Policies for Reducing Poverty

International Monetary Fund. External Relations Dept.
Published Date:
January 1990
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Recognizing the immense waste of human resources within their economies due to poverty, some developing country governments have begun to change their approaches toward development to include the poor as clearly identified targets of official programs, financed by domestic resources or external aid. The lessons from their successes and failures, captured in the World Development Report, 1990, offer some hope for the poorest of the world.

As mentioned in the preceding article by Michael Walton, country experience indicates that poverty is most effectively reduced when domestic development policies stress two key components: a pattern of growth that encourages the efficient use of labor and the provision of social services to the poor. However, some of the poor will not be reached by these policies, and others will remain vulnerable to shocks. A well-targeted system of transfers and safety nets, therefore, is needed in a comprehensive poverty reduction program. A country’s development strategy and stage of development, the extent and nature of administrative and physical infrastructure, and the salient characteristics of the poor in each country will determine the precise role and optimal combination of these policies.

Promoting economic opportunities

How can governments encourage growth that fosters the efficient use of the factors owned by the poor? The answer is the first key to long-term poverty reduction. One way is through the price mechanism. Relative prices matter to most of the poor. Increases in the relative price of goods that more intensively use the labor of the poor encourage growth in sectors that employ such labor and so raise the returns to the single most important asset of the world’s poor: their capacity for work. The external terms of trade of developing countries, and the net trading position of the poor within those countries can interact powerfully to influence the benefits the poor obtain from the pattern of growth.

But overvalued exchange rates, excessively capital intensive industrialization, and artificially low relative prices of agricultural outputs can severely hamper efforts to reduce poverty, as evidenced by the experience of Ghana in the 1970s, and of Nigeria, Senegal, and Tanzania, more recently. In contrast, Cameroon and Kenya avoided heavy taxation of agriculture and performed comparatively well in terms of growth of agriculture, manufacturing, and per capita GDP.

Infrastructure development has been found to increase the productivity of the rural poor. Improved transport and marketing networks have spurred growth in agriculture and helped develop and diversify the economies of backward areas in many countries. The spread of irrigation and the adoption of high-yielding varieties and other forms of technological progress in Asia and Latin America vastly increased employment opportunities for the poor, and helped stabilize their incomes over the agricultural calendar. In India, Indonesia, and Pakistan, rural wages also rose as a result. However, certain rural development policies may bring far fewer gains to the rural poor than others. For example, agricultural policies favoring large farmers and subsidies to mechanization have had quite opposite effects in Brazil.

A buoyant and secure agricultural sector, in turn, increases the demand for nonfarm goods and services and helps create jobs in nonfarm activities. Bank research indicates that a one dollar increase in agricultural income was linked to an 80-cent increase in incomes from nonfarm sources in certain rural areas of India and Malaysia that had well-developed infrastructures.

Infrastructural development and a supportive policy environment can also promote growth in urban labor demand and hence, wages. Access to low cost public utilities, for example, has been linked to the growth and success of small firms in Colombia and the Republic of Korea. However, licensing regulations and urban planning ordinances can restrict self-employment opportunities for the urban poor and more generally inhibit informal sector activities. Such policies need to be carefully implemented and monitored so as to avoid their adverse effects on the poor.

Participation of the poor. To enhance the ability of the poor to participate in the growth process, it is often necessary to implement policies that provide greater access to resources and opportunities for productive investments. In agriculture-based economies, improved access to land would directly benefit poor households. Although major redistribution of land ownership is not usually feasible politically, smaller land transfers, tenancy, and tax or subsidy reforms have at times improved access along with earning opportunities.

When the poor own land, necessary inputs, such as irrigation, fertilizers, and pesticides, can be made available to expand the productivity of the land. Further, improving poor farmers’ access to markets and providing transport, information, and technological innovations suitable for small-scale farming, enables them to respond to economic incentives. A few rural development projects have effectively reached the poor in India, Pakistan, the Philippines, and Sri Lanka, by building local institutions, involving village organizations, and delegating responsibility to participants.

The provision of credit to the poor through innovative and effective channels can aid these policies, but past experience suggests that such interventions often do not reach the poorest or yield reasonable returns. Where these initiatives have worked, such as Bangladesh’s Grameen Bank—a nongovernmental institution that provides credit mainly for rural nonfarm enterprises—success has depended both on the scheme’s design (Grameen’s use of group-based lending) and the ability and concern of its managers.

Social services: investing in people

Investment in human capital is the second key to the long-term reduction of poverty, complementing the policies suggested above for achieving a pattern of growth favorable to the poor. Despite encouraging progress in developing countries at the aggregate level, many of the poor within these countries continue to lack access to even the most basic human services. Policies and earmarked budgets have often failed to reach them because of inefficient spending and biases toward programs that benefit the rich. For example, an estimated average 70 to 85 percent of total health care spending (public and private) in developing countries goes to curative care (mainly for a minority—the better-off urban dwellers). Yet, preventive and community services have been shown to be more effective in reducing morbidity and mortality.

The satisfaction of basic needs directly alleviates some of the most severe consequences of poverty. Healthy, well-nourished, and educated individuals obviously have a higher standard of living than sick, hungry, and ignorant ones. They are also more productive and better able to respond to new opportunities. Improved nutrition and health, for instance, increases the time the poor are able to work.

Such investments in human capital have other important effects too. The education of mothers is linked to declines in infant and child mortality, as well as improved child nutrition, which, in turn, affects a child’s ability to learn and perform at school. Family planning services enable parents to better plan and space births, thereby improving both maternal and child health. In the long run, more education produces acceptance of family planning and lower fertility.

Profiles in poverty: three families

Behind all the numbers and policy pronouncements hides the reality of a hard life for the world’s poorest. This year’s World Development Report casts its discussion of policy options for governments attempting to improve the lot of the poor against the backdrop of past and new empirical evidence on household characteristics, often from interviews. The following profiles of three families illustrate some typical settings in which the policies discussed would have an important role.

In Ghana: A subsistence farmer’s household in Ghana’s Savannah region consists of seven members: husband and wife, their three children, and his mother and father (60 and 70 years old). The family lives in three barren mud brick huts with earthen floors, on the three acres of land that it owns. There is no toilet, electricity, or running water.

The family raises food and a meager cash crop on unirrigated land of poor quality. The family lacks access to fertilizer and other modern inputs. During peak periods, all family members pitch in, while at other times of the year, there is little to do. The husband’s periodic journey to the market town to sell their cash crop and purchase a few essentials is hampered by distance and the lack of roads and transport.

The older Ghanaian family members never received any schooling, but the eight-year-old son is now in the first grade. The family hopes to be able to keep him in school, though there is pressure to keep him at home to help with the farm in the busy periods. He and his two younger sisters have never had any vaccinations, nor even seen a doctor.

In Peru: This poor urban household is in a shantytown on the outskirts of Lima. The shack is made from various scraps of wood, iron, and cardboard. The family of six—mother, father, and their four children—shares one bed, a table, and two benches. They cook with a small kerosene stove and have no toilet or electricity.

The elder two children go to the shantytown school, recently built by a local nongovernmental organization. When necessary, they take morning and afternoon turns at school so as not to leave the house unattended. The children were given polio and DPT (diphtheria, pertussis, and tetanus) inoculations when a mobile clinic came to the shantytown. Some public services are provided. Garbage is collected, and water is delivered to households that have a cement tank, which this family has not yet built. For now, the women of the family fill buckets at the nearby public standpipe.

The father works in construction on a casual basis. The work is uncertain but other (lower paying) informal sector jobs, requiring unskilled labor, are generally available. The recent economic recession has limited work all around. A new bus service that connects the shantytown with other parts of the city now enables his wife to make the long trip to a wealthier neighborhood where she earns cash doing laundry.

In Bangladesh: A poor landless laborer’s household ekes out a living in a drought-prone rural region. The family sleeps on straw on a packed mud floor, protected by a flimsy straw roof. The land on which the shack stands and the little plot surrounding it were lent to the landless laborer, his wife, three children, and niece, by a neighbor.

The nine-year-old son attends school a few mornings a week in a town an hour’s walk away. He is the first family member to ever go to school. The town is also where the nearest public services are found. The mother once took her sick son to the clinic there; the medicines they gave him were very expensive, though he did get better. The daughter does not go to school, staying home to help her mother and look after the baby when her mother or cousin cannot.

The household relies on the father’s wages as an agricultural day laborer. During slow agricultural periods in the past, he could usually find nonagricultural wage labor, in construction, for example, in a nearby town. But he is weak, following an illness, and can only provide petty services around the village for a very low return. His wife tends the few spices and vegetables they grow on the small amount of land around their house and is always on the lookout for ways of earning a little extra. Tasks such as husking rice, weeding fields, and chopping wood, are sometimes available from better-off neighbors.

Source: World Development Report, 1990, Chapter 2.

Better access for the poor. Building and developing the necessary physical infrastructure—roads, primary health clinics, and primary schools—is a top priority, particularly in rural areas. Clean water supplies and other basic sanitation and disease control are also critical.

Social sector expansion, however, will not automatically benefit the poor. There must be changes in the priorities, organization, and financing of social services. Social sector reforms initiated in Chile after 1974-75 illustrate this. Expansion coupled with increased targeting to vulnerable groups and decentralization of the health care delivery and elementary school systems resulted in wider coverage of the poor. For selected services, including higher level education and curative care, Chile also introduced greater reliance on cost recovery. As with rural development projects, local community participation in the social sectors is found to be effective in countries as disparate as Bangladesh, Colombia, Nicaragua, and Thailand, and should be encouraged.

To ensure participation of the poor, it is also critical to consider their circumstances. For example, although the long-term benefits of education are perceived by most poor parents, children are indispensable productive assets in the short term (as labor on family farms, for example). Policy instruments may be necessary to improve the incentives for parents to keep children, and particularly female children, in school. The use of payments to parents in one region of Bangladesh increased the proportion of female secondary school students from 27 percent of the total to 44 percent, double the national increase.

Transfers and safety nets

The policies discussed so far are likely to miss some of the poor. The aged and the disabled will rarely participate in the process of future growth, while the full participation of others—poor households in remote and inhospitable regions, or those whose very low wages adjust only slowly—will take time. In addition, the poorest households remain vulnerable to fluctuations in income and shocks caused by events beyond their control.

Targeted transfers can help raise the living standards of those who are missed by other efforts, while a safety net, providing some form of income insurance, can see poor households through short-term stress and calamities. Well-designed policies, broadly categorized as food-based policies, public employment schemes, and social security, can serve these objectives. They represent a crucial complement to the two-part strategy.

The role of food pricing and distribution policies. Since food is the major component of the expenditures of the poor, food-based policies are an obvious way to raise living standards and nutritional well-being, as well as to insure the poor against a sudden fall in real income. Developing countries have experimented with various schemes, including general food subsidies, food rations, food stamps, food distribution policies, and food supplementation schemes. There have been both successes and failures.

Most food-based policies have worked best in urban areas or more developed regions with effective administration and infrastructures. These policies have often failed to reach the rural poor. Jamaica’s food stamp program is one of the exceptions. It has been successful at reaching poor and vulnerable groups, due, in part, to a well-developed primary health care system (through which food stamps are distributed) and a sophisticated social welfare administration. Targeting food subsidies can increase cost effectiveness and has been achieved through required attendance at public clinics, as in Jamaica; by subsidizing food staples that are mainly consumed by the poor, such as coarse flour in Egypt; or by locating distribution outlets in poor neighborhoods, as was done in Northeast Brazil and the Philippines.

In remote areas with poor access to markets, direct food distribution is often necessary during crises and to help individuals recover from severe malnutrition. In normal times, supplementary feeding programs can assist vulnerable groups, particularly when administered through existing social infrastructure and combined with complementary health, sanitation, and education interventions involving community participation. The World Bank-assisted Tamil Nadu Integrated Nutrition Program and Tanzania’s Iringa Nutrition Program are good examples of such efforts.

Public employment schemes. Carefully designed public employment schemes have proved to be successful at supporting the incomes of the able-bodied poor and their families, particularly in risky agricultural settings. They have been used for famine prevention in India for centuries and in Sub-Saharan Africa during the 1980s, most successfully in Botswana and Cape Verde. In Latin America, Bolivia, Chile, and Peru implemented public works projects to help the poor through structural adjustment.

Public employment programs, providing unskilled work on rural development projects in lean seasons, have often been effective in reaching the poor at relatively low administrative cost. Only the poor tend to find attractive the work and wages offered. In India’s Maharashtra State, the Employment Guarantee Scheme guarantees unskilled work in rural areas to anyone who requests it subject to only mild restrictions on feasibility. This has provided valuable insurance to the rural poor, as well as helped develop backward areas of the state. The building and maintenance of infrastructure and the rehabilitation of environmentally degraded lands has served to spur employment creation elsewhere in the economy and facilitated social sector development.

Social security. In many urban areas, and in countries where the formal wage employment sector is large and wide coverage is achievable, social security systems can be effectively used to reduce poverty among the aged poor and those unable to work. This has indeed happened in Chile and Costa Rica. However, broad-based formal social security systems are not yet feasible in most developing countries, and least of all in rural areas. A practical alternative is to target transfers using correlates of poverty and community participation in assessing needs. This approach is used in India’s Kerala state, where a pension scheme provides agricultural laborers over 60 with self-reported income below a stipulated level. Local committees help verify applicants’ claims.

When properly adapted to each country’s situation, and designed to be mutually reinforcing, the above policies could greatly enrich the lives of the poorest people in the world. But good policy ideas are not all that is needed. It will take concerted political and social will and a supportive international environment to attain the reduction of poverty that is possible with the right policies.

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