Growth,inequality, and poverty reduction in developing countries: Recent global evidence

The study presents comparative global evidence on the transformation of economic growth to poverty reduction in developing countries, with emphasis on the role of income inequality. The focus is on the period since the early-mid-1990s when growth in these countries as a group has been relatively strong, surpassing that of the advanced economies. Both regional and country-specific data are analyzed for the $1.25 and $2.50-level poverty headcount ratios using World Bank Povcalnet data. The study finds that on average income growth has been the major driving force behind both the declines and increases in poverty. The study, however, documents substantial regional and country differences that are masked by this ‘average’ dominant-growth story. While in the majority of countries, growth was the major factor behind falling or increasing poverty, inequality, nevertheless, played the crucial role in poverty behavior in a large number of countries. And, even in those countries where growth has been the main driver of poverty-reduction, further progress could have occurred under relatively favorable income distribution. For more efficient policymaking, therefore, idiosyncratic attributes of countries should be emphasized. In general, high initial levels of inequality limit the effectiveness of growth in reducing poverty while growing inequality increases poverty directly for a given level of growth. It would seem judicious, therefore, to accord special attention to reducing inequality in certain countries where income distribution is especially unfavorable. Unfortunately, the present study also points to the limited effects of growth and inequality-reducing policies in low-income countries.     

Financial development and poverty in developing countries: a causal analysis

This article empirically examines the possible causal links between financial development and poverty in developing countries. To this end, we apply a modified form of traditional Granger causality tests to suit the short times series that are available. We conclude that the evidence supports the hypothesis that in the period of the 1970s–1980s financial development, measured by liquid assets of the financial system as a share of GDP or by money and quasi money as a percentage of GDP, leads to the reduction of moderate poverty. These results do not appear for the period of the 1980s–1990s or when financial development is measured by the ratio of the value of credits granted by financial intermediaries to the private sector to GDP, whereas they seem to be strengthened by using summary measures of financial development. Likewise, our analysis does not show any evidence of Granger causality from poverty to financial development.     

Growth of developing countries and world interest rates

On the basis of aggregate data covering the period 1973–1982, this note argues that the rate of growth of non-oil developing countries is influenced significantly by the growth performance of industrial countries and by the level of the real rate of interest on world markets. At the same time, no evidence was found to support the hypothesis that the nominal rate of interest has an effect on growth in non-oil developing countries.     

Growth and export expansion in developing countries: Some empirical evidence

This paper analyzes the empirical relationship between economic growth and export expansion in developing countries as observed through an intercountry cross-section. Employing data from 55 middle income developing countries for the period 1960–1977, bivariate tests revealed significant positive associations between growth and various other economic variables including the growth of manufacturing output, investment, total exports, and manufacturing exports. A production function model was also specified and estimated with the cross-sectional data. The results indicated that export performance was important, along with capital formation, in explaining the intercountry variance in GDP growth rates during the 1960–1977 period.     

The economics of poverty in poor countries

This paper examines the links that have recently been studied between poverty, high fertility and undernourishment, on the one hand, and degradation of the local environmental-resource base and civic disconnection, on the other, in poor countries. An account is offered of a number of pathways involving positive feedbacks that create poverty traps, in which certain identifiable groups of people in an economy can get caught even when the economy in the aggregate experiences economic growth. The relevant policy implications are noted.     

Labor markets and productivity in developing countries

In middle-income countries, the informal sector often accounts for a substantial fraction of the urban labor force. We develop a general equilibrium model with matching frictions in the urban labor market, the possibility of self-employment in the informal sector, and scope for rural–urban migration. We investigate the effects of labor market institutions, different types of growth, and company taxes on labor market outcomes and aggregate productivity. We quantify these effects by calibrating the model to data for Mexico, and show that matching frictions can lead to a large informal sector when formal sector workers have substantial bargaining power.     

Elections and economic policy in developing countries

This paper explores the impact of elections on economic policies and governance in developing countries. We distinguish between a structural effect, which increases accountability, and a cyclical effect which may be disruptive. Since the effects are offsetting, neither can be analysed in isolation. We implement an econometric analysis on more than 80 developing countries using positive changes in the Country Policy and Institutional Assessment of the World Bank and the International Country Risk Guide as signalling improvements in economic policy and governance. We find that both structural and cyclical effects matter. The cyclical effect suggests that mid-term is the best moment for policy change. We investigate the structural effect by comparing different frequencies of elections. Except at the extremes, a higher frequency of elections improves both policy and governance net of any cyclical effect. The important exception to this benign net effect is if the electoral process is badly conducted. Badly conducted elections have no structural efficacy for policy improvement. A reasonable interpretation of our results is that honest elections increase accountability and thereby discipline governments to improve economic policy and governance, but that if candidates can win by fraud this chain is broken.
— Lisa Chauvet and Paul Collier     

The World Bank and the persistence of poverty in poor countries

William Easterly has written a book about why extensive development assistance over the course of decades failed to alleviate poverty in poor countries. As an economist at the World Bank, Easterly observed how resources and advice provided by the Bank failed to improve the lives of the poor in poor countries. Easterly considers different explanations for the development failures. He places the blame for persistence of poverty in poor countries on governments and political elites, who use their poor as hostages to personally benefit from aid resources and debt relief.     

The impact of unemployment on inequality and poverty in OECD countries

The purpose of this research is to examine the contribution of unemployment to income inequality and poverty in various OECD countries. These relationships have been explored using Luxembourg Income Study micro-data. Considerable differences across OECD countries are revealed through the use of within-household unemployment distributions. These differences help to explain most of the observed divergences in the relationship between unemployment and income distribution, in conjunction with the heterogeneous influence of social benefits on the economic position of the unemployed in these countries. A sub-group decomposition analysis corroborates the limited effect of unemployment on income distribution in most of the considered countries. However, it seems clear that the unemployed are among those with the highest risk of experiencing poverty.
JEL classification: D31, I32, J31.     

Age-differentiated minimum wages in developing countries

The fact that minimum wages seem especially binding for young workers has led some countries to adopt age-differentiated minimum wages. We develop a dynamic competitive two-sector labor market model where workers with heterogeneous initial skills gain productivity through experience. We compare two equally binding schemes of single and age-differentiated minimum wages, and find that although differentiated minimum wages result in a more equal distribution of income, such a scheme creates a more unequal distribution of wealth by forcing less skilled workers to remain longer in the uncovered sector. We also show that relaxing minimum wage solely for young workers reduces youth unemployment but harms the less skilled ones.     

Intertemporal consumer behaviour in developing countries

This paper explores aggregate consumption behaviour in four developing countries under the assumption that consumers' planning horizons do not extend over their expected lifetime. Under certain conditions, the resulting ‘moving planning horizon model’ suggests that changes in current income would exert considerably more influence over current consumer spending than is predicted by forward-looking theories of consumption which typically assume that consumers' planning horizons coincide with expected lifetime. Estimation of the model for the group of developing countries provides empirical support for the role of changes in current income in influencing the consumption process. The results also reveal that consumers are relatively short-sighted sinced the length of the planning period of consumers ranges from just over ten months. An important implication of these findings is that policy measures can be effective not only if they influence consumers' permanent incomes but also if they affect changes in current income.     

Vertical integration and investor protection in developing countries

The industrial organization of developing countries is characterized by the pervasive use of subcontracting arrangements among small, financially constrained firms. This paper asks whether vertical integration relaxes those financial constraints. It shows that vertical integration trades off the benefits of joint liability against the costs of rendering the supply chain more opaque to external investors. In contrast to the commonly held view that pervasive input and capital market imperfections are conducive to vertical integration, the model predicts that the motives for vertical integration are not necessarily higher in developing countries. In particular, vertical integration is more likely to arise at intermediate levels of investor protection and better contract enforcement with suppliers reduces vertical integration only if financial markets are sufficiently developed. Evidence supporting both predictions is discussed.     

Urban squatting and community organization in developing countries

It is estimated that up to 30–35 percent of the total urban population of the Third World (about 185 million people) live in squatter settlements. This paper presents, from an economic perspective of tenure choice under uncertainty, a unified and consistent theoretical framework of this phenomenon, which has heretofore been studied mainly by other social scientists. The model is able to explain why land invasions occur. Furthermore, it provides some insights as to why the number of squatters in an urban area depends on a squatter community's ability to form coalitions to fully protect its members' rights. It is shown in the paper that, if a community is successful in controlling its size, government efforts which are meant to reduce the number of squatters may lead to the opposite results. In particular, the imposition of heavier fines or the increase of government expenditures on eviction activity (threat campaigns, eviction in other jurisdictions, etc.) will likely lead to an increase in the optimal number of squatters, unless the decline in expected utility caused by these efforts is so great that squatting no longer becomes viable at any community size.     

Fiscal crisis and fiscal reform in developing countries

In recent years, policy-makers in developing countries haveresponded to crisis of macroeconomic instability with two setsof measures: conventional stabilisation policies and policiesof economic liberalisation. The fiscal implications of thisdouble agenda are set out, following three lines of enquiry.First, how can policies be kept consistent, when some liberalisationmeasures have large adverse fiscal consequences? Second, cana fiscal deficit be reduced without damaging the provision ofpublic services vital for growth and poverty alleviation? Finally,since lack of tax revenue is usually the binding constrainton government intervention, how can this most easily be relaxed?     

Integrating business and technology strategies in developing countries

In the present era of deregulation, privatization and increasing global market competition, most industrialists in developing countries have come to the realization that better technology is needed for the survival of both public and private sector enterprises. Therefore, they acknowledge that technological considerations must be properly incorporated into overall business strategies. However, in the absence of an established theory and due to lack of relevant data, they face enormous difficulties. This paper describes a simple framework for integrating business and technology strategies, particularly in the context of developing countries. Possible strategic mixes are identified by considering four commonly practiced business strategies, namely: price, value, niche and image leadership; and four evolving technology strategies, namely: technology leader, follower, exploiter and extender. Necessary considerations for technological capability development and technology strategy progression path are also discussed for different enterprise situations and development conditions.     

Transparency and central bank losses in developing countries

Recent evidence shows central banks suffering from losses in some developing countries. This is a surprise to economists and policymakers. At the same time, these banks are asked to conduct monetary policy within a more transparent framework. Therefore, this paper seeks to answer the following question: Would more transparency in developing countries suffering from central bank losses be beneficial?This paper shows that the cost constraints of conducting monetary policy, central bank losses, in both transparency and opacity alike is significant and affects positively the error of the private sector in expected inflation rate and the output gap. In a country suffering from central bank losses, the expected benefits of transparency and the existence of cost constraint move in two opposite directions. As a result, it is unwise for developing countries suffering from central bank losses to focus on transparency. Priority should be given to fixing monetary policy and to developing financial markets.     

Religiosity,income and wellbeing in developing countries

This study examines the relationship between religiosity, income and subjective wellbeing in a sample of developing countries using data from the World Values Survey Waves 2–6 (1990–2014). Beyond examining the effects of religiosity and income on subjective wellbeing separately and independently, we also examine how the interaction between religiosity and income affects wellbeing. Our results suggest that while both religiosity and income positively affect wellbeing, the effect of income on wellbeing is relatively stronger (quantitatively larger in size) than the effects of religiosity. Furthermore, we find evidence in favour of complementarity between religiosity and income which show stronger effects on wellbeing than the individual effects of income and religiosity.

     

Escaping the poverty trap in a developing rural economy

Abstract. In this paper, we examine the economic policies that might allow a developing rural economy to escape from the poverty trap characterized by a subsistence level of per capita consumption in the long run. In our model where labour is combined to land available in fixed quantity to produce a homogeneous good, saving could be made through only having children, the number of which is an endogenous decision. We provide conditions under which the economy runs into a poverty trap, and proceed to analyse the relevant policies in this case. We demonstrate that an escape from this poverty trap is possible through a suitable technology transfer, or an appropriate child‐rearing tax, but not with a foreign manufacturing sector, which increases only temporarily the labour income in this rural economy. JEL classification: J11, O11, O40     

Recent trends in trade among developing countries

The paper presents the early results of empirical work on trade among developing countries. The main conclusion is that non-fuel trade among developing countries, excluding capital surplus oil exporters, remained a remarkably stable share of their total trade between 1963 and 1977. This constancy does, however, conceal two interesting opposing trends: The share of manufactures exported to developing countries has been falling sharply, while that of non-fuel primary commodities has been rising, the latter largely because of the demands of the newly industrializing countries. Nevertheless, the dynamism of manufactures has meant that they make up an increasing share of trade among developing countries. Four particular points emerge from the evidence: (i) there is no obvious sign of a bias against trade among developing countries, except whatever effect their own commercial policies may have; (ii) the more inward-looking countries tend to send a higher proportion of their exports to other developing countries and regional integration strengthens this effect; (iii) exports of manufactures to developing countries are much more capital intensive than those to industrialized countries; and (iv) exports to developing country markets may not be the vital first stage for capital goods exports that is sometimes supposed.