chapter  6
26 Pages

A macroeconomic policy approach to poverty reduction


Linking macroeconomic and financial sector policies to poverty reduction is a difficult and challenging task from the policy perspective. The evidence in the poverty literature is mixed with claims that economic growth path in developing countries has been pro-poor (see Dollar and Kraay 2002).1 On the contrary there are studies reporting the role of redistributive policies aiding poverty reduction whenever poverty skyrocketed including in the aftermath of a crisis (see, for example, Alesina and Rodrik 1994; Dagdeviren et al. 2002). The policy issue is not whether growth is or is not good for the poor, but what policy measures can make it most effective for the poor. The macroeconomic impacts can be both direct and indirect. The direct impact works through prices, and public spending on the poor (supply of public goods directly targeting the poor; opportunities provided for the poor such as education), whereas the indirect impacts of macroeconomic policy on poverty work through its effect on growth. So the literature remains dominated by a paradigm of growth being necessary for poverty reduction but it may not be sufficient if the relevant development policies are not in place. Although economic growth can contribute to the reduction of poverty, the mechanisms by which an improvement in general economic performance promotes poverty reduction are by no means universally agreed (Agénor 2004). Macroeconomic policies such as contractions in public expenditure, revenue-raising measures, exchange rate realignments and more restrictive monetary policy are usually designed to create the conditions for stability with growth, but these policies can have negative consequences on poor households. So increased government spending (Squire 1993) or access to assets and opportunities (Birdsall and Londono 1997) has been emphasised to be the logical extension of the argument that growth does not ensure the elimination of poverty. Poverty results either due to permanent non-availability of two square meals a day because of lack of work and income, or due to shocks such as ill health or crop failure. These shocks can be temporary if the households have assets to sell or access to credit, otherwise these households can eventually be pushed below the poverty line.