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TMCNet:  Job opportunities in developing countries - I

[January 01, 2014]

Job opportunities in developing countries - I

(Daily Frontier Post (Afghanistan) Via Acquire Media NewsEdge) Economic growth is the most powerful instrument for reducing poverty and improving the quality of life in developing countries. Both cross-country research and country case studies provide overwhelming evidence that rapid and sustained growth is critical to making faster progress towards the Millennium Development Goals - and not just the first goal of halving the global proportion of people living on less than $1 a day.

Growth can generate virtuous circles of prosperity and opportunity. Strong growth and employment opportunities improve incentives for parents to invest in their children’s education by sending them to school. This may lead to the emergence of a strong and growing group of entrepreneurs, which should generate pressure for improved governance. Strong economic growth therefore advances human development, which, in turn, promotes economic growth.

But under different conditions, similar rates of growth can have very different effects on poverty, the employment prospects of the poor and broader indicators of human development. The extent to which growth reduces poverty depends on the degree to which the poor participate in the growth process and share in its proceeds thus, both the pace and pattern of growth matter for reducing poverty. Asian countries are increasingly tackling this agenda of `inclusive growth’. India’s most recent development plan has two main objectives: raising economic growth and making growth more inclusive, policy mirrored elsewhere in South Asia and Africa.

Future growth will need to be based on an increasingly globalized world that offers new opportunities but also new challenges. New technologies offer not only `catch-up’ potential but also `leapfrogging’ possibilities. New science offers better prospects across both productive and service sectors.

Future growth will also need to be environmentally sustainable. Improved management of water and other natural resources is required, together with movement towards low carbon technologies by both developed and developing countries. With the proper institutions, growth and environmental sustainability may be seen as complements, not substitutes.

DFID will work for inclusive growth through a number of programmes and continues to spend heavily on health and education, which have a major impact on poor people’s ability to take part in growth opportunities. Research that compares the experiences of a wide range of developing countries finds consistently strong evidence that rapid and sustained growth is the single most important way to reduce poverty. A typical estimate from these cross-country studies is that a 10 per cent increase in a country’s average income will reduce the poverty rate by between 20 and 30 per cent. The central role of growth in driving the speed at which poverty declines is confirmed by research on individual countries and groups of countries. For example, a flagship study of 14 countries in the 1990s found that over the course of the decade, poverty fell in the 11 countries that experienced significant growth and rose in the three countries with low or stagnant growth. On average, a one per cent increase in per capita income reduced poverty by 1.7 per cent Among these 14 countries, the reduction in poverty was particularly spectacular in Vietnam, where poverty fell by 7.8 per cent a year between 1993 and 2002, halving the poverty rate from 58 per cent to 29 per cent. Other countries with impressive reductions over this period include El Salvador, Ghana, India, Tunisia and Uganda, each with declines in the poverty rate of between three and six per cent a year. Driving these overall reductions in poverty was the rebound in growth that began for most of the countries in the mid-1990s. The median GDP growth rate for the 14 countries was 2.4 per cent a year between 1996 and 2003.

Numerous other country studies show the power of growth in reducing poverty: • China alone has lifted over 450 million people out of poverty since 1979. Evidence shows that rapid economic growth between 1985 and 2001 was crucial to this enormous reduction in poverty.

• India has seen significant falls in poverty since the 1980s, rates that accelerated into the 1990s. This has been strongly related to India’s impressive growth record over this period.

• Mozambique illustrates the rapid reduction in poverty associated with growth over a shorter period. Between 1996 and 2002, the economy grew by 62 per cent and the proportion of people living in poverty declined from 69 per cent to 54 per cent.

The positive link between growth and poverty reduction is clear. The impact of the distribution of income on this relationship - in particular, whether higher inequality lessens the reduction in poverty generated by growth - is less clear. Initial levels of income inequality are important in determining how powerful an effect growth has in reducing poverty. For example, it has been estimated that a one per cent increase in income levels could result in a 4.3 per cent decline in poverty in countries with very low inequality or as little as a 0.6 per cent decline in poverty in highly unequal countries. Such calculations need to be interpreted with care given the multitude of variables involved. Even if inequality increases alongside growth, it is not necessarily the case that poor people will fail to benefit - only that they will benefit less from growth than other households.

But contrary to widespread belief, growth does not necessarily lead to increased inequality. While some theoretical research suggests a causal relationship between growth and inequality (and vice versa), the consensus of the latest empirical research is that there is no consistent relationship between inequality and changes in income.

The experiences of developing countries in the 1980s and 1990s suggest that there is a roughly equal chance of growth being accompanied by increasing or decreasing inequality. In many developing countries, rates of inequality are similar to or lower than in developed countries. A series of studies using cross-country data all suggest that growth has neither a positive nor a negative effect on inequality. This is not to say that increased growth has not led to increasing inequality in some countries. Both China and India have seen widening inequality as their growth rates picked up over the 1990s. And both Bangladesh and Uganda would have seen higher rates of poverty reduction had growth not widened the distribution of income between 1992 and 2002. For example, one study suggests that the proportion of people living in poverty in Uganda at the end of this period would have been 30% instead of 38% had the poor benefited proportionally from growth.

Due to the complex, two-way relationship between growth and inequality, it is impossible to say whether such proportional growth was possible. Even if it was, it may have come at the cost of higher growth. If the growth rate was curtailed sufficiently, the reduction in poverty may have been less than the high but relatively unequal growth experiences of each country.

Controlling for initial inequality of assets such as land and education, income inequality no longer seems to play a role in expanding or reducing the opportunities for growth. But asset inequality itself may be important because owning an asset that can be used as collateral can expand access to financial markets. Such access is likely to be growth-enhancing when it allows more households the opportunity to invest - which is especially important in economies where the average firm size is small.

Reducing asset inequality is a challenge, as it concerns the stock of wealth rather than the flow of income. Redistribution of assets may have an adverse effect on the incentives to save and invest, which may more than counteract the positive effects of more equitable asset ownership. Moreover, it is often politically contentious, and may be destabilizing. Economic growth generates job opportunities and hence stronger demand for labour, the main and often the sole asset of the poor. In turn, increasing employment has been crucial in delivering higher growth. Strong growth in the global economy over the past 10 years means that the majority of the world’s working-age population is now in employment.

At the same time, in every region of the world and particularly in Africa, youth unemployment is a major issue. This is reflected in higher than average unemployment rates: young people make up 25 per cent of the working population worldwide but 47 per cent of the unemployed.

Nevertheless, since the early 1990s, global employment has risen by over 400 million. While China and India account for most of this increase, almost all of the new jobs have been created in developing countries.

Real wages for low-skilled jobs have increased with GDP growth worldwide, which indicates that the poorest workers have benefited from the increase in global trade and growth. Fears that greater global integration and ever more `footloose’ international investors would push down wages have proved to be unfounded. Indeed, evidence on foreign direct investment suggests that firms are attracted to countries with higher, not lower, labour standards.

Macroeconomic factors, such as low inflation, export orientation and low labour taxes, help to determine how much employment is created by growth. Structural factors, such as the balance of the economy between agriculture, manufacturing and services, are also important.

While the relationship between growth and employment remains robustly positive, the strength of the link has weakened slightly since the turn of the millennium. This has raised concerns about `jobless growth’ in some countries.

Between 1999 and 2003, for every one percentage point of additional GDP growth, total global employment grew by 0.30 percentage points - a drop from 0.38 for 1995-99. This may prove a problem for some countries in the Middle East, South Asia and sub-Saharan Africa, where the number of jobs being created may not be high enough to absorb their growing workforces.

But even if the relationship between growth and employment is weakening, this may suggest a stronger rationale for a higher growth strategy in the future. Furthermore, the trend may mask improvements in productivity that could provide the basis for the creation of even more job opportunities in the longer term.

Economic growth is not just associated with reducing poverty. There is also clear evidence for a positive link between economic growth and broader measures of human development.

Economic growth is not fundamentally about materialism. Nobel laureate Amartya Sen has described economic growth as a crucial means for expanding the substantive freedoms that people value. These freedoms are strongly associated with improvements in general living standards, such as greater opportunities for people to become healthier, eat better and live longer.

Equally, weak economic growth implies vicious circles in which poor human development contributes to economic decline, leading to further deterioration in human development. For many countries, achieving the Millennium Development Goals will require breaking out of vicious circles to enter virtuous circles.

The link between economic growth and human development operates through two channels. First, there is the `macro’ link whereby growth increases a country’s tax base and therefore makes it possible for the government to spend more on the key public services of health and education.

Growth is essential if governments are going to be able to continue to provide public services, which directly benefit the poor. Although aid may provide initial support, increasing public expenditure in developing countries must ultimately be financed by collecting greater tax revenues. Given the generally low levels of tax revenue collection (often still below 20 per cent of GDP in African countries), this can only be achieved in the long-run by strong and sustained growth. Botswana and Kenya provide contrasting examples of this macro link. In 1960, the two countries had similar levels of per capita income and spent approximately nine per cent of their GDP on health and education over the next three decades. But by 1990, because Botswana had grown by 6.5 per cent a year while Kenya had only grown by 1.6 per cent a year, Botswana was spending five times as much as Kenya on these sectors on average for low-income countries, a 10 per cent increase in per capita income is associated with an 11 per cent increase in education expenditure, an 11.4 per cent increase in health expenditure and a 12.7 per cent increase in tax revenue. A sustained two per cent increase in per capita growth would bring forward the date at which a typical low-income country could domestically finance recommended health expenditure rate ($40 per capita) by 33 years.

The second channel between growth and human development is a `micro’ link, whereby growth raises the incomes of poor people and thereby increases their ability to pay for activities and goods that improve their health and education.

Vietnam’s experience between 1993 and 1998 is an example of this. The country’s high rate of growth during that period (six per cent a year) led to significant increases in household incomes (seven per cent a year). This resulted in increased demand for education: the average length of time that children attended school rose from 7.5 to 8.1 years, and enrolment rates in secondary schools increased by approximately eight percentage points.

In general, a growing economy tends to provide greater job opportunities. These lead in turn to increased demand for education as people expect higher returns for them and their children from the investment of time and money in acquiring skills.

The link works equally in the opposite direction. Increased government spending on health and education tends to boost growth in the future, and households reap the benefits from increased investments in health and education through higher future incomes. This generates a virtuous circle of development. There is overwhelming evidence that higher incomes lead to a better quality of life, not least in terms of the Millennium Development Goals on health and education. Key research findings here include the following: • Higher levels of income reduce infant mortality. India demonstrates the strength of this relationship: a 10 per cent increase in GDP is associated with a reduction in infant mortality of between five and seven per cent.

• Primary and secondary school enrolment rates are positively associated with higher levels of per capita income.

• Educational outcomes such as test scores and the rates at which children repeat a year’s schooling or drop out of school are significantly affected by per capita income.

• There is usually less disease in wealthier countries. For example, the prevalence of HIV/AIDS is 3.2 per cent for the least developed countries, 1.8 per cent for low-income countries, 0.7 per cent for middle-income countries and 0.3 per cent for high-income countries.

• Life expectancy is clearly positively related to the level of per capita income, according to cross-country evidence.

• In addition to beneficial effects on health and education, political, gender and ethnic oppression are typically lower the wealthier the country. During the 1990s, economic growth in the developing world outpaced that in the developed world for the first time. This led to a decline in aggregate poverty rates and the number of people living on less than $1 a day. Nevertheless, progress has been uneven across countries and regions. Economic growth in East Asia has averaged nine per cent a year over the last 15 years, largely driven by China. The number of people living on less than $1 a day fell from 472 million in 1990 to 213 million in 2003, although inequality rose over the same period.

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