1Poverty Reduction: Making Markets Work for the Poor International Development Enterprises (IDE) Purpose of the Paper 1. This paper provides the framework for IDE’s approach to poverty reduction. It seeks to make explicit the assumptions underlying IDE’s efforts to integrate the rural poor into expanding input and output markets. Its aim is to demonstrate that there is a case for taking specific action to enable the poor—especially the rural poor—to participate in markets both as customers of purchased inputs, and as suppliers of high-value products. It argues that poverty reduction must be market-driven, whereby the purpose of public investment in poverty reduction should aim at removing constraints to market participation. 2. The paper is meant to be a draft for IDE internal discussion with staff and the Board, and at a later stage to serve as a tool to facilitate interaction with donor agencies, collaborating organizations, and to communicate with the outside world at large. Poverty, Wealth Creation, and Markets 3. A consensus is emerging around the view that poverty is a multi-faceted phenomenon, encompassing issues of security and safety nets, self-esteem and belonging, as well as power and control. Determinants of chronic poverty and vulnerability are closely related to the volatility and low level of rural incomes, the deteriorating natural resource base, low food security, and high population growth. Much policy discussion focuses on “income poverty” (or, alternatively “consumption poverty”), both because it is the most amenable to measurement and because it connects to all the other dimensions. The international development targets suggest that the focus of poverty reduction be on identifying and addressing problems impacting on large numbers of people, rather than seeking larger gains in well-being for a few. 4. Since 1945 the countries of the non-industrialized world have made major efforts at stimulating modern economic growth. The outcomes of these various economic development strategies are at least as varied as the strategies themselves. Some parts of the less-developed world have experienced respectable economic growth during the last five decades. South Asia has witnessed growth of slightly lower than 2% per capita per year since 1965, and East Asia has grown at 3.5%. Other parts of the world have been less successful. Sub-Saharan has witness falling per capita GNP during the past thirty years, and Latin American economies have witnessed only slight positive growth rates. 5. How has economic growth affected the poor? While there is evidence today that over time, vigorous economic growth is associated with poverty reduction1, in a large 1 The elasticity of poverty, as measured by the change in the headcount index with respect to the changes in per capita income, is estimated to be between –1.5 and –3.5. At any positive rate of growth, the higher the initial inequality, the lower the rate at which income poverty falls. It is possible for inequality to be2number of developing countries the benefits of economic growth have not reached the poorest 20 to 40 percent: their share of income has fallen, and their absolute average income has remained approximately constant.2 These findings do suggest that it is one thing to increase GNP at the fastest possible rate—hoping that the economic benefits will trickle down to the poor, and quite another thing to place the improvement of the welfare of the poor as the highest priority. The world community has clearly recognized this and multilateral development banks as well as many bilateral donors have started to put heavy emphasis on poverty reduction per se, as a quite separate and distinct development goal. 6. It is against this reality that the Board of IDE has decided that the organization is to put the poor first. Putting the poor first involves making choices concerning intervention strategies on the basis of consideration of how various alternatives will affect the welfare of the poorest strata of society. 7. Today it is generally accepted that poverty consists of two interacting deprivations—physiological and social. Physiological deprivation is an inability to meet or achieve basic material and physiological needs and can be measured as a lack of income, which limits access to food and to education, health, housing, water, and sanitation services. The question arises: how can the poor generate income—income that allows the poor to overcome physiological deprivation, and thus escape income poverty? 8. Markets—and especially access to markets—have a profound impact on the well-being of the poor. Poor workers sell their labor to landlords or factory owners. Poor farmers sell their produce to traders. Markets are institutions. They can be understood as ‘rules of the game” and as organizations, which enable participants to trade in factors of production, or in outputs, or consumer goods and services. At least since the days of Adam Smith, economists have recognized that the driving force of wealth creation is the production of goods tradable outside the immediate area of production. 9. The poor are largely marginalized from commercial markets, depriving them of the opportunity to generate profits. To the extent that the emphasis of the development world is on the poor themselves, emphasis must be on incorporating the poor into markets. For markets to work better for poor people, they need to facilitate the access of the poor to assets, and enable them to use these assets to generate livelihoods and to reduce vulnerability. To do this—i.e., for markets to become pro-poor—markets must become progressively more developed, and accessible to poor people. 10. The driving force for wealth creation is market opportunities, and the ability to generate surplus income from taking advantage of such opportunities. Pro-poor markets are those that allow the poor to have access to market opportunities, and derive surplus income from such market access. sufficiently high to result in rising poverty (Ravallion, Martin. 1997. Can High Inequality Developing Countries Escape Absolute Poverty? The World Bank, Washington, D.C. 2 Note: insert table here, using data from World Bank (2000) and Daniel Little’s “Putting the Poor First.”311. With market-driven income generation postulated as the true motor force for income generation, all other factors (such as