The Nexus of Economic Growth, Employment, and Poverty Reduction - Report Example

The Nexus of Economic Growth, Employment and Poverty Reduction: An Empirical Analysis by Rizwanul Islam “I have read the above article thoroughly andmy assignment is based on the above article”. One of the most difficult and challenging problems for the policy makers and development practitioners is that of fighting poverty, which has been so ubiquitous in many parts of the world. This is especially true for sub Saharan Africa and South Asia, though historically, East and South East Asian countries have achieved some real success. Though projections show that Millennium Development Goal of reducing global poverty by half by 2015 may be achieved at global level, many countries, especially in South Asia and Africa, are nowhere near track to achieve that. (““G-Star Raw, Alan Cumming and Heather Graham Voice their Support for the Millennium Development Goals”, 2008) Creation of sustained employment opportunity in large scale to its masses is the best way to give its people regular source of income and so can be the backbone behind the task of fighting poverty. But the exact link between growth, employment, and poverty depends on various factors, and it is pertinent that policy makers understand exact implications of variables such as proportion of allocation of resource between various sectors such as farming and manufacturing which can favor more poverty reduction. (Islam, 2004;,Oberai, 1991) Economic resources, as we know, are scarce and if policymakers have clear idea about what proportion of allocation will lead to greater reduction in poverty, they will be in a better position to deliver. (“Economic Scarcity”, 2005). So, the article tries to find out how economic growth, employment, and poverty reduction are interrelated with the data of few countries, which were facing acute poverty, and their experiences of poverty reduction with rise in economic growth and how choice of sectors affected them. The study which is based on experiences of countries Bangladesh, Bolivia, Ethopia, Uganda, India, and Indonesia finds that there is no doubt that higher economic growth is the first condition in fighting poverty. But, the pattern of economic growth affects the magnitude of employment opportunities generated and thus poverty reduction is influenced further by it. In general, it has been found that shift in employment to manufacturing sector from farm sector contributes favorably in reducing poverty. Also, increase in labor force participation helps reduce poverty. However, the study did not find any invariant relationship between growth and poverty reduction, and same rate of overall growth often resulted in varying impact on poverty. It is rather the pattern of employment and labor markets that shapes with the rise in economic growth that determines their actual impact on the poverty reduction. (Islam, 2004) The paper observes that while a structural shift away from agriculture is important in poverty reduction, what happens within the sector is also important, as for the time being, majority still depends on it. So policies supporting the agricultural laborers in different forms contribute favorably in poverty reduction. Thus, while the long-term aim should be to reduce expenditure on farm sector, in the short-term, given the concentration of its people, one cannot ignore it. The long-term plan should be to rapidly shift to non-farm sector and look for growth in labor-intensive manufacturing and other sectors. (Rao,2000) From the supply side, quality of labor and expenditure on improving them through investment on education can have significant positive impact in raising the productivity of labor and reduce poverty. Though it has been long believed that the benefits of economic growth would ultimately trickle down to poor, many have doubted its automation. Kuznets came out with a U shaped relationship between economic growth and reduction in poverty (1955). (Definition of Kuznets Curve, 2008) However, Kuznets’ view that rise in economic growth would ultimately lead to rise in poverty is not acceptable to most economists, and the positive role of growth as a precursor to reducing poverty has dominated this literature. However, there has been little study done on linkage between growth, employment, and poverty. and (Ghatak, 2003) According to the paper, the virtuous circle of rise in economic growth of a nation leading to its rise in productive capacity thereby producing further employment by rising productivity leading to higher income of the poor and so they can spend higher on health, education, and skill development of their members in family leading to increased productive capacity of its members resulting in further economic growth can be called as economic growth with virtuous pro-poor growth. The employment growth that is associated with a given output is called its employment elasticity of output growth and may be taken as a surrogate for employment intensity of growth. This elasticity is the inverse of productivity of labor and so if it is more than 1, it means that there has been a fall in productive capacity of individual labor and so raising employment elasticity per se cannot be the task of policy makers. However, if this elasticity is lower than 1, it means that employment is increasing along with productivity of its labor. Though, the rate of elasticity should be less than 1, what should be its actual optimum level depends on the allocation of output to the workforce. Those activities which are labor intensive as well as generating higher growth would lead to a situation with higher employment growth with given GDP or employment intensive growth. The idea is that growth should be accompanied by rise in its ability to generate more employment. But that rise in employment numbers should not be at the cost of reduced productivity of individual labor. Thus, rise in productivity of labor as well as the number of labors employed simultaneously can be an effective tool in fighting poverty. In order to calculate the actual level of employment intensity of growth of the countries under study, employment elasticity in manufacturing sector has been considered as a variable as reliable data of largely dominated unorganized sectors in these developing countries were unavailable. After arriving at the elasticity or employment-intensity of growth, the study was supplemented by how growth has led to the structural changes in the economy and how favorably it has impacted the poor. To achieve that, a close look on sectors where poor people were employed and their trends in productivity and employability were undertaken. Next was to examine whether growth had opened new avenues for employment with higher productivity. Third it attempted to equate the productivity of the above two with change in real wages of their labors. That was the basis on deciding by how much growth had impact on poverty reduction. Indonesia’s economic growth in the 1970s and 1980s as well as the experiences of Uganda and Vietnam during the 1990s can be called as cases of good growth resulting in high employment generation and reduced poverty. On the other hand moderate growth in Ethopia and Bolivia in the 1990s did not lead to significant rise in employment and thereby having positive impact on poverty reduction. However, no invariant relationship between rate of economic growth and rate of poverty reduction was found. Because poverty reduction is influenced by intensity of employment generation from growth as well as the ability of the poor to benefit from those employment opportunities, it is conjectured that growth has different impact on poverty reduction in different countries and even same country with similar growth rate may experience varying impact on its poverty during different time period. The paper examined the relationship between employment intensity of growth and incidence of poverty as well as household data of number of countries available. Though model involving GDP and employment generation fitted well in terms of sign and level of significance, it did not perform so well in reflecting the terms of percentage of variations explained by the two selected variable, perhaps as it was the rate of employment intensity of growth of entire economy that would have an impact on poverty, and in this paper, discussion was limited only to manufacturing sector. Otherwise, based on regression results, case for impact of employment generation on poverty reduction appeared strong. Moreover, though the first part of the study related with employment intensity is rigorously statistical, many of the conclusions drawn on the poverty reduction in second part of the study are subjective in nature and lacks mathematical precision expected in an empirical analysis. While the consensus for economic growth and poverty reduction is universal, the role of employment to achieve that is not properly understood. Thus the Millennium Development Goal on poverty reduction does not mention employment generation as a means to achieve the purpose of poverty reduction explicitly. Very few studies had been done on this and this paper has tried to fill in that gap and calls for further study in this important field of developmental economics. References 1. Definition of Kuznets Curve, (2008), Economics, available at: http://economics.about.com/cs/economicsglossary/g/kuznets_curve.htm (accessed on October 23, 2008) 2. “Economic Scarcity”(2008) ISCID, available at: http://www.iscid.org/encyclopedia/Economic_Scarcity (accessed on October 23,2008) 3. Ghatak, S.(1995) Introduction to Development Economics, Routledge 4. “G-Star Raw, Alan Cumming and Heather Graham Voice their Support for the Millennium Development Goals”(2008), End Poverty 2015, available at: http://www.endpoverty2015.org/ (accessed on October 23, 2008) 5. Islam, R. (2004) “The Nexus of Economic Growth, Employment and Poverty Reduction: An Empirical Analysis”, International Labor Office,Geneva 6. Oberai, A.S.(1991) Urban population growth, employment and poverty in developing countries: a conceptual framework for policy analysis, Taylor and Francis, 1991. : 191-218,available at: http://www.popline.org/docs/067002 (accessed on October 24, 2008) 7. Rao, K. (2000) Rural Employment: The Non-Farm Sector, Deep & Deep Publications Read More