Poverty Reduction - Key Elements

Pro-poor, Sustainable Economic Growth
East Asia, where most countries reduced their incidence of poverty by half or more in just two decades, provides ample proof of the importance of economic growth for poverty reduction. Despite the Asian crisis, these countries have shown how robust growth can reduce poverty. Growth increased the demand for labor, which in turn expanded economic opportunities and raised worker productivity and wages. It also expanded public revenues that could be used for basic education, health care, and infrastructure. Outward-oriented policies in East Asia led to labor-absorbing growth, and the resulting expansion in employment opportunities brought large numbers of women into the labor force, with important consequences for poverty reduction and the status of women. The rise in female participation in school and the workforce slowed population growth through lower fertility rates. The increase in national income was used to expand investment in human capital and improve access of the poor to basic services. Further increases in productivity and declines in population growth followed.
The lesson is clear: growth can reduce poverty by generating employment and incomes, and labor intensive growth can reduce it even faster. Thus, policies that encourage labor intensive growth are powerful pro-poor measures. Such policies include, in particular, the removal of market-distorting interventions, such as overvalued exchange rates, import and/or export restrictions, credit subsidies, and reliance on state-owned enterprises. Other policies that fall in this category are development of a conducive environment for the private sector, and programs (e.g., microfinance and "workfare" ) aimed at increasing employment and income generating opportunities for women and other groups that may be outside the formal labor force. Infrastructure development can also make a considerable contribution to growth through job creation and improvement of access to economic activities and basic social services. Similarly, opportunities for self-employment by the poor must be promoted. Inflation and (as seen recently in the region) economic crises also have a severe impact on the poor. Consequently, sound macroeconomic management is essential for sustained reduction of poverty.
The private sector, the engine of growth, can also play a direct role in poverty reduction. It can participate in physical and social infrastructure, including provision of basic services that will benefit the poor (thus freeing resources for the public sector). For the private sector to contribute more effectively to the delivery of such services, an enabling environment must be established and the financial sector developed. As the role of the private sector expands, that of the government should shift from owner and producer to facilitator and regulator. Indeed, an effective regulatory framework becomes critical to promote competition, enforce fair practices and standards, and ensure that essential services reach the poor. Governments must also monitor the social impacts of privatization to see that retrenchment, redeployment, or compensation programs are appropriate. ADB's Private Sector Development Strategy is thus timely and directly relevant to poverty reduction.
Market-driven growth processes typically benefit richer areas, where infrastructure and human capital are already reasonably well advanced. For poorer areas, public investment is generally necessary, especially in rural areas, which generally have excess labor. Similarly, specific interventions are needed to provide the rural poor or urban unemployed with access to key services and opportunities for self-employment.
Another important way to accelerate growth is regional and subregional cooperation, which offers larger markets, economies of scale, and division of labor. Such cooperation is especially useful for small countries with limited options. Cooperation may work best at the subregional level, as in the Greater Mekong Subregion, the "growth triangles" pioneered by ADB, and in the Central Asian republics. It is also useful in other ways, such as in the fight against disease (e.g., tuberculosis, malaria, and HIV/AIDS), and in the sharing of ideas.
Environmental considerations, including natural resource management, are key elements in sustainable economic growth. Growth will be short-lived if it does not conserve the natural environment and resources. Although much of the past damage has been caused by powerful vested interests, the pressures of poverty and population compound the threat through deforestation, over-grazing, and over-fishing. The rural poor are often forced to live on fragile lands and waters that require sensitive resource management in the face of increasing degradation. The urban poor are exposed to disease and illness resulting from overcrowding and polluted living conditions. Poverty reduction strategies need to be accompanied by policies and actions that enhance the quality and productivity of the environment and natural resources.
Social Development
Economic growth can effectively reduce poverty only when accompanied by a comprehensive program for social development. Just as some targeting of economic development is necessary to reach bypassed areas, so social development must be targeted. Therefore, every country needs to have a comprehensive national poverty reduction strategy that provides for (i) adequate budgetary allocations for human capital, (ii) targeting of basic social services to the poor, (iii) removal of gender discrimination, (iv) an effective population policy, and (v) social protection. Beyond developing human capital, the aim must be to strengthen social capital, especially for people subjected to some form of exclusion. Accordingly, targeted programs will be required in five areas.
Human Capital Development. Human capital is the primary asset of the poor, and its development is of fundamental importance in the war against poverty. Every person must have access to basic education, primary health care, and other essential services. Without such access, the poor, and their children, will have little opportunity to improve their economic status or even to participate fully in society. It is also necessary to ensure that the relevance, quality, and quantity of education provided is designed to effectively increase participation, both in the workforce and in society at large.
Population Policy. The correlation between family size and self-perpetuating poverty is generally strong, especially in rural areas. Most countries see the need to reduce population growth to a rate where all children can be assured adequate investment in their future. To do this, a major effort is needed to enhance the quality of women's lives by giving highest priority to (i) ensuring universal education for girls, (ii) providing accessible reproductive health services, and (iii) increasing economic opportunities.
Social Capital Development. Social capital defines the fabric of society and strongly influences the rate of economic progress and the manner in which its benefits are distributed. In practice, strengthening the social capital of the poor largely means increasing their opportunities for participation in the workings of society. For historical reasons, social cohesion is often weak and many communities suffer from systematic social exclusion. In such cases, strong, proactive policies are required to reverse feelings of social and psychological inferiority, foster a sense of empowerment, and create genuinely participatory institutions. The promotion of community-based groups to undertake microfinance, health, and natural resource management is an important first step in this direction. Social capital, and a more inclusive society, can also be promoted through antidiscrimination legislation, land reform, security of property and tenure rights, legal recognition of user groups, and accessible justice systems. For ethnic minorities, special education curricula and self-managed health and other services may be necessary.
Gender and Development. In many societies, women suffer disproportionately from the burden of poverty and are systematically excluded from access to essential assets. Improving the status of women thus addresses a priority area of poverty and provides important socioeconomic returns through reduced health and welfare costs and lower fertility and maternal and infant mortality rates. Giving women voice and promoting their full participation makes an important contribution to the overall development of society. Poverty reduction programs involving microfinance (Appendix 2), water and sanitation, and environmental restoration consistently demonstrate the substantial benefits from ensuring the full participation of women (Box 1).
Social Protection. Every society has people who are vulnerable because of age, illness, disability, shocks from natural disasters, economic crises, or civil conflict. Social protection comprises a family of programs designed to assist individuals, households, and communities to better manage risks and ensure economic security. Such programs include old age pensions; unemployment and disability insurance; and social safety nets to cushion the adverse impacts of disasters, economic crises, or civil strife. Also included are policies to improve labor mobility and the enforcement of labor standards.
Good Governance
The quality of governance is critical to poverty reduction. Good governance facilitates participatory, pro-poor policies as well as sound macroeconomic management. It ensures the transparent use of public funds, encourages growth of the private sector, promotes effective delivery of public services, and helps to establish the rule of law. A sound macroeconomic framework is needed to encourage efficient and productive domestic investment and to keep inflation low to protect real incomes of the poor. Likewise, it helps prevent interest and exchange rate distortions that artificially reduce the cost of capital and discourage the use of labor. Good public expenditure management is necessary for fiscal discipline, economic growth, and equity. The latter is achieved through an effective, progressive tax system and adequate allocations for basic education, primary health care, and other public services. Effective regulation and supervision of the financial sector is needed to protect depositors, enhance competition, increase efficiency, and expand availability of financial resources for all members of society. As the Asian crisis has shown, good governance is also essential to avoid, or reduce the severity of, economic crises in an era of increasing liberalization and globalization.
Since effective and efficient delivery of basic services by the public sector matters most to the poor, weak governance hurts them disproportionately. Public sector inefficiency, corruption, and waste leave insufficient resources to support the requisite level and quality of public services and targeted antipoverty programs. However, denial of basic services to the poor is not just a matter of lack of investment. Often, it is the result of (i) institutional structures that lack accountability, (ii) domination by local elites, (iii) widespread corruption, (iv) culturally determined inequality, and (v) lack of participation by the poor.
Where such problems exist, systemic changes are needed to move from poor governance to government accountable to the poor. Such changes are difficult to bring about, since existing arrangements that exclude the poor reflect prevailing economic and power inequalities. Yet unless these issues of inequality are tackled, it will be difficult to raise living standards of the poor.
Action must proceed at two levels. Public administration and expenditure management at the national level must be strengthened to promote pro-poor growth and social development. At the same time, responsibility for provision of public services should be devolved to the lowest appropriate level of government. Unfortunately, institutional capacity tends to be weak in local governments and there is danger of capture by local factions. Devolution may therefore have to be pursued in a phased manner, preferably starting with priorities such as basic education and primary health care. The long-term objective, however, should be to empower the poor and develop institutional arrangements that foster participation and accountability at the local level (Box 2).
In achieving this objective, as well as in poverty reduction efforts generally, a diversified range of stakeholders is involved. Apart from the government and the private sector, civil society institutions have an important role to play. Numerous vibrant and responsive NGOs-both national and international-are engaged in development work or championing the legal rights of the poor. ADB will actively seek cooperation with such NGOs to benefit from their experience and perspectives, and take advantage of their closeness to the poor and vulnerable.