The Institute for Economic and Social Research University of Indonesia What is pro poor growth? Mohamad Ikhsan The Institute for Economic and Social Research University of Indonesia

Outline What is a pro poor growth ? Definition Possible trade off Implementation of a pro poor growth. Political Economy of Pro Poor Strategy

Pro Poor Growth : Definition Many existing definitions all imply that growth must be to the benefit of the poor and give them more access to economic opportunities. Others simply define pro poor growth as high elasticity of poverty rate to economic growth (e.g. Ravallion and Datt, 2000) Some define as the poor benefit disproportionately from the economic growth. Meaning that the income of the poor must grow more than the average income growth rate. This definition works well under condition the poor portion dominate the population. How about if the near poor dominate? I have two practical definitions of pro growth derived from the decomposition of poverty measure (e.g. Kakwani, ?) Growth with better income distribution (strong preposition) Growth but no change in income distribution (weak preposition)

Possible Trade off Suppose we have to choose: Growth rate 7 % with a marginal deterioration of income distribution? Growth rate 3% but with an improved income distribution which scenario would be more pro poor growth? The answer may be depend on the magnitude of elasticity of growth or inequality hence higher the poverty reduction outcomes. Current evidences show that China and Vietnam to choose the second one while Indonesia in 1978 up to pre crisis followed the first one and neither one during the 1999-2002 i.e. low growth but worsening income distribution.

Short run vs. Long Run. Direct impact may not take to account the indirect or second round effects. For example one country experiences the high growth rate but worsening income distribution in the short run but in the long run will sustain high growth rate and improved income distribution Are you going to choose the second policy choice? Example of improvement access to electricity and water. Heavy investment in those sector will produce higher growth and possibly worsening income distribution in the short run but once the poor get better access – hence reduced cost of consuming those relevant goods, income distribution may be improved.

Aggregate v.s Specific Approach When evaluating and applying pro poor growth, should we focus on aggregate as policy choices and derived into specific issue or other way around? Some may in favor of starting from specific issues with better results on specific issues but we may end up the problem of excessive compensation on the aggregate. This creates a political economy problem.

How to implement pro poor growth It is clear that pro poor growth that directly reduces poverty must be in sectors where the poor are and use the factors of production they possess. For Indonesia’s case about ¾ of poverty incidence is the rural one and mostly agriculture . Thus pro poor growth must be focused on rural areas, improved incomes and productivity in agriculture and must make intensive use of labor.

Short term vs. long term In the medium term, we should also look for indirect linkages between sectors and factors. High and labor intensive growth manufacture can lead to labor transformation and increase the incomes both poor migrants and those poor left behind. This is consistent with Indonesia’s experiences during 1980-1990s. Similarly, growth that is intensive in skilled (non poor) might increase the demand for unskilled as two are often complementary. Or as the poor improve their human capital, growth can be pro poor if it becomes more intensive in human capital rather simply in unskilled labor. Those imply when designing pro poor growth we should focus on the long term at least the medium term impact rather than the short term impact.

Spatial Issue Many experiences show that high concentration of poor people can often lead to persistent poverty traps where concentrations of the poverty generate negative spill-over effects credit, land or labor markets, the quality of public institutions, or too little public investment. Pro poor growth must therefore try to stimulate economic activity in these pockets of poverty. For this case many experiences show that public-private sectors involvement is more effective than leaving the public sector alone.

Breaking Poverty Cycle Other experiences show that persistent poverty incidences happen because the inability of poor family to break poverty cycle. With limited resources, we then have to focus on how to break those cycles by concentrating on developing human capital of children from nutrition, health and education investment. This policy choice may end up low performance in poverty reduction in short run but greater achievement in the long run. Can and Do the poor have capacity to wait for longer time? Thus, balancing the short term and long term is also important.

Managing the side impact - risks Expansions in economic opportunities often- if not always – produce a greater risk to the poor. The poor have disadvantage to cope with the risks. Thus resources also are needed for creating safety net. The challenge then how to design good targeting safety net schemes and not destroying the traditional, informal and more efficient scheme.

Put attention on both supply and demand In general, a good poverty strategy should handle both supply and demand sides to reduce the transition period time. The demand side is particularly important for the poorest and to encourage the poor to participate in the poverty program.

.. Finally some political economy issues When doing specific approach we may end up with over compensation for the poor vis a vis no thing for the near poor. This will create problem to get political support particularly when the portion of near poor dominate the population. Pro poor growth also implies shifting public resources from the middle class while they are the decision makers. It is more difficult to abolish the (inefficient and ineffective) poverty program. So be careful to introduce new program otherwise you will create a dependency on poverty program.

Conclusion Message 1: growth is necessary but not sufficient Message 2: Pro poor growth must be focused on where the poor depend on for their livelihood and use the factors of production they possess Message 3: Balancing the short term and long term growth is also essential. Message 4: Go to specific issue is preferable but don’t forget the aggregation problem ( the excessive transfer) Message 5: Taking into account the political economy issue and we may end up with the second best. Some leakages to the non poor may be necessary for initiating pro poor growth policies.

Thank you