CHAPTER THREE: INTERNATIONAL PERSPECTIVES ON LOCAL ECONOMIC DEVELOPMENT AND POVERTY
3.2. ECONOMIC GROWTH, INEQUALITY AND POVERTY ALLEVIATION
decision making, who leads what actions, and how success is judged(ibid). LED has therefore been pursued since it does not hamper development.
LED overcomes market failures, mainly because it generates trust, leads to match collective and individual interests, and reduces, after an initial period, production costs (Canzanelli 2001). It also galvanizes the population, mainly because it provides objectives and sense of purpose and it stimulates citizens to participation and entrepreneurial ventures (ibid). LED is effective in promoting rural urban linkages, thus it is applicable not only in urban areas but also in peri-urban and rural areas (World Bank 2005). LED has been actively pursued since it helps in enhancing the competitiveness of an area.
LED is crucial in improving competitiveness upon which the success of communities will depend on their ability to adapt to the changing and increasingly competitive environment (Castells 1998). At the international level the drivers of this change include economic, technological and political pressures. At the national level these pressure include widespread privatization of whole industries and decentralization of government services. Through LED which planning policy can enhance the competitiveness or the comparative advantage of an area by embedding economic activity based on local resources in that territory so that it can compete globally (Pose 2001).
inverse relationship between poverty and economic growth, wherein economic growth impacts poverty and poverty impacts on economic growth; however this relationship is complex (Ravallion and Chen 1977). In Europe there was rapid economic growth in the 19th century and currently there is rapid economic growth in China and East Asia with dramatic consequences (World Bank 200).
The World Bank argues that the higher the annual growth in GDP, the greater the poverty reduction. For example in East Asian countries like China which have witnessed high economic growth coupled with a reduction of the incidence of poverty. Evidence has shown that economic growth can lead to rising consumption amongst the poorest fifth of the world‘s population (ibid).
Rapid economic growth improves none income poverty such as better health access. However the relationship of economic growth and poverty alleviation is not that simple since countries with the same growth rates may have different poverty reduction rates thus there is need to understand the underlying dynamics for successful poverty alleviation (Ravallion and Chen 1977). How quickly growth can reduce poverty depends on the initial income distribution (inequality) and how it evolves over time (Lusting et al 2002). In societies with more inequality the same growth rate makes far less of a dent in poverty as illustrated in figure 8 below.
Figure 8: Growth, Inequality and Poverty Reduction
Source: Adapted from World Bank (2000); Lustig et al (2000)
The above graph shows that countries with a Gini coefficient of around 0.6 growth reduces poverty only half as quickly as in countries with a Gini coefficient of about 0.2. The efficiency of economic growth in reducing poverty also depends on how the income distribution shifts as the economy
0 0.5 1 1.5 2 2.5 3 3.5
0 0.2 0.4 0.6 0.8
Gini Coefficient
% reduction in poverty associated with a 1% increase in income
grows (Lusting et al 2002; Ravallion and Chen 1997; World Bank 2000). For example in one case the economy grows with earnings of the top income quintile rising only, in the second case everyone‘s income increased proportionally and thirdly only the bottom quintile income rose. In the first case there would be no poverty reduction and in the third case there will be greater poverty reduction (Lusting et al 2002). In Uganda after decades of war and economic collapse there was rapid economic growth in the 1990‘s averaging 5% per year. Between 1991and 1998 the share of Ugandans living on less than $1US fell from 56% to 44%. The reduction in income inequality made growth effective in reducing poverty with the Gini Coefficient falling from 0.36 to 0.34 during the period 1995-1998(Appleton et al 1999 cited by Lustig et al 2002).
In Bangladesh on the other hand GDP per capita grew by 2% during the 1990‘s and poverty declined slowly. The answer to the slow poverty reduction in Bangladesh partially lies in the rise in the Gini coefficient which rose from 0.26 to 0.31 between 1992 to 1996 (ibid). Parallels of Bangladesh may also be drawn with South Africa. Despite South Africa‘s relative success in terms of macroeconomic stability South Africa‘s policies fail to create sufficient growth, job creation and poverty reduction (May 2004). This may be partly explained in South Africa‘s high and persistent inequality which at times is costly for development and has trapped large numbers of its citizenry in poverty. However this does not imply that growth should not be pursued but other efforts need to be undertaken to ensure that growth reaches the poor (World Bank 2000; Wodon 1997; Appleton et al 1999 cited by Lustig et al 2002). This may include a reform emphasizing micro reforms to increase the economic prospects of the poor (May 2004). It has been observed that inequality impacts on poverty and growth however the causal relationship is not that clear (Lustig et al 2002).
Scholars such as (Alesina and Rodrick 1994 cited by Lustig et al 2002), Dollar and Kraay 2000 and Foster and Szekely 2001 cited by Lustig et al 2002) have come up with ways of showing how economic growth benefits the poor. These include using estimates of the incidence of poverty with respect to growth using regression lines. These approaches have been criticized since they are arbitrary in setting the poverty line (Ravallion and Chen 1977). Thus there is a challenge in identifying the relation between economic growth and poverty reduction though a growing body of literature supports that inequality hampers growth. However empirical evidence is inconclusive
(Lustig et al 2002). In summary economic growth is key in poverty reduction and conversely poverty alleviation is necessary for economic growth.