciable dent was made on absolute poverty. Caste, class, and gender inequalities in income, health, and education have been particularly large in northern India but small in Kerala, with comprehensive land reform and redistribution in the 1970s, substantial investment in health and education, and an emphasis on equality of opportunity by gender.
In India’s democracy, the poor pressured political leaders to adopt programs aimed at improving the lot of weaker sections of the population. However, except for Kerala and West Bengal, the landed and business classes dominated the government service and legislatures, and it was not in their interest to administer effectively programs that helped the underprivileged at their expense. Thus by 1970, only 0.3 percent of the total land cultivated had been distributed under land legislation. Furthermore, laws were frequently enacted with loopholes and exemptions that allowed land transfers to relatives, keeping land concentrated in the hands of a few families. Also large moneylenders, farmers, and traders controlled village cooperatives and used most of the social services and capital provided by community development programs (Barhan 1974:255–262; Morawetz 1977:39–41; for studies indicating a decline in the income and asset shares of the poor, see India, Ministry of Agriculture and Irrigation 1976; and Pathak, Ganapathy, and Sarma 1977:507–517).
The fastest poverty reduction probably occurred after liberalization reforms spurred growth. This began first in the mid-1980s with limited delicensing and price decontrol but culminated in the New Industrial Policy in 1991, assumed in response to IMF and World Bank pressure for India to reduce its chronic deficit on international balance on goods, services, and income (or exports minus imports of goods and services). Sala-i-Martin (2002:38) estimates the fall in India’s $1/day (1985 PPP) poverty rate from 17 percent in 1980 to 5 percent in 1990 to 1 percent in 1998, and $2/day poverty from 54 percent (1980) to 32 percent (1990) to 14 percent (1998); the World Bank estimates higher rates (see above) but a falling trend during the same period.
Policies to Reduce Poverty and Income Inequality
As we discussed in an earlier section, growth may be the best medicine for poverty alleviation. Here, however, we discuss policies more specifically focused on decreasing poverty, including those targeted at reducing income inequality.
As indicated earlier, the inverted U-shaped curve descriptive of income inequality rises in early stages of development and drops later on. Moreover, income inequality worsens as income increases from low to middle levels and then improves as income advances from middle to high levels.
This pattern, however, may be a consequence of economic policies. Greater inequality is probably a result of past policies that assumed benefits would eventually trickle down to the poor. Furthermore, many LDCs emphasized the growth of the urban-oriented, highly technological, highly mechanized production of Western-style
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consumer goods. They neglected production patterns based on indigenous tastes, processes, and factor endowments.
Socialist economists argue that high income inequality is inevitable in a capitalist society, with its gulf between incomes from capital, land, and entrepreneurship, on the one hand, and wage-earners, on the other. However, empirical evidence indicates that evolutionary policy changes in a mixed or capitalist LDC, such as Taiwan, South Korea, and early post–World War II Japan, can reduce poverty and income inequality substantially (Ahluwalia, Carter, and Chenery 1979:299–341; Adelman and Robinson 1978; Frank and Webb 1977).
The World Bank (2001i) emphasizes expanding economic opportunity for poor people by building up their assets. As might be expected, the initial distribution of assets and income is crucial in determining income inequality. People who already own property, hold an influential position, and have a good education are in the best position to profit as growth proceeds. Thus, a society with high income inequality is likely to remain unequal or become more so, whereas one with small disparities may be able to avoid large increases in inequality. It simply may not be possible to grow first and redistribute later, because early social and economic position may have already fixed the distribution pattern. To reduce poverty and income inequality, a society may need to enact land reform (discussed in Chapter 7), mass education, and other such programs straightaway rather than waiting until after growth is well under way (Morawetz 1977:41; Nafziger 1975:131–148; Alesina and Rodrik 1994:465–490).
CAPITAL AND CREDIT
In LDCs generally, the poor live primarily from their labor and the rich on returns from property ownership. Not only do the poor have little capital; their poverty also limits their ability to respond to good investment opportunities, such as new seed varieties, fertilizer, tools or their children’s education.
Government efforts to supplant traditional money lenders in providing credit for the poor have had only limited success. Even public agencies require collateral. People with few assets can rarely meet such a standard. Furthermore, the substantial staff time needed to process and supervise loans and perhaps arrange technical assistance, as well as the higher risk of bad debts, make it difficult for these credit programs to be self-supporting. Moreover, the limited amount of subsidized credit has frequently not wound up in the hands of the poor but of more influential groups.
Some credit programs (the MicroFund in Manila, Philippines, and the Association for Development of Microenterprise or ADEMI in Santo Domingo, Dominican Republic, both established in 1989) provide training and technical aid for the urban poor, especially women, in microenterprises (very small firms). Indonesia’s Badan Kredit Kecamatan (BKK), founded in 1982, provides individuals (primarily lowincome women) tiny initial loans (a $5 limit) quickly on the basis of character references from local officials without collateral. The BKK is profitable but still reaches the poor, as the smallness of the loan and strictness of the terms cull out the nonpoor. In the early 1980s, the Small-Scale Enterprise Credit Program in Kolkata raised the average income of new borrowers 82 percent within two years, whereas the Kupedes
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program for Indonesian microenterprises, established in 1988, increased average borrower incomes from $74 to $183 after three years. These four lending institutions were supported with limited subsidies to help cover their initial administrative costs but not otherwise to subsidize interest rates.
Group lending is one way to avoid subsidies in providing credit for the poor. Under such schemes, similar to the Grameen Bank of Bangladesh established in 1988, peer borrowing groups of five or so people with joint liability approve loans to other members as a substitute for the bank’s screening process. The group members discuss all loan requests, scrutinize the investment plan and creditworthiness of the borrower, and save an established percentage of the loan, which remains on deposit during the borrowing. Failure to repay by any member jeopardizes the group’s access to future credit. The Grameen Bank received limited subsidies from international lenders to start up the group and offer interest rates several points below the market. As of 2003, Grameen had more than 1,170 branch offices, served more than two million clients (94 percent of whom were women), and had a repayment rate of 92 percent (Yunus 2003; World Bank 1990i:66–69; Otero and Rhyne 1994; Jazairy, Alamgir, and Panuccio 1992:206).
The poor can increase investment through risk pooling. In addition to spreading risk throughout the extended family, people spread risk by (usually informal) reciprocal relationships within patron–client (superior–subordinate) systems, lineage, and village communities (Dasgupta 1993:204–238).
Public investment in roads, schools, electricity, potable water, irrigation projects, and other infrastructure, if made in underprivileged areas, can provide direct benefits for the poor, increase their productivity, or provide jobs for them (World Bank 1980i:41–42).
EDUCATION AND TRAINING
As Chapter 5 contended, investment in education, training, and other forms of human capital yields a stream of income over time. Universal, free, primary education is a major way of redistributing human capital to the relative benefit of the poor. High primary enrollment rates are associated with relatively high income shares for the bottom 40 percent of the population (Ahluwalia 1974:17; Psacharopoulos and Woodhall 1985:258–264; and Chapter 10).
In parts of low-income West Africa, the government not only subsidizes the universities but also provides free tuition and living allowances for the students, whose parents usually have incomes that are higher than the national average and rarely originate from the low-income peasant agricultural sector. Student living allowances comprise nearly half the funds that West African governments spend on higher education. Sub-Saharan Africa spends 22 percent of its public educational budget on higher education although only 2 percent of those aged 18 to 23 attend school at that level. During the economic recession and fiscal constraints of the 1980s and 1990s, Ghana, Tanzania, and Mali, as well as countries suffering from war such as Ethiopia, Mozambique, Somalia, and Liberia, reduced primary enrollment rates. Moreover, the Brazilian government spends 23 percent of its public education budget
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on higher education but only 9 percent on secondary education. In addition, the top one-fifth income earners in Chile, Uruguay, Costa Rica, and the Dominican Republic receive more than one-half of the subsidies for higher education, whereas the poorest quintile receives less than one-tenth. Furthermore, many resource-poor low-income countries have sacrificed quality of education at the primary level, often lacking instructional competence, basic mathematics, science, and language textbooks, and other teaching materials (World Bank 1990i:79).
EMPLOYMENT PROGRAMS
Unemployment in LDCs is a major concern. It leads to economic inefficiency and political discontent as well as having obvious implications for income distribution. Open unemployment, in which a person without a job actively seeks employment, is largely an urban phenomenon in LDCs. The unemployed are mainly in their teens and early 20s and usually primary or secondary school graduates. It is rare for unemployed youth to seek an urban job without family support.
Some policies to reduce unemployment include faster industrial expansion, public employment schemes, more labor-intensive production in manufacturing, a reduction in factor price distortion, greater economic development and social services in rural areas, a more relevant educational system, greater consistency between educational policy and economic planning, and more reliance on the market in setting wage rates (see Chapter 10). Public works programs for expanding employment can provide a safety net for the poor and help LDCs respond to recessions and macroeconomic shocks (World Bank 1990i:86–87).
HEALTH AND NUTRITION
LDCs increase efficiency and equity by shifting funds from advanced curative medicine in urban hospitals to basic health services such as preventive care, simple health information, an improved health environment, and nontraditional or middlelevel health practitioners in numerous rural clinics. The demand by the poor for medical care is highly price elastic so that when fees are more than nominal, the poor will be the first to drop out. Charging higher fees to the rich for hospital care, however, can generate substantial revenue (World Bank 1990i:86–87). Sickness and insufficient food limit the employment opportunities and earning power of the poor. Food subsidies or free rations increase the income of the poor, lead to better health and nutrition, permit people to work more days in a year, and enhance their effectiveness at work. However, because of the expense of food programs, they are not likely to be continued unless food production per capita is maintained or raised. Poverty is a terribly circular affliction.
POPULATION PROGRAMS
Chapter 8 maintains that the living levels of the poor are improved by smaller family size, as each adult has fewer dependents.