Inclusive growth means poverty reduction and declining income inequality

I am doing some work on the way technology can be chosen to maximise employment in the pursuit of advancing general well-being. This is in the context of some work I am doing on advancing what is known as ‘relative pro-poor growth’ strategies in Africa via employment creation programs and draws on my earlier work in South Africa on the Expanded Public Works Program. In the current work, I have been assessing ways in which the Labour Intensive Public Works program in Ghana has been deployed to serve this purpose. The problem one confronts when working as a development economist in less well-off nations is that the institutional bias promoted by the IMF and the World Bank is towards advancing, at best, what we term ‘absolute pro-poor growth’. But that sort of agenda typically fails to strengthen other aspects of a strong civil society because it is almost always accompanied by rising inequality which continues to concentrate power and influence at the top and leads to resources being disproportionately expropriated by the wealthy (and usually foreign) classes. Institutions such as democracy, justice, law and order and causes such as environmental sustainability are then compromised.

This topic bears on a number of strands of public policy that have been canvassed in the recent period.

First, there is a continual call from so-called progressives who say governments need to tax the rich in order to get the funds to run social and other progressive-type programs.

We hear that call continually.

‘Tax the rich the rescue the NHS in Britain’

‘Tax the rich to pay for a Green New Deal in the US’

‘Tax the rich to pay for better education’ (everywhere).

And so on.

I have written several times about that narrative, including:

1. Off-shore tax havens – be sure we define the issues correctly (July 23, 2012).

2. Governments do not need the savings of the rich, nor their taxes! (August 17, 2015).

3. Upward mobility declines sharply as the rich make off with the growth (January 26, 2017).

4. Progressives should move on from a reliance on ‘Robin Hood’ taxes (September 4, 2017).

5. The ‘tax the rich’ call bestows unwarranted importance on them (February 21, 2018).

It should never be part of a progressive narrative. The two components of say ‘Tax the rich the rescue the NHS in Britain’ call should be forever separated and expressed as individual, unrelated propositions.

A progressive might want to tax the rich more to reduce their command over real resources as a means of containing their politicial influence or their influence in labour markets etc.

But the government never needs to tax the rich to get money to pay for government spending. Never if that government is monetarily sovereign in the Modern Monetary Theory (MMT) meaning of the term.

A progressive will always want to advance social and environmental programs that increase well-being for the population and will typical eschew outcomes that benefit only the highest income earners.

When I give public presentations on economic development, poverty and unemployment, I am often asked in the question time how I judge policy effectiveness.

I reply with a simple rule of thumb.

I judge the policy framework and the economy by not how rich it makes society in general but how rich it makes the poor!

And I add that economic growth has to bring a maximum poverty reduction rate (meaning income inequality has to also fall as a result of the poverty reduction strategy).

It is not an original benchmark but I think it is an effective one. It doesn’t make much sense to speed up the train if you leave an increasing proportion of the potential passengers behind on the station.

A society that generates rising poverty rates and cannot even see that all those working are over the poverty line is a deeply flawed one.

But, equally, a society that generates growth which is disproportionately received by the highest income earners (rising inequality) is not desirable, even if poverty rates are falling.

This is the difference between ‘absolute pro-poor growth’ (making the poor less poor irregardless of distribution) and ‘relative pro-poor growth’ (tilting the benefits of growth disproportionately to the poor – reducing inequality), which I will return to presently.

The ‘tax the rich’ is relevant then for ensuring a growth strategy delivers relative pro-poor growth, which should be the progressive goal.

Second, progressives have jumped on the UBI bandwagon and have bought the line that there can never be enough jobs or that paid work is coercive so the responsibility of government should be to guarantee incomes, rather than the MMT position, that it should guarantee employment.

I have written countless blog posts, academic articles and books about this topic.

If you want to see more on that topic go to the – Job Guarantee category and start reading.

Coincidentally, a World Bank official has just published an article in the IMF’s Finance and Development Journal (Vol 55, No.4, December 2018) – Reimagining Social Protection – which bears on this point.

The thesis in the article is that:

The changing nature of work is upending traditional employment and its benefits. In developed economies, global drivers of disruption-technological advances, economic integration, demographic shifts, social and climate change-are challenging the effectiveness of industrial-era social insurance policies tied to stable employment contracts. Those policies have delivered formidable progress, but they have also increasingly harmed labor market decisions and formal employment …

In developing economies, the world of work has mostly been diverse and fluid.

They go on to document the fact that in poorer nations “social insurance participation and coverage have remained low” and that:

Informality persists on a vast scale in emerging market economies-as high as 90 percent in some low- and middle-income countries – notwithstanding technological progress …

Changes in the nature of work caused by technology shift the pattern of demanding worker benefits from employers to demanding welfare benefits directly from the state.

And then they argue that “Social assistance, which contributes to equity in societies, could be enhanced” and suggest that a solution is to offer some form of “guaranteed minimum income program”, whether it be means-tested or universal or something in-between (negative income tax).

The narrative is somewhat confused. It is not clear whether the World Bank is advocating ‘absolute pro-poor growth’ (making the poor less poor irregardless of distribution) or ‘relative pro-poor growth’ (tilting the benefits of growth disproportionately to the poor – reducing inequality).

The claim that “social assistance … contributes to equity” suggests a ‘relative pro-poor growth’ strategy. But then the article talks about a “risk pooling” and “risk-sharing” framework where the government only deals with the “relatively rare” instances where the “most catastrophic losses” of income result and plunge families into poverty.

Governments may also be involved in reducing the costs of “lower-loss events” (susch as unemployment) but beyond that there is a declining role for government:

responsibility … shifts away from purely public resources and direct provision to household or individual financing and market provision.

Now why would institutions such as the World Bank be joining up with CEOs of companies that engage in harsh labour practices within their own firms to support basic income guarantees.

This is particularly the case when the World Bank has not shown a concern for programs that build ‘relative pro-poor growth’.

I answered that question in these blog posts (among others):

1. Why are CEOs now supporting basic income guarantees? (March 28, 2017).

2. Basic income guarantee progressives cosy up with the worst CEOs in the world (April 4, 2018).

It is clear that the high income earners require growth in order to expand their own incomes even though they also try to squeeze the share of other income groups in existing national income.

To maintain growth, there has to be expenditure and the largest component of aggregate expenditure is consumption by households.

Therein lies the problem.

Squeezing the poor of wages and creating increasingly precarious work with elevated levels of job instability is good for the top-end-of-town because they can get a larger share of what is produced.

But it also undermines the growth rate and becomes self-defeating.

Two things help in the quest of the elites:

1. Load the poor up with credit and debt – to keep consumption spending growing in an environment of flat wages growth.

2. Get the government to provide a guaranteed minimum income (without higher taxes on the top earners) – also keeps consumption spending growing in an environment where jobs are being slashed and wages growth suppressed.

So the advocacy by the CEOs for the provision of a UBI makes perfect sense. It is another way they can ensure national income growth continues, so they can further feather their own nests.

A dollop of UBI compared to billions of expropriated income growth! A good equation.

Growth strategies

And this all bears on the work I am doing about poverty reduction programs in Africa.

I won’t say much specific here about that because there are confidentiality issues at this stage.

But the World Bank article cut across this work in another way.

The article talks about ways in which governments can “offer more effective risk sharing to citizens and residents” in an environement where technology is making “industrial-era policies” (relating to social assistance) obsolete.

It cites a number of ways including:

In Ghana, the Labor Intensive Public Works programs digitized paper-based transactions and made wide use of biometric machines. The result was a reduction in payment time from four months to a week.

As an aside, the program is actually called The Labour Intensive Public Works (LIPW) program and the IMF and World Bank should respect the proper spelling.

The LIPW operates under the umbrella of the Ghana Social Opportunities Project (GSOP) which was introduced in October 2010 with World Bank support.

The GSOP aims:

… to improve targeting in social protection spending, increase access to conditional cash transfers nationwide, increase access to employment and cash-earning opportunities for the rural poor during the agricultural off-season, and improve economic and social infrastructure in target districts.

The two main arms of the Project were the Livelihood Empowerment Against Poverty (LEAP) Implementation and Capacity Building component and the LIPW component.

The LEAP component involved cash grant payments to increase consumption capacity and provide “access to services and opportunities among the extreme poor and vulnerable”.

Increased nutritional outcomes for young children and those with disabilities, improving health care access, increasing school attendance and outcomes and widening access to welfare and training services were all included.

It is a limited program but has expanded and was covering some 213,044 households by September 2016 across all 216 districts in Ghana (Source).

The LIPW component of GSOP

To provide beneficiaries with employment and income-generating opportunities, particularly during periods when there is a shortage of labour demand and in response to external shocks.

It started in 2010.

It is highly targetted both demographically and spatially and aims to help poor rural households escape poverty.

The workers are deployed to create essential public infrastructure which improves the productive potential of the nation.

The feature of the program is its use of labour intensive work methods instead of more modern, capital intensive methods.

So instead of deploying heavy machinery (bulldozers, earth moving equipment), the workers in the LIPW build roads, dams and work in forests using manual techniques.

The goal is to maximise employment for the project outlays.

My work in South Africa between 2007-2008 evaluating the Expanded Public Works Program for the ILO demonstrated this point to me.

The design of an employment guarantee project has to be operationally effective and tailored to the contextual circumstances facing the nation.

It has to ensure the maximum number of people get employed (all those who want a job but cannot find one); provide secure incomes; undertake productive (broadly defined) tasks; and ensure the participants receive opportunities to train for new skills by choice.

In a nation such as Ghana, which has a massive public infrastructure deficit and significant poverty (especially in rural areas), the imperative is to ensure the programs provide as much work as is possible for the tasks being pursued.

The EPWP brought home the point that while, for example, US and British-trained engineers wanted to build roads with the latest capital intensive machinery the reality was that this would have employed very few people per km of road built.

When confronted by the idea that the same roads could be built – to the same quality specification – but with labour intensive methods, the public works engineers are confronted and reject the suggestion.

When I was working on the EPWP in South Africa, I was told by engineers that the country was aspiring to be a sophisticated nation and should not be using labour intensive techniques.

However, the reality is that research has shown that the road outcomes are of equal quality if built with more traditional, labour-intensive methods.

And, when there is massive poverty and a lack of overall skill development the most sensible nation building strategy is to use technologies that suit the stage of development that the policy makers confront.

So it was perfectly reasonable to produce roads in South Africa using labour intensive techniques. These labour-intensive programs produce high quality roads and employ thousands of workers. The quality is not a function of the capital intensity.

The LIPW in Ghana has learned this lesson and the labour intensive methods have helped to rehabilitate a huge number of roads and build dams for farming and improved orchards etc.

A small majority of the jobs have been gained by women, which has empowered them to seek other advantages such as improved health and education.

The program is not perfect by any stretch of the imagination. But it is so much better than what was on offer before.

The poverty rates in districts where the program has been deployed have declined dramatically (by more than 10 per cent).

A March 2016 report from UNICEF – The Ghana Poverty and Inequality Report evaluation of the LIPW – reported that between 1992 and 2013:

Ghana’s national level of poverty fell by more than half (from 56.5% to 24.2%)

This is on the back of an average annual growth rate since 2005 of over 7 per cent. The LIPW has been an important part of the poverty reduction effort.

But, and this is the issue:

Despite the growth recorded, inequality has been increasing in the country and poverty remains prevalent in many areas.

What we observe in Ghana is that despite the overall economic growth:

… the annual rate of reduction of the poverty level slowed substantially from an average of 1.8 percentage points per year in the 1990s to 1.1 percentage point per year reduction since 2006.

The problem is that the growth has been accompanied by rising income inequality which compromises the capacity of the nation to reduce extreme poverty.

That is certainly the issue in Ghana.

It is evident that:

1. “Looking at consumption levels … the gap between the poorest 10% and the richest 10% of the population has been on the rise and has also increased since 2006.”

2. “The wealthiest decile now consume 6.8 times the amount than the poorest 10%, up from 6.4 times in 2006.”

3. “average consumption of this wealthiest group increased by 27% between 2006 and 2013, whereas for the poorest it only increased by 19% – meaning that growth for the richest group was over 1.4 times greater than for the poorest in this period.”

4. “The wealthiest 10% consume around one third of all national consumption, whereas the poorest 10% consume just 1.72%.”

5. “What is particularly notable is that, most recently, in the period 2006 to 2013, the curve flattens out even more but the tails actually invert – the extreme poorest are now experiencing higher levels of growth than average.”

The latter result (5) is, in part, due to the LEAP and the LIPW programs.

Rising inequality matters in this context because:

Between 1992 and 2006 poverty fell by an impressive 23.2 percentage points; but if inequality had not increased the reduction would have been 2.5 percentage points higher – equivalent to maintaining around 555,422 people in poverty by 2006 who could have otherwise exited it …

… while growth has driven impressive poverty reduction, rising inequality has indeed reduced poverty reduction. Since 2006 alone, the rise in inequality reduced poverty reduction by 1.1 percentage points, equivalent to maintaining around 289,822 people in poverty since 2006 who could have otherwise exited it …

So while economic growth typically places a strain on the natural environment, a poor nation would hope to maximise the poverty reduction that comes with each percentage point of such growth.

An inclusive growth strategy means that “growth … has benefited the poor disproportionately more than the wealthy”.

Despite the LIPW (and LEAP), Ghana fails that test.

And this brings me back to the difference between ‘absolute pro-poor growth’ and ‘relative pro-poor growth’ strategies.

Economic growth is required to reduce poverty. That is undeniable in the context of an expanding population.

However it is clear that “rising average incomes may not necessarily reduce extreme poverty if income inequality is high”.

An inclusive growth strategy will raise “the consumption of the poorest individuals in society thereby enabling them to meet their basic needs” by also reducing income inequality.

A ‘relative pro-poor growth’ strategy is inclusive because it targets both reductions in poverty and income inequality.

The World Bank and the IMF have for too long been satisfied to promote ‘absolute pro-poor growth’ strategies (and even failing to achieve that) which means that the goal is achieved if absolute poverty is reduced iwthout regard to the distribution of that growth across demographic cohorts.

So a nation can see absolute poverty reduce somewhat while inequality rises, which means the growth is being expropriated by the higher income and wealth classes and reducing the effectiveness of the poverty reduction program.

I will write more about this at some future date.

But in terms of what it means for the design of programs such as the LIPW, governments cannot just be content to lift the poorest citizens out of poverty by providing work.

They must also accompany those employment guarantees with other policies that ensure that income inequality is also compressed as economic growth ensues.

The introduction of a UBI, for example, would not achieve those aims.

Conclusion

Progressives should always reject the goal of ‘absolute pro-poor growth’.

Only inclusive growth, which means falling poverty rates, rising consumption potential among the poorest and declining income and wealth inequality, has to be the goal.

A ‘tax the rich’ policy makes sense in that context. Not to raise funds for the job creation programs. But to ensure growth is more equitably shared.

Just giving the poor a cash handout (like the UBI) will not help in this regard.

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.