Key Observations and Implications

5.1 The poverty reduction-GDP growth experience in Asian countries differs markedly between the two decades of the 1990s and the years after the turn of the century.

In the 1990s, Bangladesh, Indonesia, and Korea were the best performers in achieving higher reductions in income poverty (particularly in the rural areas) for every percentage point of economic growth. On the other hand, India, Pakistan, PRC, and Thailand fared most poorly in translating economic growth into rural poverty reduction, with Pakistan and the PRC actually seeing a rise in poverty in the face of the growing economy. These outcomes were in spite of rather high annual rates of GDP growth in the case of the PRC (over 10%) and Thailand (over 8%). In the case of Thailand, this poor translation of rapid economic growth to desired social outcomes had alarmed the Thai government enough to shift its focus toward social development in its subsequent 5-year development plans. The PRC's experience could be the result of the drastic reduction in availability of public social services particularly in health and education that came with the sweeping economic reforms introduced under Premier Deng Xiaoping in the 1980s. Yeh (1996) observed that education expenditures as a proportion of GDP had declined from the mid-1980s (i.e., from a peak of 3.1% in 1986, to only 2% by 1990). School enrollment thus fell steadily through the 1980s, and this decline in accumulation of human capital clearly took a toll by the 1990s.

Malaysia, Nepal, and the Philippines also appear to have made good progress in the 1990s, with each percentage point of GDP growth having been accompanied by an approximately commensurate reduction in the income poverty headcount ratio. The observed outcome for Nepal, based on data reported in the UNDP Human Development Reports, may appear surprising in light of the political turmoil undergone by the country in the 1990s, which had taken a toll on social services and the overall poverty situation. For the Philippines, accelerating economic growth in the early to mid-1990s had been a departure from past years of troubled economic performance, and appears to have translated reasonably well into reduction in income poverty. Top-level commitment to a Social Reform Agenda may have been instrumental to this. In Malaysia, rapid poverty reduction and social development through the 1970s to the 1990s is widely attributed to the affirmative measures undertaken to improve the position of the Bumiputera and other disadvantaged groups (Shari 2003).

In examining the 2000–2008 period, it has been possible to employ the multidimensional HPI-1 in the analysis of the poverty reduction-economic growth linkage for Asian countries. The countries that emerge to have been most successful in bringing down multidimensional poverty with economic growth (with magnitude of PEGs exceeding 1) are Malaysia, Nepal, Singapore, Thailand (whose reinforced efforts to emphasize social development appear to have paid off well), and Viet Nam. Cambodia, Mongolia, Pakistan, and PRC likewise appear to have been able to bring down poverty with their economic growth in recent years, with elasticities exceeding 0.5. Bangladesh, India, Indonesia, Myanmar, Philippines, and Sri Lanka have been relatively slower in reducing poverty with economic growth. The Philippines and Sri Lanka actually had rising poverty measured both as income poverty and by the HPI-1 up to 2005, with positive elasticities indicating perverse movement in poverty associated with economic growth. Mongolia likewise had rising income poverty in the same period, but was mitigated by improvement in non-income welfare indicators, leading to a positive PEG for income poverty, but a normal negative sign when PEG is based on HPI-1. In the case of the Philippines, the rise in poverty accompanied the highest rates of GDP growth recorded in 30 years.

Between the 1990s and the current decade, Pakistan and the PRC achieved a dramatic turnaround in translating economic growth to income poverty reduction, whereas the linkage had been in the perverse direction in the 1990s. In contrast, Bangladesh, Nepal, and the Philippines saw significant deterioration in their ability to translate economic growth into income poverty reduction. Malaysia and Thailand have emerged to be top performers in translating growth into reduction of multidimensional poverty, coming from relatively lower levels of performance in the 1990s in spite of rapid rates of economic growth then. The opposite was the case with Indonesia, which dropped from near the top to near the bottom of the list.

The Indonesian outcome is particularly noteworthy, as it graphically illustrates the difference it can make when poverty is defined multidimensionally as against the usual income-based definition. While Indonesia's PEG in the 2000–2006 period is highly elastic when based on the US$1.25-a-day poverty measure, it has a rather low elasticity based on the HPI-1. This implies that Indonesia has had difficulty improving non-income aspects of welfare among the poor, even as it had been successful in bringing down the numbers of those who earn less than the poverty threshold income. This outcome can in turn be readily attributed to the fact that its public expenditures on social services, particularly health and education, have been the lowest among the Asian countries studied. This appears to be the direct result of the huge fiscal costs of the bank bailouts undertaken by the Indonesian government in the aftermath of the Asian financial crisis. The Philippines in the early 2000s faced a similar fiscal constraint, in this case due to a heavy debt service burden that took about one-third of the government budget, thereby crowding out social expenditures.

A similar result is seen with Pakistan, PRC, and Sri Lanka, all of which have much lower PEGs when poverty is measured multidimensionally. On the other hand, Mongolia's perverse (positive) PEG based on income poverty transforms into a relatively high PEG based on multidimensional poverty, showing that it has been able to compensate for lack of income poverty reduction with improvements in social welfare.

5.2 Sectoral composition of economic growth influences the inclusiveness of growth.

Sectoral structure of the economy and sectoral composition of economic growth have been commonly believed to be important to the attainment of inclusive growth, with a common premise that stronger growth in the agricultural sector would promote faster poverty reduction. This result comes out clearly from the multiple regressions examining the joint effects of agriculture's contribution to GDP growth, quality of governance, and public expenditures in social services on the inclusiveness of growth. The result supports the observation made earlier by Hasan and Quibria (2004) for Southeast Asian economies.

There is also evidence from the data that higher contribution of manufacturing to overall economic growth has been associated with faster poverty reduction in response to economic growth, an effect that is particularly more pronounced in the Southeast Asian countries. This signals a possible impending shift in the relative importance of agriculture and manufacturing as a basis for more inclusive growth, with the latter becoming increasingly important especially in the Southeast Asian countries. The PRC's substantial jump upwards from the bottom of the list in the 1990s could be a reflection of the rapid growth of its manufacturing sector since then.

5.3 Public expenditures in human development and the social sectors, particularly in health, education, and housing, clearly contribute to the inclusiveness of growth.

There is a clear correlation between the level of social expenditures by the government and the inclusiveness of economic growth attained in Asian countries. The obvious policy implication is that the pursuit of economic growth would be enhanced (i.e., promote more inclusive growth) by deliberate allocation of greater public expenditures to health, education, and mass housing. Contrary to expectations, especially in light of the above results, expenditures on agriculture did not appear to have significant influence on the poverty elasticity of growth. However, this need not lead one to the conclusion that public investments in agriculture are not warranted and must assume lower priority. It is likely that the above result can simply be a reflection of the wide scope for variation in the nature and quality of expenditures undertaken by governments for agriculture, including likely differences in attribution of various types of expenditures to the sector.

5.4 Quality of governance has the strongest impact on inclusiveness of growth.

Among the three determinants of inclusive growth examined in this study, quality of governance emerges as having the strongest effect on the PEG, i.e., on the inclusiveness of growth. In particular, analysis of the data based on the World Bank's World Governance Indicators points to government effectiveness, rule of law, and political stability as having a clear influence. This result is not surprising, inasmuch as governance ultimately determines the effectiveness of the delivery of all interventions coming from government in pursuit of poverty reduction, including public expenditures and policies that would promote broadbased growth in the economy. Thus, the countries that emerge as having had the most inclusive growth in the current decade are also those that are particularly known to have better governance in the region, especially Singapore and Malaysia.

The implication is that investments in strengthening governance, especially in the three areas named above, would be important accompanying measures to initiatives for promoting economic growth. Indeed, apart from enhancing its inclusiveness, economic growth itself would be directly served by improvement in the quality of governance.

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