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Poverty, growth and the World Bank
A dollar a day
Sep 17th 2013, 10:38 by J.P.
In 1991, David Dollar and Aart Kraay, both of the World Bank, published an influential paper, “Growth is good for the Poor”. It established, as an empirical matter, that when average incomes rise, the average incomes of the poorest fifth of society rise proportionately. The implication was that economic growth and its determinants—macroeconomic stability, rule of law, openness to trade and so on—benefit the poorest fifth as much as they do everyone else.
This was the heyday of the “Washington consensus”. The term had been coined by John Williamson of the Institute for International Economics only two years before. And the study helped confirm the then-widespread view that, as a guideline for policymakers, poor countries ought to concentrate on getting the basics of growth right, rather than on specific measures aimed at helping the poorest. They could do that too, of course. But the impact was not all that great. When Messrs Dollar and Kraay examined four interventions—primary education, social spending, agricultural productivity and improvements in formal democratic institutions—they found little evidence that these disproportionately benefited the poor.
Now, Messrs Dollar and Kraay, together with Tatjana Kleineberg, have revisited their study. Using a larger and more detailed data set (118 countries not 92), they find that just over three-quarters of the improvement in the incomes of the poorest 40% is attributable to improvements in average incomes—ie, it comes mainly from growth. The title of the new paper says it all: “Growth still is good for the poor”.
But the context is very different from what it was in the early 1990s. Now, the talk is all about income inequality, people being trapped in poverty and the need to help the poorest directly. Barack Obama, David Cameron, the World Bank and dozens of non-governmental organisations, for example, have signed up to the idea that extreme poverty can be eradicated by 2030 (in practice, this means reducing to about 3% the share of the world’s population subsisting on $1.25 a day or less). With hundreds of development agencies gathering in New York on September 25th to talk about “sustainable development goals” to replace the millennium goals that expire in 2015, the air is thick with talk about the problem of inequality and about how the poorest can be trapped by “business as usual”.
Does this mean the new paper contradicts—and possibly undermines—the post-Washington consensus? The World Bank itself has what it calls a new “overarching mission” which fits the mood of the sustainable-development goals. It commits the bank to “end extreme poverty and promote shared prosperity”. It is hard to resist discerning some tension—a difference in emphasis, at least —between the aim of “promoting shared prosperity” and this sentence from the new paper: “historical experience in a large sample of countries does not provide much guidance on which combinations of macroeconomic policies and institutions might be particularly beneficial for promoting ‘shared prosperity’ as distinct from simply ‘prosperity’.” If it is hard to know how to promote “shared prosperity”, why not just concentrate on prosperity pure and simple?
On the other hand, the mission also says that “reaching the target [of ending extreme poverty] will require sustaining high rates of economic growth across the developing world.” And that is clearly consistent with the Dollar-Kraay-Kleineberg paper. The bank’s description of its new mission describes the rationale for its targets. This blog, by the bank’s chief economist Kaushik Basu, explains why shared prosperity ought to be a guiding principle for the institution.
