Difficulties of reducing poverty in developing countries

a country like a laboratory for testing, experimentation, or practice as any to understand the determinants and the difficulties of reducing poverty in developing countries.

Since 1960s our country has experienced dramatic fluctuations growth, financial crises, inflation and stabilisation, all during a process of democratization and economic liberalization and reform.

Until very recently, the results of this period of policy experimentation in terms of either poverty reduction or growth have been uninspiring. Consider first the continent wide record on poverty and growth.

Tanzania for the last 25 years has attempted more or less unsuccessfully to find a sustainable method to grow faster and to reduce poverty and inequality nationwide.

Poverty rose in almost every country in the region in the 1980s due to debt crises, financial instability, high inflation and stabilization. This unpleasant process peaked between 1989 and 1992.

Fundamental to the goal of increasing earning opportunities for the poor is an enabling environment of economic growth. The evidence in the United Republic of Tanzania is overwhelming that economic growth is a necessary condition for poverty reduction.

Growth almost always increases employment, hours of work and the take- home pay of unskilled labor. Since the bulk of the poor are unskilled and earn their income from labour, growth can be a powerful economic lever for lifting people out of poverty.

If growth is a key anti-poverty strategy, it follows that many policies which are not specifically targeted toward the poor may in fact be important components of the poverty strategy simply because they raise the growth rate.

Policies that raise the rate of saving and investment, increase exports or modernize the industrial base are not generally considered poverty strategies because they are not targeted to the poor. Yet if they raise the overall growth rate in a labor-intensive way they may do more for the poor than targeted interventions.

The evidence is equally clear that the style of growth matters too. In the open economy a goal for policymakers should be to make sure that, while maintaining internal and external balance, the growth strategy they adopt maximizes the benefits that go to the poor.

Job creation is crucial for poverty reduction. If growth is labour intensive and creates jobs faster than the rate of growth of the labor force, then not only will new employment opportunities keep pace with new entrants, but real wages for the unskilled are likely to rise as well. Any country which is able to develop a sustained growth trajectory will have implemented the most important element of its anti-poverty strategy.

Even if our country does nothing to increase the number of jobs available to the poor, it is still likely to make some progress in reducing poverty, provided that its per capita income grows.

For even if growth is not led by the sectors in which the poor work, still it will increase the demand for unskilled labour; people whose earnings go up hire more help and use more personal services.

Domestic industry will expand, creating new job opportunities for the unskilled. Over time, provided that the rate of increases of jobs exceeds the rate of growth of the labour force, wages will begin to rise for the unskilled, even for those who continue to do the same jobs, simply because of the rise in the demand for unskilled labour relative to its supply.

This is what could be called the trickle-down poverty reduction strategy, one in which growth is almost sure to be accompanied by rising inequality.

Trickle-down style growth comes from the inability or unwillingness to find any other way to increase the productivity of the unskilled except by letting growth indirectly increase the demand for their services.

There is a general conviction that employment creation should be a key element in any growth strategy targeted toward increasing earning opportunities for the poor.

However, since open unemployment is small in most poor countries, unemployment by itself is not a very important source of poverty. Unemployment is a luxury that most poor people cannot afford.

Therefore when one speaks about job creation as a poverty strategy, what one really must mean is the substitution of good jobs for bad jobs. Growth which simply expands the number of low paying jobs may be labour intensive, but it will not do much to alleviate poverty except perhaps in the very long run.

How does a country substitute good jobs for bad jobs? Leaving aside education and training for the moment, there are two ways to do this: create new and more productive work that can be performed by the unskilled or increase the assets owned by the poor thus raising their productivity and the wages they can earn.

Many of Tanzania's poor work in agriculture. Making agriculture a leading sector in a country's growth strategy as other countries do should increase the demand for unskilled labour.

To do that the government should assist the sector to develop new products and export markets. In addition the government needs to eliminate any artificial barriers and costs imposed on agriculture by sector-specific taxes or pricing policies for agricultural commodities.

All of this will help the sector and the poor who work there. The other way to help the poor who work in agriculture is to increase their productivity by giving them the complementary inputs they need to produce more. That could mean access to land or credit, improved transportation and marketing facilities, better irrigation, improved seeds and technical assistance.

Another promising way to increase the labour intensity of demand in the economy is by increasing the construction of infrastructure. Construction, like agriculture, is a big user of unskilled labour.

Social investment funds are an example of this sort of approach to increasing employment of low wage workers, but on a fairly small scale. But the scope for poverty alleviating infrastructure construction activity is far larger than social investment funds.

The government, through its power to tax and to finance large scale projects, is the one unit in the economy large enough to change the sectoral composition of domestic demand so that it is more labour intensive. One of the ways it can do this is by investing in the construction of infrastructure. The projects chosen should not be making work projects.

Rather they should be investments such as water or sewer systems that improve living conditions and health of the poor or productive investments such as roads, irrigation systems or reforestation and land reclamation that increase the earning power of the poor.

All of these are all win-win projects that increase the income of the poor while they are being built, and which increase social welfare and/or worker productivity when they are completed.

Backward regions pose difficult political and development problems. Generally, a high percentage of the nation’s poor and very poor are concentrated in these regions.

If there is pressure to reduce poverty or if the backward region is stronger politically than economically, it can force the national government to tax the advanced region to finance regional transfers.

The strategy in these circumstances is to attempt to change the structural conditions that perpetuate this source of poverty. Where the pockets of poverty are regional the government should review macro policies that discriminate among regions.

For example, in some cases the region produces an agricultural commodity for export. That makes its income highly sensitive to the real exchange rate. It will lose when there are large capital inflows to the modern sector which cause an appreciation of the real exchange rate.

In other cases high tariffs that protect domestic manufactures discriminate against backward, natural resource producing regions. In still other cases the net impact of central government finances and expenditure is biased against the region in question.

Investments in infrastructure and education targeted to the lagging region are likely to be part of any solution to the problem. Both are examples of poverty targeted investments which will be discussed further in a moment. They help in several ways.

Construction projects increase the demand for unskilled labour and therefore raise the income of the poor in the short run while the projects are being built. And if there is a significant transportation problem which prevents the region from capitalizing on its export potential, these investments will raise the farm gate prices received by poor farmers in the long run. Investment in education helps in two ways.

It helps to make local activities more profitable and productive, and it prepares the local population to migrate to the growing areas. Either way the regional income disparities and poverty in the backward region should decline, other things being equal.

MUHARRAM MACATTA is a retired civil servant. He is an economist . Before retirement he served as director of international and external trade; director of imports and exports, with the then Ministry of Commerce, which later came to be known as the Ministry of Industry and Trade. And he also is the founder and first director of the SabaSaba International Trade Fairs.