If the early 1990s raised hopes of a broad-based consensus on economic policy for growth, equity, and poverty reduction, the late 1990s dashed them. The East Asian crisis and the Seattle debacle saw to that. In the year 2000, the governors of the World Bank, whose mission it is to eradicate poverty, could meet only under police protection, besieged by those who believed instead that the institution and the policies it espouses cause poverty.
How can these two groups, the policymakers and the protesters, who seemingly share the same ends, disagree so much about the means? And how can they interpret the same objective reality so differently?
The response so far is for the two groups to question each other’s motives, commitment, and analytical capacity. But in this brief, it is argued that at least some of the disagreement can be understood in terms of differences in perspective on three key features of economic policy—aggregation, time horizon, and market structure—an interpretation more conducive to dialogue than confrontation.
Disagreements between whom?
- Group A, labeled “Finance Ministry,” includes some who work in finance ministries in the North and in the South, many economic analysts, economic policy managers, and operational managers in international financial institutions (IFIs) and regional multilateral banks. It includes the financial press and some academic economists trained in the Anglo-Saxon tradition.
- Group B, labeled “Civil Society,” includes analysts and advocates in the full range of nongovernmental organizations (NGOs), as well as people who work in some of the specialized United Nations agencies, in aid ministries in the North, and in social-sector ministries in the South. Among academics, non-economists would tend to fall into this group.
Groups A and B are better thought of in terms of tendencies rather than specific individuals.
Disagreements over what? While there are several areas of agreement between those two groups (such as the importance of investments in education and health and of international public goods for the well-being of the poor), major disagreements center on a specific set of economic policy instruments. Group A tends to believe that the cause of poverty reduction is best served by reduction of fiscal imbalances, rapid adjustment to lower inflation and external deficits, liberalization of the financial sector, deregulation of capital controls, privatization of state-owned enterprises, and perhaps the strongest unifying factor in this group, rapid and major opening up of an economy to direct foreign investment and trade. Group B tends to lean in the opposite direction on all of these issues, but perhaps the most divisive areas are trade and openness, and there the rhetoric is fierce.
Aggregation. Different people instinctively operate at different levels of aggregation when they talk about the consequences of different economic policies.
For example, many in Group A work with poverty measures that calculate the proportion of people in a country who fall below a critical level of income/expenditure—the most commonly used threshold is the famous poverty line of $1 per person per day.
When Group A analysts showed that the incidence of poverty in Ghana fell between 1987 and 1991, very few people believed it. Group A analysts reacted to this disbelief as expected—by saying that people did not really understand the detailed statistical analysis, that those who criticized represented special interest groups, and so on.
However, there are at least three reasons that the claim that poverty decreased in Ghana could be questioned:
- First, the indicators used by Group A to measure poverty do not adequately capture the value of public services, which may worsen without the effect showing up in measures of poverty. The claim that poverty has gone down will ring hollow to those involved in ground-level operations, as well as to the poor whose lives are made worse by the decline in public services.
- Second, a national fall in the incidence of poverty often misses large regional movements in the opposite direction. For example, in Ghana, between 1987 and 1991, the fall in national poverty was based on a decline in rural areas and an increase in urban areas. For an NGO working with street children in Accra, where poverty had increased, it was cold comfort to be told that national poverty had gone down.
- Last, while the basic concept of Group A is the incidence of poverty (a percentage measure), people in Group B instinctively think of absolute numbers of poor as the criterion. In Ghana, for example, while the incidence of poverty was falling at around one percentage point per year, the total population was growing at almost twice that rate, with the result that the absolute number of poor people grew sizably between 1987 and 1991.
Time horizon. The “medium term” is the instinctive time horizon that Group A uses when thinking, for example, about the consequences of trade policy. But Group B has concerns that are both shorter and longer term. Those who work with the daily reality of poor people’s lives are extremely concerned—like the poor themselves—about the short-term consequences of economic policy, which can drive a family into starvation, force it to sell its assets at fire-sale prices, or pull its children out of school. For the poor, it is no use being told that things will pick up again over a five- to 10-year horizon.
There are also those who have a much longer time horizon than a decade, such as environmental groups, including some with religious perspectives on stewardship of the earth’s resources. For them, it is the 50- or 100-year perspective that is important. They do not see how economic growth can be sustained, given the earth’s limits, and they see negative consequences of resource depletion in both the immediate and the long term.
Market structure and power. The implicit framework of Group A, in thinking through the consequences of economic policy on distribution and poverty, is that of a competitive market structure. The instinctive picture that Group B has of market structure is one riddled with market power. They see the formulation and implementation of economic policy as influenced by powerful agents, and they see policy consequences filtered through noncompetitive market structures.
Group A’s immediate response to the suggestion that openness in trade, for example, might hurt the poor in poor countries is to invoke the basic theorems of trade theory. Opening up an economy to trade will benefit the more abundant factor because this factor will be relatively cheap and opening up will increase demand for this factor overall. Since unskilled labor is the abundant factor in poor countries, opening up will benefit unskilled labor and, hence, the poor. But the theory breaks down if local product and factor markets are segmented, either because of poor infrastructure or because of the local power of middlemen and moneylenders. These situations are highlighted repeatedly in discussions about the possible negative consequences of openness.
Group B believes very strongly that increased mobility of investment capital makes workers in both receiving and sending countries worse off. Such a view is derided by Group A analysts as being irrational: “How can you say that when capital leaves the US, it hurts US workers, and when it gets to Mexico it hurts Mexican workers as well?!”
In a framework with perfectly competitive markets, it is indeed irrational to suggest that increased mobility of investment capital makes workers worse off everywhere. But consider a situation where capital and labor in each country bargain over wages and employment in markets that are not perfectly competitive. Increasing capital mobility is akin to increasing the bargaining power of capital relative to labor, so empirically, workers could end up being worse off in both countries, relative to capital. This is Group B’s implicit framework, with added emphasis on the political power of big multinational corporations to influence domestic economic policy.
A seeming disagreement: The “growth” red herring. The word “growth” also appears controversial, with Group A accusing Group B of being “anti-growth,” and Group B countering that Group A believes that “growth is everything.” For all the rhetoric, there is more agreement here than meets the eye. The problem is that the word “growth” is used both in its technical sense of “an increase in real national per capita income” as well as in connoting a particular policy package. This package of “growth-oriented policies,” as seen by Group A, is perceived as “economic policies that hurt the poor” by Group B. If viewed in the technical sense, one would probably find less disagreement on whether growth helps reduce poverty, although some in Group B would still argue that this is not the answer over a 50- or 100-year time horizon. The real differences, as argued, concentrate instead on economic policies and issues of aggregation, time horizon, and market structure. The current growth-poverty debate, certainly as presented by some elements of Group A, misses the point.
The argument presented here is that there are key differences in perspective underlying the seemingly intractable disagreements on aggregation, time horizon, and market structure. Simply recognizing and understanding this would be one step toward bridging the gap.
Although more is needed from both sides, the focus here is on Group A. The message for those at the more academic end of the Group A spectrum is that explicitly taking these complications into account is more likely to shift the intellectual frontier than falling back yet again on conventional analysis. For those at the more operational and policy end of the spectrum, the message is that instead of being closed and inflexible, recognizing and trying to understand legitimate alternative views on economic policy is not only good analytics, it is good politics.
For further reading see R. Kanbur, “Income Distribution and Development,” in A. Atkinson and F. Bourguignon, eds., Handbook of Income Distribution, Volume 1 (North Holland, 2000), R. Kanbur, T. Sandler, and K. Morrison, The Future of Development Assistance (Washington, DC: Overseas Development Council, 1999), R. Kanbur, “Poverty Reduction Strategies: Five Perennial Questions,” in R. Culpeper and C. McAskie, eds., Towards Autonomous Development in Africa (Ottawa: The North-South Institute, 1998).
Ravi Kanbur (sk145@cornell.edu) is T.H. Lee Professor of World Affairs and a professor of economics at Cornell University, USA. His homepage is at www.people.cornell.edu/pages/sk145/.