Do we even know what affects growth and poverty?

Don’t we know that all that matters for reducing poverty is growth, especially after China? And therefore we development economists should focus on the things that make growth happen: Macro policy and creating the right institutional environment. And not bother with the micro evidence…

No, no, and, as the expression goes, no. Every step in that syllogism is wrong, and, I will argue … each step is probably more obviously wrong than the previous one.

Abhijit Banerjee

It is rather ironic that just as the annual meeting of the ADB convened in Manila to discuss the “Asian century” emphasizing the role of the region in propping up the global economy that a survey by the Social Weather Station on self-reported poverty showed that a majority of Filipinos (55% in the first quarter of 2012 compared to 45% in the previous quarter) still considered themselves poor. Business leaders and policymakers seemed unflustered though as they expressed confidence in our long run prospects for growth and development.

After more than sixty years of working with both bilateral and multilateral aid agencies as well as non-governmental organizations, you would think that a good understanding of the links between growth and poverty reduction would exist. Unfortunately, there is strikingly very little we know based on the evidence that is available.

At the very least, all that we do know is that the so-called trade-off between growth and poverty reduction does not hold. From cross country analysis, we find that fast growing countries tend to see poverty decline. But that is about it. We do not know which causes which. Is it growth that reduces poverty or does poverty reduction provide the initial conditions for growth to occur?

To be clear, we don’t know if: (a) countries that grow faster, reduce their levels of poverty quicker (growth reduces poverty), (b) countries that reduce poverty subsequently grow faster (poverty reduction causes growth), or (c) growth without poverty reduction becomes unsustainable politically and therefore leads to cases of growth interrupted (both growth and poverty reduction have to occur simultaneously).

The previous government of the Philippines for instance spent the better part of the last decade focusing on growth through public spending and foreign investments. The incidence of poverty however did not decline which led to the pilot-testing of a conditional cash grants program to indigent households near the end of its second term of office. Its political difficulties stemmed from another source: perceptions of illegitimacy in the way it had acquired and held on to power.

The subsequent government has placed a greater emphasis on fixing perceived areas of corruption while rolling out the conditional cash grants program of its predecessor, but has found not only growth to have slowed, but (self-reported) poverty to have risen as well, at least at the onset.

This to-ing and fro-ing from one policy agenda to another demonstrates why it is so important to know the answer to the question how are growth and poverty related. Otherwise we could be wasting much of our time and resources promoting one type of reform when in fact we should be promoting another.

We know precious little about what promotes growth to begin with. It would be a shame investing so much in it (getting an investment grade credit rating for instance through fiscal austerity) when what we should be doing is throw everything we’ve got at something else.

It doesn’t help that what we thought we knew has been subsequently disproven or found to be flawed. For example, back in the 90s we were told that growth (or the lack of it) was mostly explained by adequate (or inadequate) levels of savings and investment in physical infrastructure, human capital and population. It turns out those factors only account for about a third of the growth. The rest remains unexplained.

The implications of this are that even if the government were able to take advantage of the fact that for once in our nation’s history we are no longer a net debtor, but a net creditor nation, and competently implement the roll-out of its public private partnerships, its education and health reforms and some variation of a reproductive health program, growth of the kind that it hopes for would still not be guaranteed.

If we were to compile all the findings of empirical work on cross-country growth rates, we would find that a total of 145 variables have been identified as significant, contributing either positively or negatively to growth. Given the number of countries to be observed and the range of variables to be tested, no satisfactorily robust method exists that would allow us to test all these variables all at once to measure their relative importance.

Even if we relied on partial correlations that tell us that policies, institutions and anti-corruption measures significantly affect growth, we still would not know which policies, institutions and forms of anti-corruption matter most. The data sets for testing such suppositions simply do not exist. Macro analysis simply is not viable. It exposes much policy work to the accusation that it is merely based on conjecture, ideology and politics.

Suppose we were to test proposed solutions at the micro level using micro experiments? Random evaluations using control and test groups might hold the key. Applying for instance new forms of administration across a range of local government units might help us rule out or rule in certain reforms. Evaluating specific policies like the Pantawid Pamilya as it rolls out might provide evidence as to how our version of conditional cash grants is either effective or ineffective in different settings throughout the country.

(Note the distinction I made between Pantawid Pamilya and other similar programs such as Brazil’s Bolsa Familia. Knowing that a version of conditional cash grants works in one setting does not necessarily prove it will work everywhere else. We should be cautious in accepting the claims made by Jeffrey Sachs, a speaker at the ADB meeting, who believes that we already know how to fight poverty in every setting throughout the world.)

When it comes to promoting growth through industrial policy (targeting poverty through industry and employment programs), we were told by the Washington Consensus not to experiment anymore. Growth came by lowering trade barriers and improving governance. They claimed that “one size fits all”. Countries had to craft their policies in a way that followed “best practice” which meant letting the free market allocate resources and determine our place in the value chain of global production.

What our experience and that of Latin America and Sub-Saharan Africa in adopting this so-called consensus points out, what we should have been pursuing was not the principle of best practice (our laws and regulations are often regarded as such), but the one of “best fit” as highlighted by the East Asian growth experience.

The countries in that region didn’t accept the Western capitalist mould of economic governance, but developed their own forms based on local institutions and tradition. This made the process of development more acceptable and sustainable. If we are to follow their path, then perhaps we should not be so hesitant to experiment as they did.

The problem is that our policy elite suffer from an identity crisis. They are habitually more Asian in their practices, but they seek to pass themselves off as Western. As a result their prescriptive pronouncements often conflict with social reality such that when the rubber of public policy hits the road, it quickly burns out because of excessive friction.

It would be wonderful if we could experiment with new ways of doing public policy that worked with, rather than against, our collective identity. To do that though, we would first need to acknowledge our collective ignorance about a great many things.

UPDATE: It has been reported this morning that self-reported hunger in early March this year has gone up to the highest level it has ever been (exceeding the previous peak in 2008).

Doy Santos aka The Cusp

Doy Santos is an international development consultant who shuttles between Australia and the Philippines. He maintains a blog called The Cusp: A discussion of new thinking, new schools of thought and fresh ideas on public policy (www.thecusponline.org) and tweets as @thecusponline. He holds a Master in Development Economics from the University of the Philippines and an MS in Public Policy from Carnegie Mellon University.


  • ricelander

    To be clear, we don’t know if: (a) countries that grow faster, reduce their levels of poverty quicker (growth reduces poverty), (b) countries that reduce poverty subsequently grow faster (poverty reduction causes growth)…

    Growth reduces poverty or poverty reduction causes growth?  

    What causes your balloon to swell: the air pumped into it or the stretching of the rubber to let the air in?  Hmm.

    Why is his balloon swelling faster and bigger than mine?  Is he pumping more air or is my rubber tighter?

    Why don’t we look at the value creating capacity of our economic activities?  The entrepreneur who makes P10,000  for every peso he invested is going to be richer than that one who makes only P100, right?  I think the same thing is true too of a country.

    • To use your analogy, what would happen to that country if the concentration of wealth was such that only a few could make money because only they had access to capital, networks and markets. The rest were poor and had no access to any of these, either formally or informally. This lack of opportunity would lead to low or stagnant growth. Even if these entrepreneurs produced enough money to cause the overall economy to grow, it still would not bring the poverty rate down. In this case growth would not reduce poverty.

      If on the other hand you had a country where each citizen had equal access to education, markets, and social networks for producing wealth. All of a sudden, one person has a brilliant idea for a business and starts making a bundle. Other people see this and start imitating him. Because they have access to the same resources, they too start improving their lives. The cycle keeps repeating and spilling over into other sectors of the economy. In this case growth reduces poverty.

      Going back to the first case where only a few people keep getting wealthy. This causes social tension and political instability. Thus the growth that had occurred gets disrupted and only returns when a sense of fairness and equity is restored. Here both growth and poverty reduction have to occur simultaneously for both to be sustained.

      • ricelander

        To use your analogy, what would happen to that country if the concentration of wealth was such that only a few could make money because only they had access to capital, networks and markets. 

        I like the idea of breaking up the monopoly of capital by the few but how could you do that ever so gently?  

        Just a thought experiment since I do not have time to make research.  If we had as much investment going around and these investments had as high profitability or rate of return compared to, let us say, South Korea, would we be still as poor as now?  I suppose that if growth in investment in the Philippines is not producing any palpable improvement in the fight against poverty, it is because there is not enough.  There is substantial increase in FDI over the first quarter but we are superkulelat pa rin if we consider all of Southeast Asia.  So, again, what if we are having as much as Singapore or Malaysia is getting over the past say ten years?  

        Investments create jobs.  When highly profitable, investments expand quickly, would pay higher salaries and benefits allowing higher consumption and more savings and so on and so forth.  Or at least that is how I understand it.

        • UPnnGrd

           One way to break up the monopoly of capital is to  TAKE AWAY half of the capital held by the hacenderos-and-above RICH-DUDES, divide the amount by 5-million, and then give 5 million families this resulting number.

          Another way is to tax the middle-class-and above by an extra 5%, then divide that number by 500 thousand, and give the result to 500 thousand families.

          Another way is to kidnap Bill Gates, ask him to fork over $2Billion, and then give 5% to Malakanyang, 5% to colonels-and-above, 5% to the Senators, 5% to the Congressmen, 5% to governors and then divide the rest by 200-thousand  to give to 200 thousand families.

          There are many more….    option (2) sounds more palatable.

          Another way is to borrow US$95Million-a-year at 6%APR, lend the $95Million at 9% to Pilipinas “Gameen-type” institutes so they can lend at 35% to 50% to Pilipinas small- and medium-enterprises.   I think this option is attractive even if there is 5% leakage whenever there is campaign season.

          • ricelander

            Your last proposal deserves serious consideration after some refinement.

            You need an iron-fisted dictator for the first, and gentle-to-rough persuasion for the second.  i would cut down on the number of beneficiaries.
             

          • UPnnGrd

            Best part about last proposal is it gets past a major hurdle.  The hurdle —>>>>  “… Tutulong ako, bakit ba hindi?  Payag akong tumulong, pero dapat, patas.  Tumutulong na ako, kaya  dapat, sila naman!!!  Bakit ako  na naman ang uunahin mo… ngayon, dapat, sila muna!”

            Best part about Noynoy admin is there will NOT BE any ngawa-ngawa from Conrado deQuiros, Mong Palatino, Randy David or one or the other of the Tulfos about “… ay, naku, siguradong may KKK na nakikinabang diyan….”

        • To answer your two sets of questions above. The East Asian model made copious use of rents to spur entrepreneurial activity. The entrepreneurial ventures were either state-assisted (Japan and Korea) or even state-owned (Taiwan) because there was a low level of capital concentration needed for sizeable private investments to be made.

          The good governance people tend to frown when you use the word rents (or state intervention of any kind), not realizing that there are different kinds of these. Yes, you have the monopoly rents or crony rents which are destructive. But then you also have Schumpeterian rents that are productive, and these are the kinds of rents that East Asia properly used for creating wealth, which I think is the gist of what you are saying.

          The question then is what form of governance produces such kind of rents in a developing economy and how do you get this going in a society where a select few control much of the economy?

          • ricelander

            The question then is what form of governance produces such kind of rents in a developing economy and how do you get this going in a society where a select few control much of the economy?

            Dictatorship?  Marcos, to my mind, almost had the right formula.  His most hated crony capitalism was I suppose a crude attempt to copy the South Korean and Japanese model of chaebols and zaibatsus, except that where SKorea forced its old evil elites through threats and intimidation towards the desired economic direction, Marcos kicked them out and replaced them with friends most of them without proven entrepreneurial skills.  Where Marcos created a set of powerful enemies with resources to undermine him at every turn, SKorea forced corroboration.

          • The Japanese case of rapid growth took place under a parliamentary democratic system, which shared some features of French dirigisme. Brazil’s and Mexico’s desarollismo under both democratic and dictatorial regimes is another example which may not have been as successful as East Asia but achieved some good results nonetheless. 
            My point is these economic governance systems have been used by both dictatorial as well as democratic states. There is a tendency to associate them with the former, but they are compatible with either one.

          • ricelander

            I suggest dictatorship not out of associating the success of one over the other but more on observation of the chaotic order of Philippine society.  You need at least a platform of order and discipline.  Our brand of democracy is really a sort of free for all, devil may care, survival of the fittest street brawl…

          • Again, what does the evidence tell us? Dictatorships do tend to have higher median economic growth rates, but do have a wider variance. Under Mr Marcos for instance, the Philippines experienced some good years in the 70s, but really bad ones in the 80s. Democracies on the other hand tend to have lower median growth rates but a narrower variance (e.g. the Phils post-Marcos).

            But that is based on analysis that treats countries as being either one or the other. I tend to look at countries as lying on a continuum. Some which are classified as democratic, say Japan, really do not fit the Western model, while some that are considered autocratic do have some forms of accountability built into them.

            And also that is based on a certain time period. Japan since the 90s has been growing slow compared to their double digit growth rates from the 50s to the 70s. But it has been democratic throughout. Most Western democracies grow slower because they are beginning from a high income base. As per the title, we really cannot say anything conclusive about what affects growth here either.

      • ricelander

        …if we relied on partial correlations that tell us that policies, institutions and anti-corruption measures significantly affect growth, we still would not know which policies, institutions and forms of anti-corruption matter most.  

        How about: what if we had a Henry Ford among us, or an Akiro Morita, or Richard Branson?  Or a Bill Gates?  

        Just thinking.

  • J_ag

    It appears tragically that PNOY oversimplified his slogan for change. Adam Smith had written so clearly that for the invisible hand of markets to work the State (public institutions) are the enablers of markets to level off/align competing interests. 

    The complexity of the problems in Philippine society stems from the almost complete capture by private interests of the institutions of the State at all levels. 

    Even mighty China is learning that process in its rapid move to marketize their semi-command economy. 

    • What happened during the campaign of 2010 demonstrated the power of narrative. PNOY sold a story, a story that was more believable to a plurality of voters: “Why are we in such dire straits? Well, because of X, Y and Z (GMA to be more specific). And to counter that, I offer A, B and C as the antithesis to that, which will save us from this squalor.”

      You could hear him weaving that same story at the ADB conference where he said, that he had rid the government of corruption, and that now the country had turned a corner, good times would roll. That, as I said, is the iffy part of the story. What I did like about that speech though was his admission that he needed to enact structural changes to make the reforms stick. It is important for the government to now define what those changes are and to get it right.

      To borrow a phrase, the president campaigned in poetry, but now has to govern in prose. What this piece tries to highlight are the nuances when you try to translate your story into reality on the ground. 

      • UPnnGrd

        ManuBuen and cocoy will be among those who will tell you — GMA won the election for Noyi-Noy…   in other words, they voted Noyi-Noy because of   VillAAA-RRROOOYOYO!!!

        GuLLLOOO remaining in jail paves the way for smooth re-elections 2016 for PersiNOY.

  • I don’t need no stinkin’ factual analysis to know that too many babies birthed into a finite ability to create jobs, or a finite land mass with finite water and arable soil and fishy seas, creates a bunch of drains on resources, not for 5 years or 10 or 18, but a lifetime. By the way, speaking of facts, have you ever done a GDP/mouth analysis, and what does it show? How steep is the hill? Spread pretty thin, I betcha.

    Nice article, but I get tired of words sans acts. More seriously now, I was reading comments by a gentleman name of Sachs out of Columbia U in the USA, a counselor to popes and presidents, and he commented specifically about the Philippine birth rate as being damaging, and it would take “determined effort” to latch onto Asia’s growth. I see effort, but not determined. Determined would slow population growth.

    • I would be very careful, Joe. It is precisely these sort of “words” that provide ammo to the anti-RH lobby who portray the bill as a conspiracy concocted by the West to prevent the flow of immigrants into their labour markets and so on.

      I was merely pointing out that based on the evidence, investing in physical and human capital alone does not account for growing prosperity. I believe some pro-RH adherents commit over-reach when they claim that it will. There is no silver bullet, in other words, no universal principle that will deliver us from poverty.

      • So I’m supposed to not say anything because the Anti-RH people will cite Joe Am  to prove the conspiracy? Because there are so many illegal immigrants in the U.S., people wanting to go there because the U.S. HAS figured out how to generate wealth by, in part, not having 10 kids per family as accepted? I think I’ll keep yammering and if the Philippines wishes to roast in its own lunacy, that’s fine with me.

        I agree that passing an RH Bill alone will not do much to alleviate poverty. It is one of many determined steps that can be taken to make the Philippines blossom in prosperity. I would underscore the word determined. That is the word used by that Sachs fellow, and it means not hoping and praying or arguing and procrastinating. It means DOING something to become a vibrant competitor.

        • No, not your advocacy, but the basis for the advocacy. Jeffrey Sach’s big bang approach to reform in Russia did not go down well and has been blamed for the despondency that followed which set the stage for Putin. Big bold social experiments often fail if the proper groundwork has not been covered. That’s why starting small and proceeding based on the evidence is important.

          • Zing. I need to read more about my sources methinks. Thanks. J.

          • Joe, check out my previous posts on reproductive health:

            http://www.propinoy.net/2011/03/03/how-sri-lanka-overtook-us/ 

            http://www.propinoy.net/2011/02/14/reproductive-health-lessons-from-bangladesh/ 

            http://www.propinoy.net/2010/08/02/population-and-development/ 

            I have used “factual analysis” to argue for it (using paired country comparative case analysis). The cross-country analysis cited above tells us that if you combine RH with other human and social policy, it only accounts for a third of growth.

            For me that means that while these policies are important, by themselves alone, they won’t lift our productivity enough to lift the masses out of poverty. 

            It means that we will need to pursue an industrial policy to boost growth in different sectors of the economy. And that requires us to beef up our economic bureaucracy as per the East Asian model.

          • Makes sense to me. Thanks for the reference links. I’ll read the articles. Also, re Sachs, fine, skepticism is healthy.

          • Okay, I’ve done my
            homework, specifically reading the following:

            A commentary about “big
            bang” approaches by John McMillan at Stanford University’s Graduate School
            of Business and a counterpoint by Oleh Havrylyshyn who was then Deputy Director
            of the IMF’s European II Department.
              http://www.imf.org/external/pubs/ft/fandd/2004/09/pdf/counterp.pdf

            “Why Russia
            Failed to Follow Poland” by Hannes Mueller, Department of Economics,
            London School of Economics and Political Science .

            http://www.politik-salon.de/files/hm_receo_2007.pdf

            And, from the
            horse’s mouth, an explanation of his role by Jeffry Sachs, including the
            following admonition: “I stress these
            points because there is a long-standing narrative that says that I was out to
            help impose the “Washington Consensus,” a Milton-Friedman-style free-market
            economy.  This is patently false.  Yet it is repeated.  It
            should stop being repeated. ”

            http://jeffsachs.org/2012/03/what-i-did-in-russia

            Now the balance of these commentaries supports Big Bang privatization while
            acknowledging that each country is unique. Russia had some peculiarities in
            implementation that constrained things, and Russia did not receive the funding
            from Western countries recommended and expected by Mr. Sachs.

            None of the
            articles focuses on runaway population growth, but on rapid countrywide
            privatization versus piecemeal efforts.

            I hold to my view that runaway
            Philippine population growth is damaging and it is negligent to do nothing
            about it.  “Determined effort”
            is not being given right now to poverty, and it is required. This means not
            simply voluntary population slowdown but getting rid of the economic drain of
            corruption and building stronger industrial bases in agribusiness,
            manufacturing, tourism, trade, and tech-based services like call centers.

            I disagree with your
            view that suggests a determined effort is somehow “like the failed
            Russia”, or would be ridiculed as a Western scheme to dominate the
            Philippines and keep its poor Filipinos out of the U.S.  Determined efforts ought to be undertaken on
            ALL fronts, by the Philippines, including slowing population growth. I fear you
            use your expertise in peculiar ways and I’m not sure why.

          • I don’t think you understood me. The fact that it won’t solve the problem completely, doesn’t mean it shouldn’t be attempted. It will contribute some growth of incomes and reduction of poverty, but it won’t be sufficient.

            The problem is that your reasoning for why it should be attempted (“I don’t need factual analysis”) frames the discussion as one of conjecture and ideology. This is exactly what the anti-RH lobby wants it to be.

            As for Jeffrey Sachs, I believe you have entered a minefield. Despite his disclaimers, it is very hard to disassociate him with the policy failures of Russia because he was the chief adviser.

        • Sorry about spacing. That is the way the comment block transcribes a “One Note” paste.

  • Manuelbuencamino

    Good thought piece.  From what I understand after reading your post, it seems like crafting a national development plan is folly at this point. Should our economic planners now focus on micro development plans, as a sort of laboratory experiment, before crafting and adopting them on a national scale?

    • Well yes and no. The idea of looking for macro evidence to support national macro policies and programs comes from the notion that we need to compare like with like. What the piece has highlighted is the fact that when we develop national plans, evidence that support it is best found at the micro level. In other words, it is imperative to think small, before thinking big.

      • Manuelbuencamino

        And to think small means to start small or do small scale lab tests first. Did I get you right?

        • Yes, that’s how many anti-poverty programs start, the CCT or Pantawid Pamilya being one that won out over its rivals. Now that it has been rolled out nationally, we should get decent stats to evaluate its effectiveness.

          • Manuelbuencamino

            I’ve heard it said that these CCT type programs take a few years to ripen, in the sense that the effects on education will not be seen until kids go past the drop-out stage etc. Is this true?

          • GabbyD

            actually, getting kids to stay in school is one of the short run, direct, good outcomes of a program like this. after all, the money is conditional on attendance. if the program has good monitoring, attendance should happen immediately.

            the long run effect is that the productivity, earning potential, etc, of a HS grad is higher than one with lower income. i’m sure thats true, but i havent seen any studies at all on the HS educ wage premium.

          • Even after one year, you can already test the effectiveness of the program by looking at attendance levels and retention rates by comparing them to the previous year’s.

            You are talking about more long-run impacts such as the improvement of life chances by staying in school and breaking the cycle of intergenerational poverty.

            But an examination even of the short-run benefits would be enough I believe to justify the cost. Even if the BLES does not collect median wage data, its employment data would show the importance of higher educational attainment (i.e. keeping kids in school) not only for employment, but for quality employment.