Poverty and Shared Prosperity 2016: Part 5

It’s day 5 of my series on the World Bank’s Poverty and Shared Prosperity report. Let’s dig in.

Chapter 5 of the report brings us to Reductions in Inequality: A Country Perspective. This chapter studies five countries, so chosen because of success in fighting extreme poverty and inequality and also because they have disparate characteristics that mean their successes are not all attributable to a handful of common factors. Those countries are Brazil, Cambodia, Mali, Peru, and Tanzania.

One of the first conclusions drawn from the performance of these five countries is that good macroeconomic policies are essential to success. This chapter seeks to answer the question of why some countries have performed better than others–what did the better-performing countries do that the others did not? It is here that we would hope to learn strategies which may be applicable to countries who still have a lot of progress left to make.

Each of these five countries has had a substantial shared prosperity premium, meaning the bottom 40% of earners have seen more gains than the top 60% over the past several years. Along with this shared prosperity is a narrowing of income inequality, too.

An interesting point raised is that reducing inequality and improving economic growth don’t necessarily translate into political or civil stability. Mali is cited as an example here: Mali was one of the greatest success stories in reducing its income inequality and extreme poverty over the period studied, but this did not stop the emergence of armed conflict in 2012, which has since produced a number of setbacks for the country. The lesson here is that economic progress alone cannot guarantee long-term stability, particularly when various political problems and conflicts are left unresolved for decades. A country’s economy can grow in spite of those problems, but such issues ultimately threaten that economic progress when they go unaddressed for too long.

Brazil

While Brazil still suffers high levels of inequality, it has been dramatically reduced over the past several years in form of major gains to the bottom 40% of the population. What worked here? The report cites a number of factors:

  • A new constitution in 1988 guaranteed a number of basic rights, redefining the government’s obligations to the people.
  • Free public education and free universal healthcare were major planks of this constitutional reform.
  • Education reforms were key to creating a better-developed labor force.
  • Better fiscal policy including management of inflation targets reduced market volatility.
  • As a major commodity exporter, Brazil benefited hugely from high commodity prices.
  • The wage gap between skilled and unskilled workers fell dramatically.
  • Basic infrastructure like electricity was expanded throughout the country at public expense.
  • Targeted cash transfers to the poor helped boost incomes.

With the stage set by early government reforms, commitments to those reforms along with favorable external conditions led to significant erosions of both poverty and income inequality. Not bad! (It is worth noting that Brazil has had rather more trouble since 2013, though. We may not know until the next report what effect this has had on poverty and inequality in that country.)

Cambodia

Cambodia has enjoyed tremendous economic growth since 2000, and it is a growth that most of the population–including the poorest–have been able to share in. This has been especially important because Cambodia’s population is largely rural, and as we know by now, rural populations have high rates of poverty compared to urban dwellers.

Factors cited as aiding Cambodia’s improvement:

  • Steady, sensible policymaking.
  • Countercyclical government investment to reduce the shocks of recessions.
  • Fiscal deficit management–keeping government spending under control.
  • Low food and fuel prices.
  • Expansion in tourism, garment exports, and real estate have fueled growth.
  • Government investment in infrastructure.
  • Rising rice prices boosted incomes for agricultural workers.

There is some bad news, though. The labor force is larger than the country’s economy can really absorb, and the garment export industry–a mainstay of the Cambodian economy–is sagging somewhat. Infrastructure is also not being upgraded and expanded rapidly enough to meet demand or attract new investment. Safety nets are also inadequate and not available to enough citizens, which further limits the economy’s growth potential.

So, while the overall news is good, it appears that Cambodia is reaching a limit in what its current growth strategies can accomplish. New methods (and a lot of investment) will likely be needed in the near future.

Mali

Mali was one of the 15 poorest countries in the world in 2014, so it is an outlier among the case studies. It measures poorly on almost every indicator available. About half the population lives in extreme poverty of less than $1.90 US per day. The government’s inefficacy at improving the lot of Mali’s citizens boils down to various forms of corruption. The country’s elites play musical chairs with government positions and handle most conflicts by simply buying people off rather than addressing festering political issues. As a result, the country lacks stable, accountable institutions that act in the public interest. The report suggests that the government of Mali had almost nothing to do with the country’s record inequality reductions. The best that could be said for the government is that it more or less stayed out of the way.

Since it wasn’t the government, what was responsible for Mali’s progress?

  • Structural reforms that began in the 1980s reduced the government’s influence over markets.
  • Political stability, which lasted up until recently, allowed for infrastructure expansions.
  • GDP growth stabilized in the 2000s, likely a result of political stability in that time period.
  • Cereal production increased substantially, which is thought to be responsible for much of Mali’s economic growth in that period.
  • Remittances from Malians living in France had a noticeable effect on incomes in Mali.
  • Though the government is largely ineffective, educational improvements were seen in Mali that contributed to poverty reduction.
  • Good weather, rising food prices, and strong demand for crops that are readily produced in Mali are behind much of the country’s progress.

Unfortunately, recent armed conflict in Mali has probably undone some of this forward movement. It will be interesting to see what the next report shows in this regard.

Peru

The report describes Peru’s growth from 2001 to 2014 as “unprecedented.” A number of favorable economic circumstances as well as targeted government policies are behind this surge. Among them:

  • Structural reforms in the 1990s which liberalized markets and reduced regulation.
  • More flexible exchange rates.
  • Privatization of state-owned companies.
  • Control of fiscal policy was handed to a newly-independent central bank.
  • High commodity prices attracted foreign investment.
  • High urbanization rates boosted the informal economy in the cities.
  • Industrial agriculture and the exports of its products were a major component.
  • Increased educational attainment improved labor incomes.

Despite this growth, Peru has a stubbornly high level of informal employment–around 70%–mostly due to restrictive labor laws surrounding dismissal policies and nonwage costs. Even so, the informal economy saw massive gains, as well.

Notably, Peru spends very little on social programs, and much less than its Latin American peers, although it has made efforts in recent years to implement programs aimed at helping the poor. Educational attainment has improved, but the quality of Peru’s schools is lacking–its students consistently rank low in OECD measures. The report notes that progress in Peru is slowing, quite possibly showing the limitations of Peru’s current policies.

Tanzania

The last case study is Tanzania. This is a country that has seen steady but impressive poverty and inequality reductions through 2014. Unlike the other case studies, where such changes are mainly due to economic growth, in Tanzania it appears that redistribution of income is the primary driver of shrinking poverty and inequality. The report notes the following factors:

  • Transition from state-led to market-driven economy.
  • Opening up to foreign investment.
  • Reforms in the 1990s that encouraged export growth.
  • Inflation and foreign exchange rate controls.
  • Overall diversification of the economy, though this is still in progress.

As noted, however, growth was not enough, and this is attributed to weak market institutions, low productivity, and an overreliance on agriculture. Tanzania makes heavy use of progressive taxes and other measures which are designed to capture more tax income from top earners in order to fund social services that benefit the poor.

As the report notes, a handful of countries cannot represent the entire world. But what is shown here is that there is no one-size-fits-all solution to bring down poverty and inequality. Even so, it is clear that focusing on basic social services like education and healthcare produce positive growth dividends well into the future. The government’s role as a promoter of economic activity is also on display here. But excessive regulation and inept management can be a hindrance, too. Good fiscal policy that keeps inflation down appears to be important, but so does infrastructure investment. Cash transfer programs, when well-targeted, can do a lot to alleviate poverty and inequality. Management of labor markets also shows up as a key variable, which means the government has a valuable role in ensuring the labor force is dynamic, possessed of abundant opportunities, and able to adapt to changing circumstances.

Since I didn’t quite finish the report this week, I’ll get to Chapter 6 on Monday, which examines specific policies. Can’t wait for that one!

Photo by Rennett Stowe

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James
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Poverty and Shared Prosperity 2016: Part 5

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