CHAPTER THREE: INTERNATIONAL PERSPECTIVES ON LOCAL ECONOMIC DEVELOPMENT AND POVERTY
3.3 POVERTY REDUCTION AND ECONOMIC GROWTH
(Lustig et al 2002). In summary economic growth is key in poverty reduction and conversely poverty alleviation is necessary for economic growth.
The poor often have low income levels thus they are unable save and are always at the mercy of lending institutions (Lustig et al 2002). Moreover they often rely on unsustainable, inefficient and informal financial institutions (Besley et al 1994 cited by Lustig et al 2002). The poor also face obstacles when borrowing money; and are usually charged high transaction costs and high interest rates since they are considered a risk (De Soto 2000 cited by Lustig et al 2002). Moreover the poor are often unable to produce acceptable security when borrowing. All this hampers their ability to borrow money, improve productivity and foster economic growth. It is therefore crucial to foster financial institutions and services that serve the poor so as to aid economic growth (Lustig et al 2002).This may include relaxing the financial regulatory frameworks and fostering institutions that equip the poor to build savings and borrow money. land reform; making tenure secure for the poor will also improve the Poor‘s access to credit and making the market work for the poor will aid the fight against poverty (ibid).
However, it is not self evident that private markets will reduce poverty (Cook et al 2003 cited by World Bank 2000). Indeed, they may exacerbate it, even where economic growth raises all incomes over time as private markets expand, the time period may be very lengthy indeed and the distribution of benefits may be very uneven (ibid). An important goal of the state should be regulation of markets, for successful poverty reduction. Making markets work is necessary but not sufficient hence markets need to be made better for the poor for successful poverty alleviation.
Thus there should be greater fairness, with adequate supplementation in the markets (Sen 1999).
A better or working market should reduce transaction costs, expand choices for the poor, and should be monitored over time (Porteous 2004; Sen 1999). A case in example is the Cell Phone Industry in South Africa where there has been wide spread growth of cell phone usage in South Africa, from a zero base in 1993 to over 10 million users in 2003 (Porteous 2004). The usage levels are well in excess of original projections and continue to grow, especially among poorer segments of the population (ibid). The cell phone industry has been almost entirely market driven, with low levels of state access regulation, and yet a successful access outcome. This is contrasted with the costly and largely unsuccessful fixed line roll out to poorer households of the main state owned operator, Telkom (Porteous 2004). Cell phones appear to be a market that is working for the poor in terms of the definition suggested above (ibid). The advantages of owning a cell phone include
being connected to labor market which is crucial in increasing income. Apart from making markets work human capital needs to be developed to foster economic growth and poverty alleviation.
Human capital broadly refers to people‘s educational attainment, health and nutrition (Sen 1999;
Lustig et al 2002; World Bank 2000).There is growing evidence from micro economic studies that associate better education with higher income (Schultz‘s 1998 cited by Lustig et al 2002).
Education may also generate other externalities which propel growth (Wolfe and Zuvekas cited by Lustig et al 2002). For example how well a mother is educated is crucial for her children‘s learning.
Nutrition on the other hand impacts on the level of productivity. Poorly nourished workers may be less productive, and persistent malnutrition may push production down (Dasgupta and Ray 1996;
Ravallion 1997).
Investing in education may not be a priority to the poor as opposed to using young people to work in the fields (ILO 1998). Investment in education is also unattractive to the poor since returns are highly converse given the fact that returns are most attractive at higher levels of schooling (ibid).
For example in Mexico finishing university raises household income by 62%, while a primary school diploma the increase is only 8 %( Bouillon et al 2001). Thus families may tend to invest less in education but this has adverse consequences on income potential. Malnutrition also impacts on education attainment since it has been observed undernourished children have weaker cognitive skills (Alderman and Hoddinott 2001 cited by Lustig et al 2002).
To improve economic growth, it is crucial to invest in the health and education of the poor. Health interventions may include public spending on infrastructure and service improvements in service and quality. Basic infrastructure investment (running water, electricity and transportation) and early intervention programs in health and nutrition are key in promoting human capital. From the above arguments it is clear that there is need to foster human development since it propels economic growth. Besides human capital, growth may be stalled by constraints in innovation and failure to secure insurance.
The adoption of new technology by the poor is influenced by human capital and the possibilities for obtaining insurance (Dasgupta 1993). The lack of insurance is an impediment in coming up with
new innovations, or technologies since the poor are unlikely to secure insurance. For example using a seed variety may raise output, however it increases risk of loss in the event of bad weather or market fluctuations, thus one would rather stick to old methods (Dasgupta 1993). Since insurance is difficult to obtain for the poor they often seek other alternatives such as deaccumulation of buffer stocks, borrowing and other informal insurance schemes (Udry 1995;
Deaton 1989 cited by Lustig et al 2002). These types of alternatives are usually less efficient than formal ones, for example selling livestock jeopardizes future production (Rosenzweig and Wolpin 1993 cited by Lustig et al 2002). To ameliorate lack of insurance and to promote innovation the insurance industry needs to be pro-poor wherein the regulatory framework needs to be relaxed.
Safety nets need also be established so that minimum levels of consumption are maintained (Lustig et al 2002). The government may also support ideas from the people with potential of raising production by providing financial assistance, and establishing a culture of research and development. Apart from the above making sure that poverty does not deepen during crisis is crucial.
Poverty in a nation should not be allowed to worsen during adverse situations since this may also hamper growth. Shocks such as economic crisis, natural disasters, and wars may exacerbate poverty and stall growth (Inter-American Development Bank IDB 2002). There is evidence that social indicators such as infant mortality and educational attainment tend to deteriorate during times of upheaval (ibid). Countries must therefore put in place tools that cushion further deterioration of human capital development of the poor. These may be in the form of protecting pro-poor public spending during structural adjustment. Other alternatives may include emergency employment programs which at least try to maintain the current status rather than further deterioration which may hamper growth (Wooden et al 2000).
Growth may be dampened by social and political relationships. For instance in areas where the people have no say in the political process poverty may instigate social upheaval coupled with violence which impedes growth (Lustig et al 2002). Poverty concentration in certain geographic areas, ethnic, racial or by gender factors can take an economic toll on the wider society and retard a country‘s‘ economic growth (ibid). Poverty also breeds with it frustration which can ignite
dysfunctional behavior and social ills such as crime, alcoholism, drug addiction, domestic violence which can trap the poor and also bring about high economic costs (World Bank 2000).
Recent theory has identified links between poverty, social instability and growth (Lustig et al 2002) For example if there is low per capita income, pressure from social groups may prompt the government to implement redistribution policies, political practices such as inefficient tax systems, unproductive spending, corruption and lobbying which weaken incentives for capital accumulation and stall growth (Benhabib and Rustichini 1996 cited by Lustig et al 2002). In South Africa‘s policies after apartheid such as RDP, URP, where as a result from the pressure to correct the imbalances of the apartheid regime (Godehart 2006).
Social exclusion coupled with income inequality may lead to discrimination of the poor thus by their exclusion they are prevented from exploiting factors of production (Lustig et al 2002). Social exclusion is often fueled by deep ethnic divisions that can thwart macroeconomic stability and growth policies (Easterly and Levine 1997). The socially excluded usually lack human capital development and can push down a nation‘s growths potential, while residential segregation may trap the children of the poor at low education levels due to lack of funding and absence of role models. This may lead to perpetuation of poverty and low growth traps (Benabou 1994). Social exclusion, ills and instability should be improved so as to enable growth.
Poverty reduction programs can be targeted in certain geographic areas which are socially excluded since they yield externalities that affect national growth (Ravallion and Jalan 1996). For example, ‗beefing up‘ community capital can enhance returns on private investments and improvement in school quality boosts returns to education and income (ibid). Investing in public infrastructure in polarized areas can also improve returns on investments particularly if the beneficiary population is involved in investment initiatives (Adato et al 1999). Solving the issue of crime and violence in marginalized areas can indirectly spur growth by preventing investment- dampening; political and social instability; and thereby avoiding high economic cost of upheaval (Londono and Guerrero 2000). Solving socials ills such as crime may also attract potential investors to an area since the place image would have improved (Lustig et al 2002). In Latin America the impact of poverty, social exclusion, ills and instability on growth has been well
documented. Recent estimates cost of violence and crime in Latin America comes to one-tenth of the regional GDP while the early unwanted pregnancy has a negative impact on the socioeconomic status of single mothers, cutting short their schooling leaving them with fewer job prospects and increasing their demand for public assistance programs (Londono and Guerrero 2000). Parallels of this can be drawn to the South African scenario with regards to the Social Grant given to single mothers.
In conclusion it is clear that poverty coupled with associated social ills and social instability stalls economic growth. Low investment in human capital, innovation and technology, insurance and capital continually trap the poor in poverty thereby impeding growth. It is therefore necessary to reduce poverty so as to boost economic growth since the two are mutually reinforcing (Sen 1999).
For example when promoting LED it is necessary to improve the underlying conditions for example education and health since they improve production and ultimately growth. Promoting economic growth per se, may not necessarily lead to poverty alleviation since the growth may be undermined by low productivity due to malnutrition or violence, thus it becomes necessary to improve the conditions of poverty to maximize growth.