Translating growth into poverty reduction

Many countries have experienced unprecedented economic growth and a significant reduction in poverty over the past decades.

Globally, a 1-percentage point growth in income has been associated with a decline in poverty of about 2.4 percentage points. But even with relatively high economic growth, poverty reduction has been highly variable across countries, and the benefits of growth have not always reached the poor and vulnerable.

With an average yearly growth rate of 10 percent, China has been able to reduce the number of poor people in the country by nearly three-fourths since 1990. In Latin America and the Caribbean, poverty fell by one-fourth between 1995 and 2005.

Despite this, the number of people still living in poverty is staggering: In the middle of the last decade an estimated 1.4 billion people worldwide lived in extreme poverty. So the agenda to sustain growth and ensure that its nature is favorable to poverty reduction remains paramount.

In this context, the private sector has an important role to play in supporting growth that can sharply reduce poverty. Poverty rates across countries would not have gone down dramatically without a dynamic private sector. But the impact of private investment on growth and the impact of growth on poverty are not automatic. Leveraging the private sector has the potential for high rewards, but there are major risks that must be managed too.

First, poverty reduction through economic growth depends greatly on proper income distribution. Private sector participation can help create a better distribution of income, especially where the initial situation is highly skewed.

Second, the pattern of growth that the private sector promotes is crucial. The effect on poverty is greater when growth is focused on areas where poor people are concentrated and on sectors where they earn their livelihoods. New pathways for businesses need to directly engage the poor as workers, suppliers, distributors and consumers in financially sustainable ways.

Third, when markets fail or are inefficient, the private sector's responses to market signals can exacerbate inequalities, leaving the poor worse off. For example, distortions in the access to assets and finance can further deepen the distributional differences.

The International Finance Corporation (IFC), the World Bank Group's private sector arm, can serve as an example for private sector-led poverty reduction. Its priority is to foster a shared understanding of a clear poverty alleviation focus in corporate strategies. The IFC has used the World Bank Group's vast knowledge and resources about the best ways to reach the poor to implement innovative approaches to poverty reduction.

Evaluative evidence indicates that poverty reduction need not come at the expense of financial success, and that the IFC's broad range of interventions has enhanced both the pace of growth and its benefits for the poor. The vast majority of IFC investment projects have contributed positively to economic growth, most have addressed poverty indirectly, but the linkages among growth, distribution and benefits for the poor are made explicit in project design.

A focus on growth and a better distribution of its benefits is necessary to ensure that growth can be sustained and that it makes an effective contribution to poverty reduction. The private sector can be a key player in ensuring that growth is sustained and that its benefits reach the poor.

Vinod Thomas is director-general, Evaluation, World Bank Group and Marvin Taylor-Dormond is the director of Private Sector Evaluation of IEG.

(China Daily 08/15/2011 page8)