This paper reviews the empirical evidence on the existence of poverty traps, understood as self-reinforcing mechanisms through which poor individuals or countries remain poor. Poverty traps, understood as self-reinforcing mechanisms through which poor individuals or countries remain poor, have captured the interest of many development policy makers, because poverty traps provide a theoretically coherent explanation for persistent poverty. They also suggest that temporary policy interventions may have long-term effects on poverty. However, a review of the reduced-form empirical evidence suggests that truly stagnant incomes of the sort predicted by standard models of poverty traps are in fact quite rare. Read the entire paper here.
The G20 Ministers of Finance and Central Bank Governors met in Sydney over the past weekend. An important outcome of the meeting is a commitment to lift G20’s collective GDP (which accounts for about 85 percent of world GDP) by more than 2 percent above the trajectory implied by current policies over the coming five years. This will amount to over US$2 trillion more in real terms. The higher growth would help generate significant additional jobs.
The targeted increase of more than 2 percent is based on a report prepared by the IMF with inputs from the OECD and the World Bank Group (WBG). The WBG contributions were prepared by a team drawn from various units and led by the Development Economics Vice Presidency. The report finds that with a feasible set of policy reforms, an increase in growth of that order of magnitude is achievable.
India has covered a long distance in what seems like a short time. Once proudly reckoned as one of the BRICS countries, it is now making frequent headlines in the international financial press as one of the financially fragile countries (fragile 5, fragile 8, edgy eight etc.). Like many other emerging markets in the world, India is feeling the pinch of the global liquidity retrenchment and rebalancing on its exchange rate and capital flows. Several observers have rationalized the investors’ behavior on account of the hard data on the Indian economy: growth has decelerated (from 8.9 % two years ago to 4.5 percent in fiscal year 2013), current account deficit is reigning high, inflation remains stubbornly high, and savings and investment rates have been falling. And all of this is happening amidst an upcoming national election, when elections anywhere invariably are associated with political and economic uncertainty.
What would it take for India to regain its place in a more revered acronym soon, rather than a less flattering fragile ‘n’ ensemble?
Much confusion has arisen in policy debates in India about whether or not growth has helped the poor; if yes, how much and over which time period; and whether growth is leaving certain social and religious groups behind. There remains deep skepticism on the part of NGOs and journalists that growth has been good for groups that were disadvantaged over long periods of time in the past.
Arvind Panagariya and I decided to investigate these claims – see here and here. We ask simple questions relating to the evolution of poverty in the post-reform era in India. How have poverty levels changed over the last few decades? We scrutinize changes across 6 different dimensions: (1) over time, (2) across states, (3) across rural and urban regions, (4) across social groups, (5) across religious groups, and (6) using different poverty lines. We find no basis whatsoever for claims that growth in India has left disadvantaged communities behind.
Much of the G20’s agenda following the global financial crisis has been focused on crisis response—on short-term crisis management and recovery. In the aftermath of a major crisis, economic stabilization of course is the first order of business. And the G20 has done reasonably well in that respect. But economic stabilization alone will not restore strong and sustained growth, as global growth faces deeper structural challenges.
In advanced economies, some of the structural weaknesses have accumulated over time, such as the labor market rigidities in Europe, the deficiencies in tax and expenditure structures and associated fiscal problems in a broad range of advanced economies, including the US, and the challenges arising from ageing populations. The global financial crisis has added to these challenges by causing supply-side disruptions that lower potential growth, including the destruction of capital stock, financial sector dislocations, and increases in structural unemployment—as well as adding to the fiscal woes. Challenges also arise from a changing pattern of competitiveness and comparative advantage as emerging economies increasingly penetrate global production and trade. So future growth in advanced economies will require not just supporting a recovery of demand but also a reallocation of resources to new sources of growth—new products, new services, new jobs.
Incomes in the poorest two quintiles on average increase at the same rate as overall average incomes, according to a new working paper by David Dollar (Brookings Institution), Tatjana Kleineberg and Aart Kraay. In a global dataset spanning 118 countries over the past four decades, changes in the share of income of the poorest quintiles are generally small and uncorrelated with changes in average income. The variation in changes in quintile shares is also small relative to the variation in growth in average incomes, implying that the latter accounts for most of the variation in income growth in the poorest quintiles. These findings hold across most regions and time periods, as well as conditional on a variety of country-level factors that may matter for growth and inequality changes. This evidence confirms the central importance of economic growth for poverty reduction and illustrates the difficulty of identifying specific macroeconomic policies that are significantly associated with the relative growth rates of those in the poorest quintiles. This reprise of Dollar and Kraay's earlier work also looks at the World Bank's new "shared prosperity" goal by considering the income growth rates of the poorest 40% of the population in each country in addition to looking at the poorest 20%.
'Why is China Ahead of India? Implications for Europe and the US,' was the topic of a talk yesterday at the World Bank by Nobel winner Amartya Sen which was chaired by Kaushik Basu. In the span of just under two hours, Sen managed to pinpoint India's main Achilles Heel (primarily related to the low overall quality of education, poor health care and skewed energy and other subsidies), while weaving in references to Kido Takayoshi, Mao Zedong, David Hume, Mahatma Gandhi, Adam Smith, Jon Stuart Mill, Milton Friedman, Keynes, Marx and other thinkers and influencers.
Amartya's talk coincided with the publication of a New York Times op ed titled 'Why India Trails China' in which he stressed that one cannot wait to fix health and education only after reaching some modicum of overall prosperity. Indeed, proper health and education, which foster human capabilities, are an essential precondition to sustainable growth and the ability to compete successfully in an integrated world. India still needs to take these East Asian lessons fully on board.
Following is the trancscript of Kaushik Basu's interview with CNBC-TV18, India, which first appeared on www.moneycontrol.com.
In an interview to CNBC-TV18, Kaushik Basu, chief economist, World Bank said the growth situation has to be taken seriously. "I do believe that, for India, there has to be all focus on growth."
Despite the fact that compared to the rest of the world, India is doing well, he said, it has the potential to get right back to 8.5 percent growth. "We have to put all hands on growth and try to get it back again up as quickly as possible," he added.
Q: You have been appointed as World Bank’s chief economist. So, the view from the inside has now changed to the view from the outside, has not it?
A: A little bit. Three months ago, I moved from the heart of Indian policymaking to seeing it from outside.
More than ten years ago Ronald Inglehart, of the University of Michigan, and his team at the World Values Survey asked thousands of respondents around the world to rate their views, on a scale of 1 to 10, on whether they felt inequality in their countries should go up or down. The way they phrased the question was that 1 corresponded to full agreement with the statement that “incomes should be made more equal”, whereas 10 stood for “we need larger income differences as incentives for individual effort”.
This is the central message of a report World Bank staff prepared as an input to the G20 Los Cabos summit held from June 18-19. The summit comes at a precarious time for the world economy. The Euro Area is facing a relapse into recession, with potentially large losses of output with global repercussions if current risks to stability and growth are not addressed forcefully. Recovery in other advanced economies is weak and faltering. Growth is also slowing in emerging economies that have been the drivers of global growth in recent years. Against this background, the Bank report, entitled Restoring and Sustaining Growth, conveys the following main messages: