1 Poverty in Bangladesh: Creating Opportunities & Bridging the East- West divide Ambar Narayan, Hassan Zaman (based on World Bank Poverty Assessment for Bangladesh 2008) April 20, 2009

2 Poverty trends in recent years Poverty headcount rates (%) Upper PL Lower PL National Urban Rural Notes: Using official Poverty Lines estimated for HIES (2005, 2000)  Poverty rate reduced from 49% to 40% during Similar reduction for extreme poverty rate (34% to 25%) Similar reduction for extreme poverty rate (34% to 25%) Significant reduction in both urban and rural poverty Significant reduction in both urban and rural poverty  No. of people in poverty fell by 6 million, in extreme poverty by 8 million  But nearly 56 mn. still in poverty, including 35 mn. in extreme poverty “Consumption” poverty: inability to purchase what is necessary to satisfy “basic needs”, including minimum calorie needs and non-food items

3 Long-term poverty trends (91-92 to 2005) Poverty rate fell from 57 to 40%, extreme poverty rate from 41 to 25%Poverty rate fell from 57 to 40%, extreme poverty rate from 41 to 25% –Highest reduction in poverty during Consumption growth has benefited the poorConsumption growth has benefited the poor –Stable relative inequality (Gini index for consumption at 0.31) since –During , consumption growth among the bottom 30% higher than the average

4 Rich-poor gaps Ratios of percentiles of per capita exp have remained mostly unchanged between 2000 and 2005 (e.g. p90:p10, p50:p10) – little change in relative inequalityRatios of percentiles of per capita exp have remained mostly unchanged between 2000 and 2005 (e.g. p90:p10, p50:p10) – little change in relative inequality But gaps between percentiles have increased (e.g. p90-p10, p50-p10) – increase in absolute inequalityBut gaps between percentiles have increased (e.g. p90-p10, p50-p10) – increase in absolute inequality

5 Bangladesh compares well with South Asian countries in poverty reduction….. Poverty reduction in Bangladesh among the highest in the region since 1990s Poverty reduction in Bangladesh among the highest in the region since 1990s Growth in Bangladesh more pro-poor than in other SA countries except Nepal Growth in Bangladesh more pro-poor than in other SA countries except Nepal

6 …. But less so with East Asia East Asian countries have reduced poverty much faster – higher growth rates and comparable responsiveness of poverty to growth East Asian countries have reduced poverty much faster – higher growth rates and comparable responsiveness of poverty to growth If Bangladesh attains similar growth rates, it would match the pace of poverty reduction in East AsiaIf Bangladesh attains similar growth rates, it would match the pace of poverty reduction in East Asia ― In 1990 both Bangladesh and Vietnam had poverty rate of 58%; in 2005 Vietnam’s poverty rate was 20%, half that of Bangladesh’s

7 Poverty projections and MDGs IF the GDP growth is maintained (annual average 5.3%), MDG target (halving poverty rate from 57% in 91-92) will be metIF the GDP growth is maintained (annual average 5.3%), MDG target (halving poverty rate from 57% in 91-92) will be met These projections assume (based on recent history)These projections assume (based on recent history) –Stable inequality: if inequality were to rise, less poverty reduction will occur for same GDP growth –Continued fall in fertility: if household size had not fallen (from 5.2 to 4.9) between 2000 and 2005, poverty reduction would have been cut by half Whether the projections are met also depends onWhether the projections are met also depends on –Frequency of shocks (e.g. food prices, natural disasters) can reduce GDP growth and responsiveness of poverty to growth Had there been no rice price shock, there would be around 4.2 million fewer poor people in Bangladesh in 2008Had there been no rice price shock, there would be around 4.2 million fewer poor people in Bangladesh in 2008 Estimated poverty reduction during would have been 5 pct points; instead ~2 percentage points with the rice price shock (i.e. from 40 to 38%)Estimated poverty reduction during would have been 5 pct points; instead ~2 percentage points with the rice price shock (i.e. from 40 to 38%) Rice price shock is also estimated to have raised poverty gap (average deficit of the poor’s consumption relative to the poverty line) by 30%Rice price shock is also estimated to have raised poverty gap (average deficit of the poor’s consumption relative to the poverty line) by 30% –How deep and long the current global recession will be (impact on remittances and RMG exports)

8 Rise in non-income indicators of welfare Many non-income indicators improved more significantly for the extreme poor than for the overall populationMany non-income indicators improved more significantly for the extreme poor than for the overall population Consistent with inequality in consumption not worseningConsistent with inequality in consumption not worsening

9 What explains poverty reduction during ? Significant social and economic transformation Economic transformation – closely related to strong GDP growth (>5% annually) and urbanizationEconomic transformation – closely related to strong GDP growth (>5% annually) and urbanization –rising returns to human and physical assets, especially wages –shift from low return agricultural labor to nonfarm employment (mainly services) in urban areas –growth in remittances and exports Forces emerging from social transformations over timeForces emerging from social transformations over time –A fall in the number of dependents in a household, linked to past reductions in fertility –Increases in labor force participation and educational attainment, particularly among women

10 Economic transformation: labor markets Poverty reduction attributed to rising labor productivity and wages, and (to a lesser extent) to shift from agriculture to non-farm employmentPoverty reduction attributed to rising labor productivity and wages, and (to a lesser extent) to shift from agriculture to non-farm employment –Increase in labor productivity in industry contributed most significantly to income growth –Share of agriculture in employment fell from 51% to 46%, that of services grew from 27% to 31% –Overall job creation during kept pace with population growth Poverty reduction by sectorPoverty reduction by sector –Highest within services due to employment growth (5.4% annually, compared to 0.7% in agriculture and 3.9% in industry) –Substantial in agriculture due to small productivity growth and the large share of population employed in agriculture –Within industry driven primarily by productivity growth

11 Demographic transition creates opportunities and challenges in the labor market Although population growth is now 1.5% per year, the working age population is growing at %Although population growth is now 1.5% per year, the working age population is growing at % Large cohorts will enter the labor market; ~22 mn. new entrants will need to be absorbed into the labor market between 2005 and 2015Large cohorts will enter the labor market; ~22 mn. new entrants will need to be absorbed into the labor market between 2005 and 2015 Annual rate of job creation has to double in the years up to 2015, compared to the rate during Annual rate of job creation has to double in the years up to 2015, compared to the rate during

12 Rising contribution of women in the labor market Women’s labor force participation rates, working hours, education, income have increased more than those of men between 2000 and 2005Women’s labor force participation rates, working hours, education, income have increased more than those of men between 2000 and 2005 Women finding jobs increasingly inWomen finding jobs increasingly in –Urban areas, public sector –Self-employment outside agriculture and using formal financing (micro-credit) Women’s labor income is important for poverty reduction but its full potential remains unexploitedWomen’s labor income is important for poverty reduction but its full potential remains unexploited –women’s labor market participation still too small to make a significant dent in poverty –growth in women’s participation and incomes largely concentrated among the nonpoor

13 Remittances and poverty International remittances grew at 20% annually during ; Bangladesh among the top 10 remittance receiving countriesInternational remittances grew at 20% annually during ; Bangladesh among the top 10 remittance receiving countries Poverty rate among households receiving remittances from abroad is 17% compared to 42% among the restPoverty rate among households receiving remittances from abroad is 17% compared to 42% among the rest Areas with higher incidence of remittances less likely to be poor; 24% of households in Chittagong division and 16% in Sylhet received remittances, compared to <5% in the restAreas with higher incidence of remittances less likely to be poor; 24% of households in Chittagong division and 16% in Sylhet received remittances, compared to <5% in the rest CGE simulations attribute a little above 15% of the poverty reduction to the effect of growth of foreign remittancesCGE simulations attribute a little above 15% of the poverty reduction to the effect of growth of foreign remittances However, likely global recession poses clear risks to remittance inflowHowever, likely global recession poses clear risks to remittance inflow –63% of remittances come from the Gulf where construction industry is likely to take a downturn

14 Emerging regional divide in poverty Rising inequality between the East and WestRising inequality between the East and West –Dhaka and Chittagong contributed 79% of national poverty reduction with just over half the population; Khulna and Barisal with 20% of total population had no contribution –Till 2000, the largest difference was between Dhaka and the rest of the country; from 2000 to 2005, divergence between East and West East-West gap in poverty rate doubled from 2000 to 2005East-West gap in poverty rate doubled from 2000 to 2005

15 Growth poles and the East-West economic divide Regions differentiated by access to growth polesRegions differentiated by access to growth poles –Dhaka and Chittagong: growth poles (shares in population, economic activities) –Padma and Jamuna rivers obstacles to access to the growth poles East-West gap widened from 2000 to 2005East-West gap widened from 2000 to 2005 –Average consumption in East 9% higher in 2000, 17% higher in 2005 –Much faster consumption growth for Eastern poor than Western poor –Gaps in both endowments and returns contributed to the widening East-West consumption gap –Gap in endowment widened for all; gap in returns widened for the poor East West

16 Labor markets – East and West Real wages growing robustly in the East but stagnating in the WestReal wages growing robustly in the East but stagnating in the West –Total labor income growth in the East was twice that of the West –Slow growth of wages in the West mostly explained by stagnation in the urban areas Labor markets and the types of jobs they offer are also different between regionsLabor markets and the types of jobs they offer are also different between regions –In the East, salaried jobs dominate; in the West, farming remains important, with high share of low-paid daily waged workers –43% of labor income in the West from agriculture, compared to 25% in the East Higher returns to education in the East than West; difference especially large for urban areasHigher returns to education in the East than West; difference especially large for urban areas Gender difference and public sector premium are lower in East, likely pointing to better labor market integrationGender difference and public sector premium are lower in East, likely pointing to better labor market integration

17 Economic concentration increasing over time Clustering of formal sector employment around Dhaka and ChittagongClustering of formal sector employment around Dhaka and Chittagong Large increase in formal sector employment in East from 2003 to 2006Large increase in formal sector employment in East from 2003 to 2006 –In areas to the north and west of Dhaka City Corporation, but not the city center Rapid economic expansion to the north and west of Dhaka city (Gazipur, Savar)Rapid economic expansion to the north and west of Dhaka city (Gazipur, Savar) –cheaper land and labor, less congestion, while allowing firms to exploit the spillovers and positive externalities from Dhaka city

18 Why has the East-West economic gap expanded? Empirical evidence suggests the following storyEmpirical evidence suggests the following story –Increasing agglomeration of high-return economic activities at growth poles have led to strong spillover effects in surrounding areas and higher incomes within East –East-West differences have expanded because West is handicapped by the absence of growth poles, poor connectivity with urban centers, and deficient public infrastructure and markets –While the better-endowed households from West can respond to the economic opportunities in East by migrating, the poor are mostly unable to overcome barriers to their mobility Poverty incidence also varies widely within East or WestPoverty incidence also varies widely within East or West –Agro-climatic factors affecting specific areas; e.g. “Chars”, Chittagong Hill Tracts, salinity of land in south –Vulnerability to natural disasters/seasonal shocks: areas with higher risk of cyclone or monga more likely to be poor

19 Human development: current challenges Malnutrition continues to be strikingly high High malnutrition compared to countries of same income levelHigh malnutrition compared to countries of same income level Between and 2006, nutritional gains plateauing in terms of % of underweight childrenBetween and 2006, nutritional gains plateauing in terms of % of underweight children Fortification of basic staples in nutritional program may be key to further nutritional gainsFortification of basic staples in nutritional program may be key to further nutritional gains

20 Inequities persist in health service utilization Several indicators show increasing equity divide in health service utilization despite gains overall, e.g.:Several indicators show increasing equity divide in health service utilization despite gains overall, e.g.: –Immunization –Ante-natal care from a medical trained provider –Deliveries at both public and private facilities Access to care hindered by challenges in human resources, despite extensive network of facilitiesAccess to care hindered by challenges in human resources, despite extensive network of facilities –Absenteeism of staff –Ratio of nursing staff to doctors remains low

21 Mixed progress in education since 2000 Little change in primary gross enrollment since 90 % enrollment rate attained in 2000Little change in primary gross enrollment since 90 % enrollment rate attained in 2000 –But pattern of late entry into school: over 30% of children of primary school going age not attending primary Substantial growth in secondary enrollment (52% to 62% from 2000 to 2005).Substantial growth in secondary enrollment (52% to 62% from 2000 to 2005). –However, completion rates declining with rising rich-poor gap: only 6-7% of the poor have completed secondary schooling Public education expenditure per student significantly lower than other countries in SAsiaPublic education expenditure per student significantly lower than other countries in SAsia –Appears to be compensated by high private tuition expenditures which worsen inequalities –Room to make expenditures more pro-poor (e.g. primary stipend program benefits large share of non-poor)

22 Regional patterns in human development Human dev outcomes in poorer divisions are often betterHuman dev outcomes in poorer divisions are often better –E.g. child mortality is lowest in Barisal and secondary enrollment is highest in Khulna; Sylhet is lagging behind in most HD indicators (e.g. girls secondary enrolment, infant mortality rate) The contradiction between economic and social outcomes – do differences in social norms/conservatism play a role?The contradiction between economic and social outcomes – do differences in social norms/conservatism play a role?

23 How do households cope with shocks? Rapid national survey of 2,000 households to assess the impact of rice price shock (July, 2008)Rapid national survey of 2,000 households to assess the impact of rice price shock (July, 2008) The way households cope may have longer-term adverse consequences for productive assets and human capitalThe way households cope may have longer-term adverse consequences for productive assets and human capital –76% of households reduced quantity of food intake; 88% switched to lower quality food –8% took children out of school; 39% reduced education expenses –45% drew upon savings or pawned belongings

24 Therefore the need for effective safety nets Government has raised safety net expenditures steadily since mid-1990sGovernment has raised safety net expenditures steadily since mid-1990s But public resource allocation across divisions is puzzlingBut public resource allocation across divisions is puzzling –Not consistent with poverty incidence; e.g. 22% of households in Sylhet safety net beneficiaries while national average is 13% Low coverage and transfer valuesLow coverage and transfer values –Even among bottom 10%, less than one-fourth receive any safety net benefit Little coverage of urban poor except for OMSLittle coverage of urban poor except for OMS

25 Looking ahead: accelerating the pace of poverty reduction (A) Raising growth beyond 7% –Stable macro and political environment, removing infrastructure bottlenecks, export diversification, greater female participation in labor force and sustaining remittance growth –Investments to raise agricultural productivity (closing the “yield gap” with other developing countries) –will reduce regional disparity since lagging areas rely disproportionately on agriculture (B) Spreading growth to lagging regions –Investment in physical infrastructure (roads, Padma bridge) to improve access to markets and existing growth poles –Investment in urban infrastructure and services in lagging regions –Investment in human capital/skills – conditional transfer programs can serve dual (safety net and human devlopment) objectives –Improving access to remittances by reducing barriers to migration –Spatially targeted incentives and complementary investments to spur the creation of regional growth poles

26 Looking ahead (cont.) (C) Moderating population growth rates, tackling malnutrition and infant and maternal mortality -Measures to increase use of contraceptives, scaling up demand side interventions (e.g. maternal care voucher pilot) and provision of fortified food (D) Reducing inequities in education and strengthening quality -Raising public education spending in line with regional benchmarks and focus on access by poor, preventing drop-outs and strengthening links with labor market (E) Expanded role for safety nets -Current fiscal allocation for safety nets can be used to expand benefits to most needy by improving targeting and consolidating programs under an umbrella body -Regional allocation of safety net resources need to be aligned better with poverty incidence