Stephan Klasen and Mark Misselhorn The Growth Semi-Elasticity of Poverty Reduction Explaining Heterogeneity across Space and Time

The Growth Semi-Elasticity of Poverty Reduction2 Background Many efforts to estimate a general growth elasticity of headcount poverty Chen and Ravallion (1997) estimated growth elasticity to be around 3; World Development Report 2000/2001: elasticity between closer to 2 (Bhalla: 5!) Cross-Country Heterogeneity, sample and time period differences Must be the case: Mathematical link between growth, inequality change, and (absolute) poverty reduction;

The Growth Semi-Elasticity of Poverty Reduction3 Poverty Reduction and Growth Source: Bourguignon 2003

The Growth Semi-Elasticity of Poverty Reduction4 Decomposition

The Growth Semi-Elasticity of Poverty Reduction5 Background Bourguignon (2003): Growth elasticity of poverty reduction depends on: –Initial inequality –Location of poverty line (relative to mean incomes) Under assumption of lognormal income distribution, can calculate these elasticities precisely. Works empirically quite well (for headcount, not so well for depth, severity). Allows quick prediction of poverty impacts of growth and distributional change.

The Growth Semi-Elasticity of Poverty Reduction6 This Paper Argues: –Growth Semi-Elasticity (i.e. percentage point change in poverty as a result of growth) more useful from a policy perspective; –Avoids some distortions in growth elasticity; Derives: –Determinants of growth and distribution semi- elasticity under the assumption of log-normal income distribution; Applies –Poverty spells database to show a better empirical fit enabling a greater use of data, and better interpretation and prediction.

The Growth Semi-Elasticity of Poverty Reduction7 Decomposition Identity

The Growth Semi-Elasticity of Poverty Reduction8 Decomposition Identity Growth elasticity: –Higher, the lower initial inequality (at least as long as poverty line smaller than mean income). –Higher in richer countries (low ratio z/y). –By implication: increasing over time as countries grow. Growth semi-elasticity: –Higher, the lower initial inequality (if z<y) –Generally higher in high poverty countries.

The Growth Semi-Elasticity of Poverty Reduction9 Growth Elasticity of P0

The Growth Semi-Elasticity of Poverty Reduction10 Growth Semi-Elasticity of P0

The Growth Semi-Elasticity of Poverty Reduction11 Why Semi-Elasticity? Percentage point changes in poverty easier to understand and compare and more relevant for policy- makers; ‚Bias‘ in Poverty Elasticity: Higher in richer countries; Growing with development; More affected by growth in richer countries; Empirical advantages: No need for arbitrary ‚sample selection‘; Better fit for all poverty measures (and thus better predictive power).

The Growth Semi-Elasticity of Poverty Reduction12

The Growth Semi-Elasticity of Poverty Reduction13 Empirical Application Poverty spells database; Empirical Strategy (following Bourguignon, 2003): Dependent variable: Percent (percentage point) change in poverty; ‚Naive‘ poverty-growth model; Augmented by change in inequality; Augmented by location of poverty line and initial Gini (mathematical relation to log normal distribution parameter); Augmented by interactions with inequality change; Compared to calculated elsticities under lognormal assumption; Problem for Elasticity regressions: Must exclude data where % changes are very large or undefined. Unable to explain poverty depth/severity measures.

The Growth Semi-Elasticity of Poverty Reduction14 Relative Changes in P0

The Growth Semi-Elasticity of Poverty Reduction15 Relatives Change in P1

The Growth Semi-Elasticity of Poverty Reduction16 Relatives Change in P2

The Growth Semi-Elasticity of Poverty Reduction17 Absolutes Changes in P0

The Growth Semi-Elasticity of Poverty Reduction18 Absolutes Change in P1

The Growth Semi-Elasticity of Poverty Reduction19 Absolutes Change in P2

The Growth Semi-Elasticity of Poverty Reduction20 Application To understand past poverty reduction performance: –E.g. India‘s recent success versus lower success in growing SSA economies (e.g. South Africa); To ‚predict‘ poverty-effect of policy based on assumption about their growth and distributional effects; To simulate growth and/or distributional change requirements to reach the MDGs; or alternatively: to project MDG success based on assumed growth/distributional change patterns; Note: Measurement not policy tool !

The Growth Semi-Elasticity of Poverty Reduction21 ‚Predicting‘ Headcount Poverty

The Growth Semi-Elasticity of Poverty Reduction22 Conclusion Semi-elasticities more policy-relevant and not prone to ‚bias‘; Allow integration of more growth spells; Can explain changes in FGT-Measures better; Could also be used for simulations about growth and distributional change requirements to achieve MDGs;

The Growth Semi-Elasticity of Poverty Reduction23 Distribution Semi-Elasticity