Sustaining development and poverty reduction: Promoting growth where it counts

Abstract

Under the MDGs, poverty has been reduced but not eradicated. The post-2015 development plan is firming towards poverty eradication not merely to reduce it. One of the most widely held beliefs in development economics is that rapid and sustained economic growth is necessary for lifting living standards which in turn is necessary if poverty is to be eradicated. Debates on poverty alleviation and eradication have tended to focus on the best means of achieving or accelerating growth rates. This approach is reflective of the ‘trickle down’ theory which dominated development thinking in the 1950s and 1960s. More recently, the development community has shifted its focus from fostering any economic growth per se to achieving ‘shared growth’ – growth with a maximum pay-off in terms of poverty reduction. The increasing focus on the relevance of inclusive growth highlights the need to understand sectoral contribution to growth to provide insight into the formulation of sustainable national and global growth policies. We examine the relationship between the sectoral composition of economic growth and poverty reduction for the period 1987 to 2006 at a regional level for a cross section of developing countries. We used pooled cross section data with observation over time because of data limitations. Panel data estimation was employed because the characteristics of the data constitute that of panel data. It is necessary to highlight that the panel data set is unbalanced and unevenly spaced, with missing values arising in different years for different countries. While unbalanced panel estimations are able to be carried out with the econometric software at hand, many limitations arise, particularly concerning diagnostic testing. We provide a comparison of the estimated sectoral GDP elasticities of poverty and present evidence that growth in services is twice as effective as growth in both agriculture and industry in reducing absolute poverty. However, these results vary substantially across different income levels and across geographic regions. We maintain that while non-agricultural growth may induce substantial poverty declines by transitioning those marginally below the poverty line, it may fail to target those living in extreme or chronic poverty. Thus, if meaningful poverty reduction is to take place and become self-sustaining, broad-based growth in agriculture and rural economy still appears to be essential to poverty reduction policies. We argue that such a result warrants the attention of post-2015 development agencies and policy makers given the interrelationship between drivers of economic growth, job creation and poverty reduction.