Eliminating Human Poverty

Macroeconomic and Social Policies for Equitable Growth

Santosh Mehrotra, Enrique Delamonica

• Publisher: Zed Books
• Year: 2013
• ISBN:
  9781848136557
• Edition: 1
• Topic: Economics
• Subtopic: Development Economics
• Index: Economics

This book focuses on the provision of basic social services - in particular, access to education, health and water supplies - as the central building blocks of any human development strategy. The authors concentrate on how these basic social services can be financed and delivered more effectively to achieve the internationally agreed Millennium Development Goals. Their analysis, which departs from the dominant macro-economic paradigm, deploys the results of broad-ranging research they led at UNICEF and UNDP, investigating the record on basic social services of some 30 developing countries. In seeking to learn from these new data, they develop an analytical argument around two potential synergies: at the macro level, between poverty reduction, human development and economic growth, and at the micro level, between interventions to provide basic social services. Policymakers, they argue, can integrate macro-economic and social policy. Fiscal, monetary, and other macro-economic policies can be compatible with social sector requirements. They make the case that policymakers have more flexibility than is usually presented by orthodox writers and international financial institutions, and that if policymakers engaged in alternative macro-economic and growth-oriented policies, this could lead to the expansion of human capabilities and the fulfillment of human rights. This book explores some of these policy options. The book also argues that more than just additional aid is needed. Specific strategic shifts in the areas of aid policy, decentralized governance, health and education policy and the private-public mix in service provision are a prerequisite to achieve the goals of human development. The combination of governance reforms and fiscal and macro-economic policies outlined in this book can eliminate human poverty in the span of a generation.

1

Introduction

Human development is a goal, an objective and an aspiration. The goal gives salience to the well-being of the individual and the individual’s full participation in society. It is a goal towards which economic policies should lead.

The notion of human development also provides an alternative framework beyond the traditional approach of economic analysis at the theoretical level. This notion is firmly grounded in the capabilities approach (Sen, 1982, 1985; Nussbaum, 2000). It requires an explicit and constant recognition of the need to integrate economic and social policy, which alone will ensure the goals of human development. This has at least two implications. First, by integrating and linking the human dimension with the analysis of growth and development, it should no longer be sufficient to look at macroeconomic variables, such as investment and trade, to assess or predict a country’s performance or growth in the near future or the long run. Elements such as gender equity, and the health, nutrition, and education levels of the population are as significant as the macroeconomic variables.

There are practical policy implications of such a theoretical framework. It could be argued, for instance, that the international financial institutions should be evaluating country performance differently over a loan period (e.g. the period of applicability of the joint IMF–World Bank–Government Poverty Reduction Strategy Papers in low-income countries).¹ This would not be merely in terms of macroeconomic indicators, or governance indicators, but also in terms of human development outcomes. This does happen increasingly at meetings of the Consultative Group of donors, but ultimately the most important indicators remain macroeconomic ones. The weight of ‘Policies for Social Inclusion’ in the evaluation of country policies is only 25 per cent. The Poverty Reduction Strategy Papers, initiated in 1999, are an attempt to address this problem. Whether this change in name from the erstwhile Policy Framework Papers means a substantive change in direction in the IMF remains to be seen; but the evidence so far does not suggest that there has been much substantive change (IMF, 2003; 2004).

Second, while there has been an increase in literature focused on many of these issues (i.e. the link between social and macroeconomic variables) (World Bank, 1980, 1990, 2000a), studies usually apply standard economic tools to non-economic issues. We believe that this approach gives a distorted picture of what human development is and how it can be achieved. In particular, the analysis of health and education sectors as if they were competitive markets could lead to seriously misguided policy recommendations. As a result, we suggest that Human Development, as a theoretical lens, is more naturally associated with various strands of non-orthodox economics, such as structuralist macroeconomics and evolutionary growth theories.

We do not pretend to cover all aspects of human development in this brief book. Our goal is more modest, as we concentrate on one fundamental piece: the provision of basic social services (BSS) to expand what Sen calls capabilities and functionings. We concentrate on how basic social services can be financed and delivered more effectively than hitherto in order to ensure universal and equitable access to high quality basic social services – so that the Millennium Development Goals (MDGs – some set for 2005, but mostly with a target date of 2015) can in fact be achieved (see Annex 1.1 to this chapter for a brief discussion of the magnitude of human poverty and Annex 1.2 for a list of the goals and targets of the MDGs). This provision of basic services is also related to other dimensions of human development, and we touch upon them along the way, especially when our analysis implies policy recommendations that differ from those of the dominant development paradigm.

Mainstream economic theory is the framework explicitly or implicitly used by most analysts of development. It is based on the assumption that given preferences and technology, production and distribution take place in such a way as to maximize welfare and to distribute income to the owners of the factors of production in proportion to their contribution to output. Thus, efficiency is maximized, and growth is determined by savings – that is, individuals/households prefer to exchange present for future consumption. This is not the place to engage in a critique of such a view, whether applied to industrialized or developing countries.² Our approach is different. It can be summarized as follows.

First, production takes time. During the period of production, transactions must be carried out. These transactions include purchases of subsistence goods by workers and purchases of production inputs. These exchanges imply that enough commodities exist to sustain workers and facilitate production. These commodities can only come from previous production,³ and, at the very least, producers expect that at the end of this period enough commodities will again exist in order to sustain workers and production in the future.

Second, profits and accumulation (and consequently growth) are expected by producers. Otherwise, there would be no incentive to produce. Although individual producers may fail, society as a whole must produce enough commodities for its survival (to sustain workers and production, i.e. social reproduction as described in the previous paragraph). Moreover, at the aggregate level, a surplus (loosely interpreted as production beyond ‘social reproduction’) is needed as an incentive for production and to allow accumulation (i.e. economic growth).

Third, all commodities (those needed for social reproduction and those representing a surplus) need to be distributed. This distribution may or may not reflect contribution to output. It rarely does, as it is based on relative bargaining power of different groups and sectors. Assuming, in order to simplify, that the commodities used to sustain workers and production are distributed in a way that guarantees social reproduction,⁴ the distributional conflict revolves around the surplus.

The distribution of this surplus affects economic growth, social development and income-poverty reduction. As it is widely recognized, there are one-way direct linkages as well as feedback mechanisms connecting these spheres. Thus, the provision of basic social services directly reduces poverty (albeit not necessarily its income dimension). It has also been argued that lower poverty (income and non-income) can result in higher economic growth, as it limits the possibility of underconsumption by generating a higher demand for goods.⁵ It is particularly important to emphasize the role of improvement in the distribution of assets (both physical and human capital) in reducing income-poverty.

As we attempt to understand the positive experience of recently industrialized countries or of high-achieving developing countries (as we do in Chapters 2 and 3), we are struck by the difficulty of establishing causality relationships. For example, despite widespread literacy within a population, many countries have not achieved rapid growth,⁶ although education is a major determinant of such economic growth. There are also examples of countries with relatively rapid economic growth but persistent income-poverty.⁷ Thus, no single element can be specified as the main cause (or ‘development magic bullet’) for success in all areas. Rather, interventions that increase income and improve the quality of human capital support each other in a synergistic way or through various feedback loops.

This synergy can be succinctly expressed as the enhanced impact a change in an independent variable has on the rate of growth of a dependent variable, given the presence of a third variable. This leads to several important, and often overlooked, interrelated effects in terms of policy at a macro-level. The impact of a policy (e.g. to promote economic growth) on another variable (say income-poverty reduction) crucially depends on the level of a third variable (e.g. previous investment in basic social services). In other words, economic growth will be more effective in reducing (income) poverty (the elasticity of poverty reduction will be higher) when the capabilities of citizens are more widespread.

It is hard to identify the necessary and sufficient conditions for achieving the desired outcomes of economic growth, income-poverty reduction and expansion of human functionings. Given sufficient inputs for BSS, the non-income dimensions of poverty can be reduced without economic growth; well-being is enhanced as ill-health and illiteracy are reduced. However, in the absence of sufficient investment in BSS, economic growth may not reduce the income or non-income dimensions of poverty, primarily because the poor may be unable to take advantage of market opportunities on account of ill health or poor education or limited skills. Actions on several fronts are needed.

Related to the previous point, standard tools of marginal analysis, rates of return, or linear regressions are not adequate to establish the importance, relative weight or priority of interventions to promote one or the other of the three desired outcomes or ends, because the presence of the synergies creates non-linearities. For instance, trade liberalization in a context of a weak human development level will have a very different impact than the same policy (all other elements being equal) in a situation where the labour force has high mean years of schooling, is well-trained and healthy.

Thus, the goals and the theoretical foundations of human development assume that there is integration of economic and social objectives and policies. Consequently, a different strategy from the one consciously or unconsciously followed by most developing countries is needed. We say ‘most’ and not ‘all’ developing countries because some of them (those we term ‘high achievers’) succeeded in developing education and health standards comparable to those of industrialized countries despite having a fraction (sometimes just a tenth) of their level of income per capita.

These experiences (summarized in Mehrotra and Jolly, 1997) strongly influence our analytical lens and are presented for reference and comparison purposes throughout the book.⁸ These countries also illustrate another well-known synergy, or feedback loop, among social interventions in basic health care, reproductive health care, education, nutrition, and water and sanitation. This synergy takes place at a micro-economic level, as illustrated by the positive influence of better nutrition on school attendance and learning. Better education also leads to improved health outcomes and lower fertility rates. Increased access to water also improves health outcomes and school attendance. Education improves the effective usage of water resources. Thus, a web or mesh of interaction takes place. For synergies to exist at the macro-level, actions on several fronts are again needed. This should not be taken to mean that ‘everything matters’; quite the contrary. If everything matters, nothing does. The implication of the subtitle of the book, ‘Macroeconomic and Social Policies for Equitable Growth’, means that while the ends at macro-level are the three objectives (economic growth, expansion of functionings, and income-poverty reduction), priorities have to be set at the level of means such that there is a balance between macroeconomic and social policies, rather than a hierarchy between them (see Chapters 2 and 3 for further discussion).

To summarize, there are two synergies present. One takes place at the macro-level among income-poverty reduction, expansion of human functioning and economic growth. The other synergy of outcomes, at the micro-level, occurs as a result of interventions to provide the basic social services that are the foundation of expansion of functionings. These two synergies are linked by the synergies among good health, nutrition and education – which are ends in themselves, but also means to other ends at a macro-societal level, and hence common to both sets of synergies. This conceptually underlines the need to integrate social-sector policies with macroeconomic ones.

In order to achieve this integration, it is crucial that fiscal, monetary and growth policies be compatible with social-sector requirements. The latter must also be compatible with macroeconomic constraints and supportive of the long-term growth process. A natural starting point for discussion of this integration and compatibility is the budget. On the one hand, total revenues and spending are at the core of fiscal polices. On the other hand, public expenditure supports the provision of basic social services (BSS). The importance of BSS in this synergetic connection requires that a deeper look be taken at their provision and financing. This implies that the case for the state’s active role in this area needs to be made. In addition, the level, distribution and efficiency (quality) of public spending on BSS needs to be analysed.

The structure of this book follows the logic presented in the last few paragraphs. Part I (Macroeconomic Policies) has two chapters. Chapter 2 (Integrating Macroeconomic and Social Policies to Trigger Synergies) presents a conceptual macroeconomic framework. In order to do that, it examines the dominant framework for economic and social policymaking. Finding it wanting, the chapter proposes an alternative based on the two synergies. The two-synergy analysis is a theoretical construct with policy implications and builds upon certain specific antecedents in development theory. It is also a conceptual framework that can guide the analysis of, and assist in understanding, specific country examples of success or failure in human development and poverty reduction. In light of this conceptual framework, the experience of the now industrialized countries in respect of social provisioning is discussed. Chapter 3 then goes on to spell out macroeconomic policies consistent with achieving pro-poor, employment-intensive growth and achieving the Millennium Development Goals.

Part II (Public Expenditure on Basic Social Services) comprises five chapters. Chapter 4 examines the data on the inadequacy of public spending on basic services in the majority of developing countries. Prior to the UNICEF/UNDP country studies, summarized in this chapter, almost no developing country...

Table of contents

• Cover
• About this book
• About the authors
• About CROP
• Title
• Copyright
• Contents
• List of tables and figures
• Foreword
• Preface
• 1 Introduction
• PART I: Macroeconomic policies
• PART II: Public expenditure on basic social services
• PART III: Mobilizing domestic and external resources
• Notes
• References
• Index