Introduction Economic growth can benefit the poor both directly and indirectly
Economic growth can benefit the poor both directly and indirectly, this growth can be attained through human capital, physical capital and technology advancement (Besley and Burgess, 2003:7). Donaldson (2008:2140) states that more than one billion individuals still live on less than a dollar a day. A paper was released in March 2000 which stated that the income distribution increases one for one with overall growth, this papers overall data was based on a sample of eighty countries. This paper written by Dollar and Kraay has played a pivotal role in the discussion on poverty and economic growth as a whole. The following paper analyses the extent of which Dollar and Kraay’s paper can be used in policy focused on poverty reduction and the limitations for policy makers will be discussed.
Summary of Dollar and Kraay (2000):
Dollar and Kraay’s paper in essence looks at the relationship between the income of the poor and the overall income. According to Amman et al. (2002:4) Dollar and Kraay’s paper concluded that:
• The income of the poor increases one for one with overall growth and the impact of growth on the income of the poor is the same in poor nations and rich nations;
• When an economic crisis occurs, the decrease in the incomes of the poor is not more than relative;
• There has been no change in the poverty growth relationship in decades;
• Agreeing to foreign trade, good rule of law and fiscal restraint benefit an entire nation, whether rich or poor;
• Averting high inflation is best for the poor;
• Incomes of the poor are not influenced by municipal spending;
• No empirical proof supports the Kuznet’s hypothesis.
The summary of their findings explains that not only do they think growth plays an important role in poverty reduction but they also believe that there are other policies or rather more emphasis needs to be put on policies that can possibly reduce poverty.
Parker et al. (2007:177) states that the primary goal of development policy is poverty reduction. In most parts of the planet large amounts of people have to survive on a small income and have restricted access to basic needs. In an effort to combat poverty reduction policies focusing on infrastructure development can be very helpful (Parker et al., 2007:182).
According Kakwani et al. (2003:417) argues that poverty reduction can be achieved by economic growth and distribution of income. The problems related to poverty reduction have been of concerned since the early 1900s. Kakwani et al. (2003:419) also states that pro-poor growth is known as the growth which is most beneficial to the poor and aims at bettering their economic situation through economic growth, equality and infrastructure development.
Jalilian and Kirkpatrick (2002:9) argue that financial development also plays an important role in poverty reduction specifically in developing countries; this would be done by enhancing access of financial services to the poor which will improve their productivity and help them maintain more sustainable lives. Policy agendas that focus on aspects of poverty reduction and income distribution may lead to the improvement of economic growth and equity worldwide (Kakwani et al., 2003:418).
The extent that the Dollar and Kraay’s paper can be used in policies aimed at poverty reduction:
There are many policies which are aimed at poverty reduction across the globe. The Dollar and Kraay paper has been heavily criticized for numerous reasons which make it difficult to use it in any major policy objectives to reduce poverty. Amann et al. argued that (2006:6) some of the major criticisms is that the paper itself was lacking certain academic basics because the supposed relationship between economic growth and the income of the poor was not derived from any notional representations. Most of their empirical data was also questioned as to how it was derived and where the relevant values came from. Their view of what poverty is and it only taking the bottom quantile of the income distribution into consideration was seen as insufficient (Amann et al. 2006:6).
Dollar and Kraay’s paper can be used in the development of policies for the reduction of poverty. But the problem lies with the inequality that exists between the rich and the poor. Ravallion (2001:1806) states that with inequality, income increases occurring from growth will be more beneficial to the rich than they would be for the poor. The rich in this case keep getting richer and even with the increase the poor would still be considered poor which then becomes the limitation of Dollar and Kraay’s paper.
Cruz et al. (2015:1) argues that there needs to be more effort put into eliminating the disproportion in shared wealth especially in Africa where the focus should actually be an increase in incomes of the bottom 40% instead of a one to one increase in income. Cruz et al. (2015:23) goes on to say that the if the poor were to have an income increase that was greater than the mean income growth for the entire populace, then reduction of poverty would be more possible. The Dollar and Kraay paper clearly played an important role in the drafting of such policies which aim to reduce poverty.
Dollar and Kray (2002:218) found that a number of macroeconomic policies are also necessary for poverty reduction. Dollar and Kraay (2002:219) further emphasize that growth for them, benefits an entire society and not only the poor and that growth policies should be enhanced in order to try and reduce poverty.
Limitations of this finding for policy makers:
The main limitations occur when one considers rising inequality. According to Ravallion (2001:1807) the increase in inequality slows down the efforts of policies aimed at poverty reduction. Equality would be good for overall growth because the greater the amount of poor individuals in a country the lesser the rate growth (Ravallion, 2001:1807). According to Kakwani et al. (2003:418) another limitation of this paper are in the short run, considering that certain countries experience an increase in poverty during spells of positive growth.
The poor do benefit in rise in economic growth and their incomes may increase by a small margin, but this effect is nullified by the fact that the already wealthy become wealthier because of this one to one relationship. Ravallion and Datt (1999:4) stated that economic growth is not enough for poverty reduction. Ravallion and Datt base their argument on the notion that human resource development for the poor population is an essential element of an operative strategy for waging the war against poverty (Ravallion and Datt, 1999:5). Lübker et al. (2003:570) argue pro-growth macroeconomic policies are more beneficial to the poor since they increase their mean incomes with no major impact on the circulation of income, which may be the most problematic aspect of the Dollar and Kraay paper since it did not emphasis or consider such.