The Leadership program's customized approach means identifying needs and designing activities in consultation with the client. Client ownership means that the program enters at the request of the Head of State or Senior Minister, works with local steering groups, supports extensive background research using local consultants, and engages continuously with clients in the preparatory and delivery phases.
Types of interventions include: a case studies of international best practice; b learning seminars, including South-South exchange; c process-oriented practical pilots in selected sectors; d peer-to-peer knowledge sharing of relevant experience; e team Coaching at top levels on critical issues; and f twinning of regions facing similar challenges. ISO Q Each issue of OUTREACH focuses on a new topic and presents a range of viewpoints by renowned authors and specialists worldwide, using language that is accessible to a general reader.
Understanding Growth and Poverty : Theory, Policy, and Empirics
You can access the online version or sign up to receive a subscription by mail. The Global Forum discussed strategies, programs, and policies for sustainable growth and poverty reduction through the development of STI capacity. OUTREACH magazine highlights topics that were central to the discussions at the forum, such as infrastructure investment, education, STI local applications, commercialization of science, scaling up innovation, and more. The blog tries to bring together everything you want to know about poverty and growth, including knowledge, news, resources, tools, ideas and commentary on issues relating to the design, implementation, monitoring, and evaluation of poverty reduction policies and strategies.
Six-hundred participants have already graduated from the ASCI-WBI course and gone back into their home towns putting into practice what they have learned in a number of critical areas. The chapter then examines fiscal policies, treating expenditure and taxation policies in turn, before looking at the impact of fiscal policy on the business cycle, private investment, and inflation. The chapter concludes by investigating the ways fiscal policy can benefit the poor, primarily through government expenditure. Monetary and exchange-rate policies also play an important role in the economy.
After examining the nuts and bolts of monetary policy, chapter 5 explores the different forms, causes, and measures of inflation. We show that although a loose monetary policy can help the economy in the short run, it usually results in high and volatile inflation, the costs of which are typically borne most heavily by the poor. We also show that low inflation is good for long-term growth and for poverty reduction. Various exchange-rate policies are then examined, ranging from formal dollarization to free-floating exchange-rate regimes. The choice of regime depends.
The causal link between a well-functioning financial system and economic growth, as described in chapter 6, has been firmly established. The converse also holds: poor macroeconomic fundamentals, including imbalanced growth and high inflation, can hinder development of the financial system. While the link between financial development and income inequality remains less clear, recent empirical studies have found that financial development tends to reduce income inequality. Where financial markets remain underdeveloped, policy measures are needed to widen access of the poor to financial services—by strengthening institutional infrastructures, liberalizing markets, and fostering greater competition.
We describe how developing countries have progressively liberalized their financial systems in recent decades, freeing interest rates, improving legal and supervisory frameworks, and increasing transparency. Is development assistance effective in spurring growth and reducing poverty? Because the record is mixed, the scaling up of aid poses a daunting policy challenge for both developing countries and donors. For an understanding of how future aid flows might best be used, chapter 7 examines the international aid record from the s to the present, comparing trends in both official and private capital flows to developing countries.
Private flows have swelled in recent decades, while official aid dipped in the mids and began to recover only in before being imperiled again by the global economic crisis. If the Millennium Development Goals MDGs promulgated by the United Nations in are to come close to being met, it is important not only that aid be increased but also that it be made more effective. While the vast literature on the efficacy of aid is inconclusive, a key finding, one picked up by policy makers, is that aid works best in good policy environments. Recent literature also suggests that the type of aid matters— that is, not all aid should be aimed at achieving higher growth.
Recent research suggests that, generally, aid should be spent by the government over the long run, with the liquidity impact managed by the sale of foreign exchange by the central bank. This, of course, requires good coordination of fiscal and monetary policies. We then turn to a discussion of the unsustainable debt burden experienced by low-income countries beginning in the s and the response of the international financial community.
The chapter describes debt-relief programs, beginning with the first nonconcessional arrangements of the s and continuing through to the Heavily Indebted Poor Countries HIPC Initiative and the most recent Multilateral Debt Relief Initiative MDRI under which the debt burdens of the poorest developing countries have been written off in their entirety. The chapter ends with a discussion of the relative merits of development assistance and debt relief in the context of growth for developing countries.
In chapter 9, we investigate how developing countries except those in Sub-Saharan Africa have opened their economies to trade in recent decades. During the same period, flows of foreign direct investment to developing countries have intensified. Although the relationship between openness and inequality is inconclusive, the evidence suggests that trade is good for growth and that growth, in turn, is good for the poor. But to work best, the policies that a country uses to open itself to trade must be properly sequenced and coordinated.
Domestic policies aside, advanced countries have the power to greatly increase the benefits of agricultural trade to the developing world. They could do so by reducing the subsidies they provide to their farmers, which make it nearly impossible for developing-country producers to compete in important global agricultural markets. The monetary value of such subsidies dwarfs the aid provided to poor countries. The role of institutions and technology in promoting or discouraging growth is examined in chapter Institutions are much more than buildings and organizations.
They include the informal rules and norms that govern personal and social behavior, as well as the formal rules and norms that provide the predictability needed for societies to function. We focus on institutional quality, property rights, and governance. The empirical literature clearly. Likewise, technological development has been shown to increase economic growth, but debate abounds on whether it is endogenous internal or exogenous external technological change that drives the growth process.
It is well documented, however, that latecomers can leapfrog across several stages of development and that the channels of technology diffusion are many. Turning in chapter 11 to public policy in developing countries, we first examine the role of education in the lives of the poor and its implications for economic growth and poverty reduction. The chapter begins by noting the positive impact of education in stimulating economic growth and combating poverty, a benefit emphatically confirmed in empirical literature.
Gender inequality is also a particularly severe problem in education, with girls receiving less education than boys. A number of global initiatives have accorded high priority to improving education in developing countries. One of the MDGs, for example, is to achieve universal primary completion by While some poorer regions appear on track to achieve that goal, this is not true for most countries in Africa, the Middle East, and South Asia.
Many countries in these regions are not in a position to mobilize the resources needed to provide even universal primary education. We conclude the chapter by noting that, although the amount of aid devoted to education has increased in recent years, it still falls far short of what is needed. The disparity in health indicators across countries is still very wide. Corruption, mismanagement, weak administrations, and a shallow pool of financial resources make it difficult to stop diseases that are easily prevented in better environments.
At the same time, the widely acknowledged human and economic costs of poor health care in the developing world are being tackled at the international level. Health reforms adopted under national poverty-reduction strategies are being supported by donors, even as other forms of development assistance are scaled back. But even greater financial assistance is needed. The labor market is one of the main conduits through which economic growth can reduce poverty. Chapter 13 examines labor markets in developing countries.
Countries in which the labor force is large or growing quickly often choose a pattern of economic growth that provides jobs. This is understandable, as employment is the surest way out of poverty. But the cost of labor-friendly economic growth often results in low labor productivity; thus, labor-friendly growth can become self-limiting. That said, because the labor force is growing quickly in many developing countries, often accompanied by a shift away from agricultural employment, some form of labor-friendly growth may be called for if an increase in unemployment or an increase in so-called informal employment is to be avoided.
Other labor concerns highlighted in the chapter are unequal wages and marked differences in access between men and women to the labor market. Access to and ownership of land are particularly important for helping the poor move out of poverty. Owners of land have a greater incentive than nonowners to make their land more productive, and land can be used as collateral to raise funds for investment in greater productivity.
Chapter 14 examines constraints on access to and ownership of land in developing countries. It starts by examining how the history of land tenure in many developing countries prevented much of the population, particularly women, from gaining secure title to land. We go on to show how inequality in the distribution of land seriously affects three key aspects of economic development: institutional development, education, and financial development. A further legitimate role for government is the implementation of second-generation reforms that address insecurity of land rights through registration and titling.
The chapter ends on a cautionary note, indicating that, although such reforms have been successful in certain regions, including Latin America, it is not clear that they would be effective or are needed in every region, given the hold of traditional systems of informal tenure. Increasing productivity is a sure way to spur economic growth.
Productivity is defined as output growth the sum that is greater than the growth in inputs the parts. Chapter 15 focuses on innovation and technological absorption as critical for improving productivity. Although most developing countries have policies designed to encourage the adoption of technologies generated by advanced economies, our knowledge.
Entrepreneurship appears to be a key factor in promoting technological innovation and the commercialization of new technologies. Small and medium-size firms, not large companies, are still the center of technological innovation and adoption. At the same time, rapid urbanization puts stress on the provision of basic infrastructure services—water, sanitation, electricity, and roads. These include unemployment, poverty, slums, megacities, land management, and housing. To meet the MDGs, countries must address these issues.
Once optional, urban planning is now a necessity. Corruption, the topic of chapter 17, undermines growth and poverty reduction. The private sector and public employees share the blame. We focus on institutional and governance issues associated with the growth— and control—of corruption. Those factors include the rule of law, crime and violence, voice and accountability, and transparency. The right amount of regulation of products, labor markets, businesses, and financial institutions is important for economic performance, as noted in chapter Over- and underregulation are equally likely to strangle markets, depriving governments of tax revenues.
In almost all developing countries, the failure to find the right level of regulation has driven economic activity underground, swelling the so-called informal sector. Bureaucratic harassment, corruption, and poor provision of essential infrastructure contribute to this unhealthy phenomenon. Managing growth in the face of externally induced economic shocks is a continuous challenge for governments in the developing world. Middle East oil producers and many African countries that export primary commodities face a special challenge in responding to unpredictable dips and spikes in prices that make it difficult to maintain a consistent level of consumption at home and a steady pace of growth.
Chapter 19 traces the channels through which shocks travel around the world. Through the effect of shocks on commodity prices, interest rates, and exchange rates, policies in the industrial world often hit developing countries in a manner similar to natural disasters such as tsunamis, floods, and earthquakes. During global crises, we still must expect that policy responses will be largely improvised and institutional arrangements ad hoc. Policy makers will face domestic pressure to resort to short-term fixes and policies, such as protectionism, that have been proven to be self-defeating.
The maintenance of sound economic policies makes more sense, even during periods of crisis, and provides much greater opportunities for growth. Only 13 developing countries have been able to sustain high growth for 25 or more consecutive years. The economic policies common to those countries are discussed in chapter The essence of those policies is the maintenance of macroeconomic stability, which involves keeping inflation in check, fiscal deficits and debt ratios low, and savings and investment rates high. Other policies and practices common to the successful 13 were engagement with the global economy, reliance on markets, free movement of labor and capital, and strong political leadership.
At the firm level, efficiency was promoted by improving the investment climate to stimulate economic activity and sustain growth. For successful low-income countries, agricultural growth was also vital for reducing poverty and protecting overall growth. Economies rarely thrive in the throes of political instability, but that does not mean that stability will ignite or sustain growth.
If the political system is stable but inequitable and stultifying, the economy will function only within narrow limits. Chapter 20 provides a glimpse into systems where elites benefit at the expense of the poor, where collusion among large firms, politicians, and the bureaucracy perpetuates traditional power structures. Only sustained pressure from domestic advocacy groups and the international community can move elites in such countries to implement the reforms necessary to increase equity and growth.
Too often, growth has been based on the depletion of nonrenewable natural capital. Chapter 21 focuses on the problems of deforestation, high carbon emissions, and climate change. In such circumstances, it can be said that markets have failed in both a narrow sense, because those who reap benefits from actions that result in deforestation and pollution do not incur the costs of those actions, and a broad sense, because sooner or later growth based on the exploitation of natural resources will sputter, as stocks of those resources dwindle.
Ultimately, the problem. Global problems call for global solutions, with advanced and developing countries taking coordinated actions to dramatically reduce carbon emissions, combat deforestation, and encourage effective market mechanisms that recognize the full costs of economic transactions.
Public Finance for Poverty Reduction : Concepts and Case Studies from Africa and Latin America
The literature on growth and poverty is voluminous and still evolving. In the short chapter that concludes this volume, we attempt to distill the most important lessons from our experience with growth and poverty. We observe that poverty and inequality in income and assets are more persistent over time than is growth. Especially in Latin America, those conditions can be traced to historical factors, inherited economic structures, and particular resource endowments.
Yet even under such circumstances, targeting policies and programs toward the poor can help reduce social inequities while simultaneously enhancing growth. Moving toward a virtuous circle of growth and poverty reduction requires complementary policies in several areas. For instance, the poor have access only to substandard schools and receive public services of low quality. Poor regions are less likely than more prosperous regions to attract investments in infrastructure, which keeps them poor.
Because poor people can expect lower returns on their investments in education and training, they are less likely to make those investments. Social safety nets that reduce the risks of unemployment in poorer regions might induce more poor people to invest in education. There is ample evidence that history, in the form of initial conditions, shapes long-term growth, while short-term fluctuations in output growth are driven primarily by shocks, especially commodity booms and busts.
To weather the shocks, savings rates should be increased during booms, but it is unclear how best to accomplish that goal. To avoid the worst effects of downturns, expansionary fiscal policies that focus on essential infrastructure construction and on protecting the poor through social safety nets are appropriate.
In some countries, high levels of remittances from migrant workers have acted as private safety nets during downturns and helped to smooth consumption in the short term. In the long term, resilience depends on political stability and market-supporting institutions that protect property rights, ensure the rule of law, process financial transactions efficiently, invest in robust infrastructure, and encourage the formation of human capital through education. With such institutions in place, openness to free flows of goods, capital, and skilled labor will enhance growth by promoting global competition, spreading new technologies, and encouraging urbanization.
Although economic development. Looking ahead, rates of growth and poverty will be determined by the way nations use knowledge, technology, and energy in firms and households and by the effects of the warming climate on economic activities. Above all, the distribution of political and economic power within and among countries will determine the direction and dynamics of growth and development. The challenge today remains essentially that of the s: how to lift people out of the trap of low growth and high poverty.
We have traveled the world only to return home. To design effective policies and strategies to reduce poverty, it is critical to understand its characteristics in a given country or region. The techniques of poverty measurement can shed light on whether poverty is increasing or decreasing and on whether economic growth is benefiting the poor.
Poverty profiles of countries and regions can help governments identify the poor by region, level of education, ethnicity, gender, or form of employment. Figure 1. With good poverty data, the effects of government policies on the poor can be evaluated, and the forms of growth that have a better chance of benefiting the poor can be identified and promoted.
Poverty and Well-Being Measuring the characteristics and extent of poverty requires a definition of well-being, a concept that can be approached from many angles. Wellbeing can be defined as command over commodities or resources, as access to assets, or as the ability to function in society. Poverty, then, would be defined as a condition involving critical shortages of those Source: Jitsuchon and Richter , Note: Each dot represents 10, people who are poor, measured by the Poverty Headcount Ratio.
As a practical matter, the measurement of poverty focuses on assessing whether individuals and households have enough resources to meet their basic needs. Although commonly used techniques for measuring poverty focus on the monetary aspects of poverty, nonmonetary dimensions are important and should not be forgotten. The poor are seldom poor only in income. In addition to having little money, they are more likely than the nonpoor to be cold, hungry, malnourished, illiterate, sick, unemployed, alcoholic, depressed, or excluded from society.
Thus, poverty is not just a shortage of quantifiable resources but a more general state of vulnerability marked by a lack of access to health services and education, low self-confidence, and a sense of powerlessness. Generally defined as the risk associated with being poor or of falling deeper into poverty, vulnerability is a key component of well-being. It is only because these important concepts are difficult to measure that they are excluded from most poverty measures. But it is also possible to measure outcomes, such as rates of malnutrition.
At the community level, welfare can be evaluated by looking at life expectancy, infant mortality rates, or school enrollment. Properly viewed as complements to, rather than replacements for, the.
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In sum, there is no perfect measure of well-being or poverty. But that does not mean poverty should not be measured; rather, it argues for a degree of caution in our approach to poverty measures and for care in analyzing how the measures are constructed. That standard is often known as the poverty line. The position of that summary statistic relative to minimum acceptable standards must be determined. As noted, the broad concept of well-being forms the basis of our overall approach to poverty, but the most common way of measuring poverty focuses on economic welfare—in other words, the monetary aspects of poverty, as in figure 1.
This was an improvement on the figure of 1. Consumption- and Income-Based Measures of Welfare It is possible to measure household welfare by looking at household income as opposed to household expenditures , but several complications often make it a second choice for poverty analysts. For one thing, households may be reluctant to report income if they have engaged in tax evasion or have illegal earnings; generally, they are more willing to report what they have spent than what they have earned.
In addition, some types of income are not always easy to measure, such as farm income or changes in the value of assets for example, farm inventories or. In addition, the incomes of the poor often vary considerably over time, as, for example, in rural areas dependent on rain-fed agriculture. For these reasons, consumption-based measures of living standards are generally preferred to income-based measures.
Consumption is likely to be more stable than income, and consumption-based measures minimize the reporting problems noted above. Consumption as a measure of well-being is not free of complications, however. In order to make comparisons across households using consumption measures of poverty, it is necessary to calculate the value of durable goods owned by the household in the year of measurement, including both the depreciation of the item during the year and the interest cost of having money locked up in the item, as opposed to having that money in an interest-bearing account.
It is important to measure durable goods because we know that even some households that cannot afford adequate quantities of food spend some of their money on other items such as.
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Those items, too, represent very basic needs of the household and should be included in our poverty measures. The potential for error in computing the value and depreciation of each durable good that the household owns can be quite large. Housing must also be included in consumption; generally, its cost is estimated by calculating actual rent payments or, as in the case of owner-occupied houses, imputed rent payments what the household would have to pay in rent if it did not own its home.
The level of utility is derived from a list of goods at given prices. If one takes into account those prices and certain household characteristics such as the number of adults and young children in the household , the expenditure function will compute the amount of spending that is needed to reach a certain level of utility.
Accounting for Differences in Household Consumption Since households differ in size and composition, a simple comparison of aggregate welfare can mislead us about the well-being of the individuals in a given household. The most straightforward way of dealing with this problem is to convert from a measure of household consumption to a measure of individual consumption by dividing household expenditures by the number of people in the household.
This easy procedure does not take into consideration the fact that different individuals have different needs a young child typically needs less food than an adult, for example or that there are economies of scale in the consumption of nonfood items. We deal with this problem by assigning a system of weights, using an equivalence scale that measures the number of adult males to which the household is equivalent.
In this way, each member of the household counts as a fraction of an adult male. There is no consensus on an appropriate scale of equivalence, however, or on its usefulness in practice. Two methods are commonly used to deal with the problem. Another is to estimate an equivalence scale for the population by looking at the aggregate household consumption of various goods during a given survey period. The poverty line is obtained by specifying a bundle of goods and services. The poverty line represents a minimum standard required by an individual to fulfill his or her basic food and nonfood needs.
In practice, it makes sense to define more than one poverty line, because there are many ways to evaluate whether or not an individual or household is poor. A poverty line can be generated for all households in a given group and adjusted from household to household, taking into consideration the differences in prices that they face, as well as differences in their demographic composition.
For example, a small household in a rural area may face low housing costs and relatively modest food prices. Thus, its poverty line defined in money terms may be low compared to that of a large household living in a city, where housing tends to be more expensive and food prices may also be higher. A poverty profile undertaken in Cambodia in used an approach along the lines described above, constructing one poverty line for each of the three major regions in the country based on the prices prevailing in those regions.
Whether a household in a given region was poor was determined by comparing its expenditure per capita with the regional poverty line. Nominal poverty lines as opposed to relative ones can change over time, owing to changes in prices typically from inflation or revisions of the real poverty threshold. This raises the question of whether relative or absolute poverty lines should be used.
Relative poverty lines.
Understanding growth and poverty : theory, policy, and empirics
Focusing on the poorest segment of a given population at a given time enables the design of targeted programs geared toward that segment rather than toward those who are relatively better off. Relative poverty lines need to be tailored to the overall level of development of a country; they tend to be revised upward with increases in per capita consumption. As relative poverty lines are defined in relation to the overall income distribution within a country, comparison of relative poverty across countries may not be of any relevance.
Absolute poverty lines. An absolute poverty line is fixed over time, enabling poverty analysts to judge the impact of antipoverty policies over. Using improved price data from the latest round of the International Comparison Program at the World Bank, poverty estimates released in August show that about 1.
Table 1. Several important conceptual problems come up when working with absolute poverty lines. First, it is often difficult to agree on a standard of living to be measured by the poverty line. This implies that the commodity-based poverty line should rise as a country becomes more affluent, both in nominal terms and in terms of purchasing power, because the minimum level of resources needed to participate fully in society probably rises simultaneously.
In addition, it may be difficult to define the correct commodity value of the poverty line because both the size and demographic composition of households vary. A common way of approaching this is to begin with nutritional requirements. Two common methods are the food-energy intake FEI method and the cost-of-basic-needs approach.
The goal of the FEI is to find the level of consumption expenditure or income that allows the household to obtain enough food to meet its energy requirements. To do this, one must first determine the amount of food that is deemed adequate. Vietnam, for example, sets this value at 2, calories per day, while recognizing that different individuals may need more or less food. After the calorie level is set, food expenditure lines can be estimated by figuring the cost of obtaining the 2, calories each day.
There are important weaknesses to this approach. For example, the cost and availability of food differ from urban to rural areas, influencing the type of calories that people consume and making comparisons difficult. The cost-of-basic-needs approach uses a consumption bundle that is deemed adequate, including both food and nonfood components, and estimates the cost of the bundle for various subgroups, such as urban and rural residents or the populations of different regions.
The key difference in this approach is that the poverty line is measured in money, so it does not insist as with the FEI that each basic need must be met, only that it could be met. But this approach poses challenges of its own, among them how to measure the nonfood components of the poverty line, such as home heating needs countries in colder climates. Measures of Poverty—Summary Statistics Armed with information on per capita consumption and a poverty line, several aggregate measures of poverty can be computed: Headcount index.
By far the most widely used aggregate measure of poverty is the headcount index, which simply measures the proportion of the population that is counted as poor. The headcount index is simple to construct and easy to understand—both important qualities. But it has several weaknesses. For one, it does not capture the degree or depth of poverty. Thus, if a somewhat poor household were to give part of its wealth to a very poor household, the headcount index would remain unchanged, even though poverty as a whole would have dropped.
The easiest way to reduce poverty as measured by the headcount index would be to target benefits to people living just below the poverty line, because they are the ones who can be moved across the poverty line most cheaply, even though they are not the neediest people in the population. In addition, the headcount index expresses the percentage of individuals who are poor, and not the percentage of households.
When we use it, we make the critical assumption that all household members enjoy the same level of well-being, which may not be true. Poverty gap index. Another measure of poverty is the poverty gap index, which adds up the distances that poor people fall from the poverty line and expresses the sum as a percentage of the poverty line. The poverty gap index is thought of as a way to measure the total cost of bringing each poor member of a society up to the poverty line, but it depends for accuracy on exact information on each poor member of society—information that very few governments have.
For example, the poverty gap index may be the same for two countries, but the poor population in one of those countries may be composed of very poor people and others who are close to the poverty line, whereas in the other country the poor population may show very little variation in the degree of poverty. Despite these important differences, the poverty gap index of the two countries would be similar. The main advantages of the poverty gap index are a that it. Squared poverty gap. This is often described as a measure of the severity of poverty. While the poverty gap takes into account the distance separating the poor from the poverty line, the squared poverty gap uses the square of that distance.
Thus, the poverty gap is weighted by itself, giving more weight to the very poor. Poverty profiles. A poverty profile is a comprehensive poverty comparison that demonstrates how poverty varies across subgroups of society. A well-presented poverty profile can be immensely informative and useful in assessing how economic changes in a specific sector or region are likely to affect aggregate poverty, even if it uses relatively simple graphs and tables.
Regional poverty comparisons are particularly important for targeting development programs to poorer areas. The poverty study for Cambodia, for example, showed that headcount poverty rates were highest in the rural sector and lowest in Phnom Penh in Poverty profiles can also show access to services by households in different regions and shed light on the relationship between education levels in a household and the likelihood that a household will be poor.
Vulnerability While poverty is being reduced in many countries, detailed analysis of household data indicates that in most countries, many households live with incomes barely above the national poverty line. When a household is near the poverty line, that household is said to be vulnerable. A natural disaster, economic shock, or change in policy may affect its consumption level and cause it to fall below the poverty line. Poor delivery of public services increases the chance that the near-poor will fall into poverty. Collecting Data The main instruments for collecting data to support poverty analyses are household surveys.
It is important to understand the issues associated with setting up such surveys and interpreting the data they generate. Measures of poverty and inequality are always based on data that have been collected using samples of households. This has two important implications. First, it means, obviously, that measures of poverty and inequality are generated from a sample and not from the entire population. For that reason, they estimate the true state of the population with at least some degree of error, which should be acknowledged.
Survey data may also need to be weighted to get the right estimates of certain measures, such as mean income and poverty rates. This requirement implies that information about the sample frame essentially the design of the sample selected must be clearly documented. Coverage of goods and income sources in the survey should be comprehensive, extending over food and nonfood goods and encompassing all income sources. Consumption should cover monetary expenditures on goods and services, plus the monetary value of all consumption from income in kind, such as food produced on the family farm and the rental value of owner-occupied housing.
Similarly, the definition of income should include income in kind. Valuation of nonmarket untraded goods can be quite complicated. None of the available techniques is widely preferred. A second issue is how to compare households at similar consumption levels. The general approach to measuring across households is to examine demand patterns to reveal consumer preferences for various market goods, and then to study the minimum total expenditure that would be required for a consumer to achieve his or her actual utility level, but at predetermined and arbitrary reference prices and with demographics fixed over all the households.
This would give a monetary measure of utility, which could be deflated by a suitable price index and an equivalence scale. Ideally, one should not rely solely on a household-level survey in making interpersonal comparisons of welfare. A separate community survey done at the same time as the household interviews, and possibly by the same interviewers can provide useful supplementary data on the local prices of a range of goods and local public services.
By matching these to the household data, one can greatly improve the accuracy and coverage of household welfare assessments. The LSMS surveys ask respondents about a wide variety of topics, not just demographic characteristics or other narrow issues. These surveys also include a household questionnaire that often runs to pages or more and that can be adapted to the needs of each country.
A related community questionnaire asks community leaders teachers, health workers, village officials for information about the whole community, such as the number of clinics, access to schools, tax collection, demographic data,. Another part of the LSMS is a price questionnaire, which collects information about a large number of commodity prices in each community where the survey is undertaken. This is useful because it allows analysts to correct for differences in prices by region and over time.
Household Surveys and National Accounts What is the best way of measuring whether or not economic growth is benefiting the poor? In recent years, that question has generated lively debate. The central issue is how to assess whether a unit of growth increases the income or consumption of the poor by at least as much as it does for the economy as a whole. Studies from the s showed that in many cases, economic growth did not reduce poverty as much as expected, although there was no evidence that it increased inequality either. The main poverty-measurement issues revolve around the use of data from the household budget survey HBS versus data from national accounts the topic of the next chapter in assessing consumption levels, and how to deal with biases that may occur in the HBS data.
There is strong evidence that rich households are less likely to comply with HBS reporting, for a variety of reasons, perhaps to conceal income or consumption.
Poverty-growth-Inequality Triangle: The Case of Indonesia
The result is that upper incomes are underrepresented in the HBS. By contrast, national accounts will pick up the transactions of upper-income households through key economic aggregates. Thus, average consumption as measured by national accounts tends to be higher than average consumption as revealed in the HBS data. But because the HBS instruments are better at capturing consumption that takes place in the informal sector, many argue that the HBS data more accurately reflect the consumption of the poor, even if national accounts provide a more accurate measure of the consumption of the population as a whole.
This debate is particularly important for countries undergoing high rates of economic growth, but the issues are relevant for other countries as well. Conclusion Aggregate poverty measures are a prerequisite for any study of how economic policies affect the poor. Arriving at accurate measures is difficult, however, because poverty is multifaceted. While the nonmonetary aspects of poverty such as political voice, access to health and education, and so on are critical, the monetary aspects lend themselves more easily.
To that end, fairly narrow indicators of welfare based on individual household consumption are generally used to measure poverty. These are compared with a minimum standard of that indicator, often known as the poverty line. By comparing the indicators with the standard, economists generate simple summary statistics—such as the headcount index, poverty gap index, and squared poverty index—to provide a broad overall measure of poverty. Macroeconomic growth and household microeconomic perspectives are both important for poverty reduction. The developing countries of East Asia have been more successful in reducing poverty than most other regions because of policies that promoted widespread education, trade, and infrastructure investment.
Note 1. Bibliography Chen, S. Jitsuchon, S. Ravallion, M. World Development Report Poverty. Washington, DC: World Bank. Oxford: Oxford University Press. World Development Indicators. Global Monitoring Report. Measuring poverty is only the first step toward creating pro-poor economic policies. Macroeconomics explains changes in these variables and guides policy makers in their pursuit of economic objectives such as economic growth and smooth business cycles, the central concerns of macroeconomics. The system of national accounts provides a framework in which macroeconomic data can be compiled and used for economic analysis.
This chapter examines how economic growth is measured by identifying the components of growth and examining how these components relate to one another within the national accounts framework. Extensions to the national accounts in the form of environmental accounts, informal sector accounts, happiness, and national well-being are also briefly discussed. Macroeconomic Sectors In macroeconomics, the economy is divided into five sectors—households, enterprises, the financial sector, the government, and the rest of the world.
They may also work as producers by forming unincorporated enterprises. They make decisions on how much to consume, how much to save, and how much to invest in financial markets. They make decisions about production and investment. It includes the banking system and other financial institutions such as mutual funds, credit unions, pension funds, and insurance companies. Government spending excludes transfers of government receipts to households. The circular flow of income, expenditure, and financing captures the important relationships among the five economic sectors and the factor markets for labor, land, and capital figure 2.
Macroeconomic Concepts Arising from the interaction and behavior of the economic sectors are certain key macroeconomic concepts that play a central role in macroeconomic analysis. These are defined as follows in the framework of the system of national accounts. This measure suffers, however, from double counting, as when the value of wheat is counted first in the production of bread.
The concept of value added provides a way around this problem. A microchip bought by a computer company and used in the production of its computers is an intermediate good because the chip is ultimately purchased as part of a final good, the computer. Value added also distinguishes between market output and nonmarket output, which includes subsistence farming and owner-occupied housing. Intermediate consumption refers to inputs into production.
Final consumption refers to goods and services— both imported and domestically produced—used by households and the government. To return to the computer example: a microchip purchase by a computer maker is intermediate consumption; a computer purchase by a household is final consumption. The same computer, purchased by an enterprise, is investment; purchased by a government, it is government expenditure.
It measures the value of the final goods and services in an economy. To ensure that total output is measured accurately, goods and services produced in a specific year must be counted only once. Most products go through several production stages before reaching the market and, thus, may be bought and sold several times.
To avoid multiple counting of goods, which would exaggerate the value of. Gross investment gross capital formation refers to additions to the physical stock of capital. Depreciation, sometimes called the consumption of capital, reflects natural wear and tear over time. It is used to differentiate net from gross investment. Net investment is gross investment minus depreciation. Net exports are the value of exports of goods and services minus the value of imports of goods and services. The difference measures the impact of foreign trade on aggregate demand the total demand for goods and services in an economy and on GDP total output.
Absorption, or domestic aggregate demand, is total final consumption by the sectors including government plus gross investment. If real GDP rises for a given year, more products and services were produced during that year. Higher production usually, but not always, means higher living standards.
There are cases in which higher real GDP does not lead to a better standard of living—for example, where growth creates problems of environmental degradation, imbalances between work and other aspects of life, and income inequality. But, as we will see in later chapters, a large change in real GDP, or, simply, greater economic growth, is the best measure of poverty alleviation in developing countries.
Since output cannot be produced without inputs, the expenditures that make up GDP are closely linked to the employment of labor, capital, and other factors of production. Thus, GDP can be defined. They yield equivalent results, once statistical discrepancies are resolved. The production approach. The expenditure approach. Earlier we identified five economic sectors: households, enterprises, the financial sector, the government, and the rest of the world. The expenditure approach to GDP measures the spending by households, enterprises, government, and the rest of the world on final goods and services.
The aggregates are defined as consumption C by government and households, investment I or gross private domestic spending by enterprises, and net exports or exports X minus imports M. A hypothetical example of the expenditure approach to GDP is depicted in table 2. The income approach. GDP also can be measured as the sum of the incomes generated by resident producers. This is the largest income category, comprising primarily wages and salaries paid by businesses and government to suppliers of labor. It also includes wages and salary supplements such as social insurance, pension fund contributions, and health care paid by employers on behalf of their workers.
Rents consist of income payments received by households and businesses that own and therefore supply property resources. The rental income is what remains after depreciation is subtracted from gross rental revenues. Interest is the money paid by private businesses to suppliers of capital. It includes interest on savings deposits. Firms treat these as costs of production. They are added to the prices of products sold. Subsidies received by the firm are subtracted from the prices of products sold.
To isolate changes in physical output over time, we differentiate between nominal and real GDP and deflate nominal GDP by an overall price index called the implicit GDP deflator. Nominal GDP measures the value of output of the economy at current prices. Although not an ideal measure of living standards or real income, real GDP is the most widely used measure of real income growth. It is useful in capturing real output growth. The index has a value of in the base year. Thus, the percentage change in the GDP deflator measures the rate of price increases for all goods and services in the economy.
First, GDP refers to production that takes place within an economy. It includes the output of domestically owned corporations in the country but not abroad and of foreign-owned corporations operating in the economy. Second, GDP includes depreciation. GNI and gross national disposable income. GNI includes income generated abroad and paid to residents but excludes income generated domestically and paid to nonresidents. Examples of factor incomes are a capital income, which includes dividends on direct investment and interest on external borrowing or lending; b labor income of migrant and seasonal workers; and c service income on land, building rentals, and royalties.
But net income from abroad need not be related to factors of production. Gross national product. Neither allows us to differentiate between the nationality of producers and the location of production. To do so, we need the concept of GNP. GNP refers to the goods and services produced by national corporations in the country, plus goods and services produced by national corporations in other countries. In practice, depreciation at the level of the entire economy is difficult to measure precisely and is measured with some lag. Thus, GDP is the preferred aggregate for measuring total output, even though it may overestimate production.
GDP allows the comparison of economic data across countries. For meaningful comparisons, the GDP of each country must be expressed in terms of a common unit, such as the U.
Understanding Growth and Poverty : Theory, Policy, and Empirics
The unit may be nominal or constant real. Adjusting GDP and GDP per capita to arrive at purchasing power parity PPP also facilitates comparison across countries, as the typical consumption bundle tends to be more expensive in richer countries, rendering comparison with poorer countries less meaningful.
The Business Cycle The economic system traditionally cycles through booms and busts, a movement known as the business cycle. The purpose of macroeconomic policy is to smooth out the business cycle by balancing growth, unemployment, and inflation. Policies that reduce unemployment might lead to a rise in inflation, whereas restraining inflation may prevent growth in jobs, at least in the short run. Thus, there is often a political struggle over inflation and unemployment levels. The black line in figure 2. When we look at the GDP growth rate, we notice that it reaches maximum and minimum points peaks and troughs with some degree of regularity.
The peak is the point at which business activity has reached a temporary maximum point A in figure 2. The economy is at full. Prices may rise during this phase. The peak may be followed by a period of decline in total output, income, employment, and trade lasting at least six months. This is known as a recession point C in figure 2.
During the recession, activity in many sectors of the economy contracts, but prices are unlikely to fall unless the recession is severe and prolonged, as in a depression. The trough of the slowdown is the phase in which output and employment reach their lowest levels point B in figure 2. The trough may be short or long. In the phase of recovery, or expansion, output and employment increase toward full employment.
As recovery intensifies, prices may begin to rise before full employment is reached and before production has risen to full capacity. Economic developments are typically described in terms of movements of variables that are related in some way to output, such as GDP, GNP, growth, employment, unemployment, prices, job creation, interest rates, housing, and consumption.
Some variables, such as consumption and imports, follow a cycle similar to that of GDP—when GDP is growing faster, these variables also grow faster, and vice versa. These variables are said to be procyclical. Other variables move in the opposite direction and are said to be countercyclical.