Opportunity 104:

Inequality in Developing Countries

Chris BarrettOctober 30, 2008

Cornell ClubNew York City

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Extreme and Ultra Poverty, 1981-2004

World East Asia Sub-Saharan Africa

Bubble sizes reflect number of people living in extreme poverty (2005US$1.25/day-person) and ultra poverty ($0.54/day-person)

1.1 bn in East Asia in 1981, 0.3 bn in 2005

1.9 bn worldwide in 1981, 1.4 bn in 2005

0.2 bn in SSAfrica in 1981, 0.4 bn in 2005

Extreme poverty has fallen rapidly in east Asia and worldwide, except in Sub-Saharan Africa, where >50% still live on less than

$1.25/day.

Sources: IFPRI (2007), Chen and Ravallion (2008)

The promise

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Middle East & North Africa

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Sub-Saharan Africa

48% African in 1990, 75% in 2004

Source: IFPRI (2007)

Ultra-poverty is especially persistent and prevalent in sub-Saharan Africa

Ultra-poor (income per capita< 2005US$0.54/day)

The challenge

Source: World Bank (2007)

Persistent poverty is closely tied to agricultural stagnation

A key driver

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Poverty (right axis)

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Cereal yields and extreme poverty move inversely.South Asian progress Sub-Saharan African stasis

Agricultural stagnation is a key driver of poverty and undernutrition

The consequence

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Per Capita Nutrient Availability (shaded areas below minima)

10.3%

2.9%16.6%

70.3%

Source: Barrett & Maxwell (2005), data: FAO food balance sheets

The WHO identifies undernutrition as the biggest risk factor for disease and death worldwide … and 30/47 SSA countries have macronutrient availability shortfalls .

Reinforcing feedback:

Poverty causes hunger and natural resource degradation.

But hunger and degraded natural resources also cause poverty.

Hence the vicious cycle of poverty traps and related relief traps: “Can’t get ahead for falling behind.”

Poverty traps

“ Most of the people in the world are poor, so if we knew the economics of being poor we would know much of the economics that really matters. Most of the world’s poor people earn their living from agriculture, so if we knew the economics of agriculture we would know much of the economics of being poor.”

- Prof. Theodore W. SchultzOpening sentences of 1979 Nobel Prize in Economics lecture

Economics of Poverty

In order to break out of poverty traps, we need to Stimulate Agricultural and Rural Transformation

Reasons:- Most ultra-poor live in rural areas and work at least part-

time in agriculture … benefit from farm productivity gains.- Given population growth, need smooth transitions into

rural non-farm economy; otherwise, urban slums expand. - The ultra-poor spend 65-80% of budget on food; they are

the biggest beneficiaries of lower food prices.

The World Bank estimates that real GDP growth from agriculture is 2.7 times more effective means of reducing extreme poverty than growth in non-agricultural sectors.

Need to StART

An example from Madagascar:

A doubling of rice yields:- reduces the share of food insecure households by 38%- shortens the average hungry period by 1.7 months (1/3)- increases real unskilled wages in lean season by 89% (due to both price and labor demand effects)- benefits all the poor: unskilled workers, consumers, and net food seller farmers … indeed, the poorest gain most.

(Minten and Barrett, World Development, 2008).

Need to StART

No one size fits all approach is viable. But several key principles exist for targeting StART interventions:

Principle 1: Build productive assets among the poor.Multiple assets matter:(1) Human capital – education and health above all. In the poorest communities, complex demand and supply-side issues as well as non-economic incentives and constraints matter.(2) Natural capital (soils, water, wildlife, forests, etc.)(3) Physical and financial capital – it takes $ to make $(4) Social capital – although often over-romanticized

Interventions include direct provision (e.g., free education) or improved investment incentives, as well as conservation of common pool assets (rangelands, water, forest, etc.) through better governance.

Key StART principle 1

Example: Education

Example 1

The poorest communities have difficulty raising funds for teachers, facilities, books, equipment. School quality commonly suffers.

Even where education is ostensibly “free”, the opportunity cost of a child’s education is often uncertain and highest for the poorest families.

Role models regularly lacking, social norms often inhibit attendance, and labor market discrimination often a big disincentive to invest in education.

Principle 2: Improve the productivity of the poor’s current asset holdings.

Two key pathways to productivity improvement:

1) Improved production/processing technologies so that the poor produce more

2) More efficient/remunerative marketing channels to increase receipts per unit output

Since technology uptake and market participation turn on asset holdings, don’t forget principle #1!

Key StART principle 2

Example: Developing and Adopting Improved Crops

Example 2

1) Orphan crops and diseases:Less than 10% of global R&D targeted to diseases or crops dominant in tropics.

2) Poor slowest to adopt innovations:Technologies that offer higher expected returns commonly require:- Accepting greater risk- Initial outlays of capital- Knowledge and access to information

“Technology treadmill” in agriculture.

Photo courtesy of Nathan Seeds, http://www.nathseeds.com/RandDInner.html

Example: Small Farmers and Big Retail

Example 3

The rapid emergence of global food marketing channels, supermarkets and fast food chains is radically transforming food marketing channels in developing countries.This raises many unanswered questions:- Under what conditions do the rural poor become suppliers?- What is the impact of becoming a supplier on household assets/incomes?- How are farm workers affected? - What happens to those who do not participate or who drop out?

Principle 3: Improve risk management for the ultra-poor, protecting their assets and livelihoods.

Regressivity, multidimensionality and context-specificity of uninsured risk exposure make improving risk management a serious challenge.

Risk reduction tools: Improved crops and livestock, betterwater control, diversification, peace,disease control

Risk transfer instruments:Improved markets, index-based risk finance, global humanitarian response

Key StART principle 3

Example: Index-Based Livestock Insurance for Kenya

Example 4

Developing commercially viable products to insure major losses.Can use these products to:

- pre-finance humanitarian response by international relief organizations

- crowd in other financial services – especially credit and savings – among the poor by reducing covariate default risk

- protect key productive assets in a region vulnerable to climate shocks

Global + local (“Glocal”) Solutions

Principle 4: Favorable transitions out of agriculture.

Must equip the next generationto transition into remunerative non-farm employment.

Keys:- development and maintenanceof physical and institutional infrastructure- early childhood health, nutrition and education, especiallyfor disadvantaged children ... closely tied to improvements in parents’ productivity, risk management and asset holdings

Key StART principle 4

Global + local (“Glocal”) Solutions

Conclusions 1

There is real reason for hope.- Real agricultural output growth is accelerating in SSA at long last … positive per capita rates of food output growth now- Renewed and innovative initiatives (e.g., AGRA) and attention (e.g., WDR 2008), and turn-around in both public aid and private investment in rural SSA

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Source: World Bank, World Development Indicators

Global + local (“Glocal”) Solutions

But there remains much to do to ensure progress.

We need to emphasize and focus on four key StART principles.

Appropriate policy design and implementation are highly context specific. So we need to continuously and rigorously research the settings in which we work and the policies we design and introduce …

… beware repeating the errors of the 1980s-90s!

And we need to train a cadre of technically skilled analysts and policymakers able to unlock the poverty that traps more than 1 billion people worldwide, especially in Sub-Saharan Africa.

Conclusions 2

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Thank you for your time, comments and support!