Tuesday, July 12, 2011

How does a country escape the poverty trap?

Without much fanfare, 28 different countries have escaped the poverty trap. These countries were once counted as a least developed country by the World Bank, but are now classified as a middle-income. So the question is how did this happen, Was it through development aid or through foreign investment?

From the Guardian, a commentary co-written by Charles Kenny from the Center for Global Development and Andy Sumner from the Institute of Development Studies takes a stab at answering the question.

So what's behind all of this sudden income growth? Is it a story about aid? One prominent Zambian, Dambisa Moyo, has written of her country that "a direct consequence of the aid-driven interventions has been a dramatic descent into poverty. Whereas prior to the 1970s, most economic indicators had been on an upward trajectory, a decade later Zambia lay in economic ruin". In the 1980s, aid to Zambia averaged about 14% of GNI. In the 2000s, a decade of strong growth, the same proportion was 17%. If Zambia's ruin in the 1980s was the result of aid, is Zambia's graduation to middle-income status in the new millennium a sign that aid now works really well?

Of course both the ideas that previous stagnation was all the fault of aid, or current growth was all the result, are ridiculous. The price of copper (Zambia's major export) was depressed in the 1980s and saw its price rocket in the middle of the last decade as China and India's economies grew and demand for the metal soared.

But growth among low-income countries in Africa and elsewhere isn't just limited to big mineral exporters. And the continent is fast drawing in more investment. Foreign direct investment to Africa is projected to rise to $150bn by 2015, reports the Africa Attractiveness Survey (that's more than the total global aid budget) – and domestic resources are being mobilised at a faster rate, too, as the Commission for Africa 2010 report discussed.

Even diamond-producing Ghana, which declared itself 63% richer at the end of last year than previously thought, didn't suggest the newfound riches were the result of mineral exports. Instead, the recalculation was driven by the fact the country's services sector was a lot bigger than previously calculated. Part of that will reflect the incredible success of the telecoms sector - 75% of the country's population are mobile subscribers. And, of course, the expansion of telecoms is a worldwide phenomenon. So a lot of the growth we are seeing in poor countries is broad-based, not just reliant on the current commodity boom – which is good news for the future.

Of course there's much to do to translate this growth into better and faster poverty reduction. Looking at the progress data for the millennium development goals (MDGs) for Ghana and Zambia there's nowhere near the kind of progress you would hope to see on income poverty. Twenty years of growth in Ghana has reduced the number of people living on $1.25 or less from just over 7 million to just under 7 million – and inequality (as measured by the Gini coefficient) rose significantly. However, in both Ghana and Zambia, the number of children in primary school has climbed along with literacy rates, and infant mortality has fallen. Even if they're not on track to meet the MDGs, quality of life is getting much better.

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