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Poverty Reduction and Economic Structure

Channing Arndt, Andres Garcia, Finn Tarp, and James Thurlow

Economic growth typically reduces poverty, but global averages conceal wide variation at the country-level, where even rapid growth may not significantly improve the incomes of the poor. In some of sub-Saharan Africa’s fastest growing countries, measured poverty rates have remained virtually unchanged over the last decade, raising concerns over the effectiveness of growth-oriented development strategies.

Mozambique and Vietnam are interesting case studies to compare, given their equally strong growth performance over the last decade, their similar sectoral composition of economic growth, and yet their widely different successes in reducing poverty. Examining the role of economic structure in poverty reduction, we found that Vietnam’s economic structure lends itself more readily to generating broad-based growth. A similar expansion of agricultural demand in Mozambique will achieve far less rural income growth than in Vietnam.

The lessons for sub-Saharan Africa are that education, rural infrastructure and institutions, and agricultural development are key areas to achieve more pro-poor growth.

Economic growth may generally reduce poverty, but global averages conceal wide variation at the country-level, where even rapid growth may not significantly improve the incomes of the poor. Thus, while fast growing Asian economies like China and Vietnam have generated substantial declines in poverty, there are equally fast growing countries like India where poverty has fallen far less. More troubling is that measured poverty rates have remained virtually unchanged over the last decade in some of sub-Saharan Africa’s fastest growing countries, like Mozambique. These instances of ‘growth without poverty reduction’ raise concerns over the effectiveness of growth-oriented development strategies.

Growth without poverty reduction?

Imperfect methods of national growth and poverty accounting may explain a weak relationship. Numerous studies have examined various measurement issues and how they might show different poverty trends. Another explanation lies in the composition of economic growth. For example, agricultural growth is typically more poverty-reducing than other sources of growth. Differences in countries’ sectoral growth patterns may, therefore, lead to different national poverty–growth relationships and thus explain why countries with similar growth rates generate different rates of poverty reduction.

A third and related explanation lies in a country’s structural characteristics, which define the size and nature of economic linkages between productive sectors and household income. Even when two countries have similar levels and compositions of growth their economic structures may produce different poverty outcomes.

Mozambique and Vietnam are interesting case studies to compare, given their strong growth performance over the last decade; their similar sectoral composition of economic growth, and yet their widely different successes in reducing poverty. Examining the role of economic structure in determining poor households’ income, we found that Vietnam’s economic structure lends itself more readily to generating broad-based growth. A similar expansion of agricultural demand in Mozambique will achieve far less rural income growth than in Vietnam.

Similar…

The economic histories of Vietnam and Mozambique have much in common. Both countries underwent 15 years of civil war and destruction (1959-75 in Vietnam, 1977-92 in Mozambique). Emerging from war, both countries faced the enormous challenge of reconstruction and development. Although the initial national strategies of both countries were inspired by socialist central planning and the administrative allocation of resources, their recent strategies have been characterized by more market-oriented approaches.

It is not only Mozambique and Vietnam’s economic histories that are similar. Around 70 per cent of their populations lived in rural areas at the end of the 1990s. Poverty within Mozambique and Vietnam is concentrated in rural areas. While agriculture remains a key economic sector, the fastest growth has been in the industrial sector at over 7 per cent per year in both countries. The service sector has expanded almost as fast; its large contribution to GDP made it the main source of economic growth over the last decade. Overall, the economic performances of Mozambique and Vietnam were strong; per capita GDP grew at 4.9 and 5.9 per cent, respectively.

Despite similar levels and broad compositions of growth in Mozambique and Vietnam, poverty outcomes differed. National poverty rates fell in both countries, yet poverty reduction was much more marked in Vietnam in both relative and absolute terms. Specifically, the share of the population categorized as ‘absolutely poor’ (using an expenditure-based ‘cost of basic needs’ approach) fell from 69 to 55 per cent during 1997-2009 in Mozambique, and from 37 to 13 per cent during 1998-2008 in Vietnam. Economic growth has therefore been far more ‘pro-poor’ in Vietnam than in Mozambique, despite similar levels of growth.

...but different

We studied the structural differences and the divergence in poverty outcomes between Mozambique and Vietnam, developing social accounting matrices (SAMs) and analysing the data using multiplier analysis. The two countries’ SAMs capture their economic structures. They have the same base year (2003) and identical dimensions. The multiplier analysis reveals the implications of economic structure for the flow of income.

Variation in multipliers across sectors indicates that the composition of growth is a key determinant of a country’s growth–poverty relationship. Our analysis revealed that multipliers are highest in agriculture for both countries, thus highlighting the key role that this sector plays in raising incomes, especially for rural households. More rapid growth in agriculture forms part of the explanation behind Vietnam’s more rapid rate of poverty reduction. We also found important structural differences within sectors between the two countries; multipliers were higher for rural than urban household income in Vietnam, whereas the reverse was true for Mozambique. This implies that a demand expansion, even in agriculture, favours urban households in Mozambique and helps explain why growth does not generate as much poverty reduction.

We then used structural path analysis to decompose the multipliers into their various impact channels, and found that trade and transport plays a larger role in income transmission in Mozambique. Marketing systems and infrastructure are more developed in Vietnam and the locations of principal urban growth poles are closer to major agricultural production zones, implying that each increment in food demand requires fewer resources for covering transaction costs. Since a demand expansion for trade and transport services in Mozambique favours urban households, the country’s higher transaction costs means that fewer of the income gains from agricultural growth accrue to rural households. Vietnam’s ability to move goods efficiently between producers and consumers translates into more direct poverty impact.

Three policy recommendations

First, inadequate education levels and high-skill premiums at least partly explain why a demand expansion in Mozambique does not generate broad-based income gains. Current policies to promote widespread education in Mozambique should narrow the skills premium now earned mainly by urban households, while also enabling poorer rural households to participate more in the growth process. This would have the effect of raising rural income multipliers in Mozambique.

Second, high transaction costs in Mozambique reduce the gains from economic growth accruing to rural households. Investing in rural infrastructure and institutions to reduce these transaction costs would therefore reduce some of the existing leakages from rural to urban economies, thereby raising rural income multipliers. In addition, efforts to foment urban growth poles in the north and centre of the country would generate more favourable urban-to-rural growth linkages as the most productive agricultural regions of Mozambique would naturally supply these urban growth poles.

Finally, the importance of agriculture for poverty reduction confirms the need for investment in and attention to this sector, particularly in Mozambique. While far from exhaustive, our analysis suggests that this combination of interventions is needed to overcome the structural barriers to poverty reduction in low-income countries.

Finn Tarp is Director of UNU-WIDER, and Professor of Development Economics University of Copenhagen.

Channing Arndt is Professor of Economics, University of Copenhagen, and External Project Director of the UNU-WIDER project ‘Development under Climate Change’.

Andres Garcia is with the World Bank, Financial and Private Sector Development, Africa Region.

James Thurlow is a UNU-WIDER Research Fellow.

Views expressed here are those of the authors. This brief summarizes a detailed UNU-WIDER working paper available at  http://www.wider.unu.edu/publications/working-papers/2010/en_GB/wp2010-122/

A version of this article was published 11 April 2011 Nordic Africa Development Policy Forum: (http://www.naiforum.org/2011/04/poverty-reduction-and-economic-structure/)

WIDER Angle newsletter
December 2011
ISSN 1238-9544

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