Development and Poverty

As far as the challenge of tackling poverty across the region is concerned, we are all aware of the fact that there are hundreds of millions of very poor people across the Asia-Pacific region. The key facts -- many of which are truly shocking -- have been repeated many times by many people. However shocking though the facts are, it is hard to avoid the impression that -- perhaps understandably -- many people who hear about poverty in poor countries suffer from a kind of "poverty fatigue". They have heard about the problems so often -- and they have heard so much about the problems of poverty in rich countries as well -- that they are inclined to take the view that perhaps the sad truth is that little can really be done to eliminate widespread poverty in poor countries.

This view is wrong for two reasons. It is wrong, firstly, because the problems of poverty in poor countries are very different to the problems of poverty in rich countries. And it is wrong, secondly, because it is just not true that little can be done to tackle widespread poverty in poor countries. In fact, there is a great deal that can be done to reduce poverty in the developing world. These are perhaps surprising assertions to make so let me say a little more about each of them.

In thinking about issues of global poverty, it is of central importance to understand that the phenomenon of poverty in the developing world is very different to the type of poverty we usually talk about in rich OECD countries. And because the type of poverty is different, then the responses needed are different as well.

In Western countries, deep and persistent poverty is not a widespread phenomenon. Rather, poverty is generally found in certain segments, or pockets, of society. This is usually localized or segmented poverty because it is found in certain groups which can be defined by region, by age, or by social group. In contrast, in many parts of Asia, mass poverty is the main economic problem. That is to say, in many countries in Asia, large parts of the population (sometimes over 40% or 50%, depending on the particular poverty line chosen) live in deep poverty. This type of poverty is, in a number of ways, very different to the type of poverty that exists in rich countries.

One main difference is that the phenomenon of mass poverty across a poor nation affects the society as a whole, and not just individuals or small groups. Thus the social externalities of mass poverty are an extremely important phenomenon and have far-reaching effects. As a result, poor societies affected by mass poverty often operate in quite different ways to rich societies where localized poverty is the problem. Examples of what I have in mind are the loss of production and the sheer waste which occurs when people are employed in dreadful working conditions, and the damage done by widespread insecurity and weak law.

One main difference is that the phenomenon of mass poverty across a poor nation affects the society as a whole, and not just individuals or small groups. Thus the social externalities of mass poverty are an extremely important phenomenon and have far-reaching effects. As a result, poor societies affected by mass poverty often operate in quite different ways to rich societies where localized poverty is the problem. Examples of what I have in mind are the loss of production and the sheer waste which occurs when people are employed in dreadful working conditions, and the damage done by widespread insecurity and weak law.

My second assertion was that there is a great deal that can be done to reduce poverty in the developing world. In fact, in some ways the solution to the problem of mass poverty in developing countries is fairly straightforward -- developing countries need to pursue high-growth economic policies so that rates of growth of GDP perhaps 6-7%, or more, are sustained for at least three or four decades, preferably longer. Many people take the view that is a tall order. However, we know from practical experience in quite a few countries that, first, it is quite possible for economic growth of this kind to be achieved in the developing world, and second, the impact of sustained growth of this kind on mass poverty is usually dramatic.

In fact, Asia provides some very good examples of how strong and sustained growth has led to dramatic reductions in poverty.

• One of the most-well known, of course, is here in Japan. In recent years we have heard a lot about Japan's economic problems but it needs to recalled that following the Meiji Restoration in 1868 Japan rose, as Professor Ichimura has put it, "from the poverty-stricken feudal conditions in the Edo period to the prosperous modern or post-industrial society in only several generations." This was a stunning economic performance. It brought great benefits to the Japanese people. And it remains a phenomenon of considerable interest to many other Asian nations because they are eager to find out exactly how Japan managed to achieve this economic miracle and whether it is still possible to copy the process today.
• More recently, Korea's economic performance in terms of promoting growth and reducing poverty has been outstanding. Korea registered very high rates of economic growth in the three decades to the mid-1990s. The growth was achieved with little increase in economic inequality across the nation. The overall result was that the proportion of the population living in poverty fell from an estimated 40% in the mid-1960s to less than 5% in the mid-1990s.
• In Thailand, Malaysia, and Indonesia, high and sustained growth in the thirty years up to the late 1990s resulted in sharp falls in measured levels of poverty in these countries.
• Current outstanding performers, in terms of growth, are the People's Republic of China, India, and Viet Nam. In all three countries, the evidence is that poverty has been falling markedly in recent years. Just last week the World Bank released a report on the Viet Nam economy that commented on the link between growth and poverty. The report noted that: "Viet Nam's achievements in terms of poverty reduction are one of the greatest success stories in economic development. A decade ago, 58% of the population had an expenditure level that was insufficient to support a healthy life. Five years later, the proportion of the population below this particular poverty line fell to 37%. It had further declined to 29% by 2002. Thus almost a third of the total population, the equivalent of more than 20 million people, were lifted out of poverty in less than 10 years."

The same lesson emerges, but unfortunately as a result of negative experience, from recent economic performance in slow growing countries such as PNG, The Philippines, and Indonesia since the 1998 crisis. In each of these countries, growth has been rather slow in recent years. And in each of these countries, poverty has risen or has been very slow to fall. In the Philippines, for example, there has been almost no increase in income per person in close to two decades. As a result, progress in reducing mass poverty has been disappointing.

From one point of view the clear lesson that emerges from these various examples is that strong, sustained economic growth in developing countries is needed to tackle the issue of mass poverty. But from another point of view, this lesson immediately gives rise to new questions. Two of the most important of these questions are:

• How can developing countries achieve high growth rates? And
• What can be done to ensure that the growth is "good growth" in the sense of ensuring that the economic growth leads to widespread social and environmental improvements as well as just increases in production?

These are difficult questions that raise many controversial issues. The short answer to both of them is: Ensure that good policies are in place -- and in particular, ensure that good macro and microeconomic policies are in place that create a sound investment climate and that provide stability. But this answer quickly prompts the question of: What can be done to encourage policy-makers in developing countries to adopt good policies?