How do public education and health spending reduce poverty?

Selim Raihan and Mehzabeen Ahmad

In recent decades, the developing world has made important progress in reducing extreme poverty. The data from the World Bank shows that the number of people living below the international poverty line of US$ 1.9 a day dwindled down from 1.85 billion people in 1990 to 768.5 million in 2016. However, the global share of the extreme poor population stands at over 10%, and there is uneven progress across different regions in the world. Therefore, eradicating poverty in all its forms and dimensions, including extreme poverty, remains the greatest global challenge and the most significant hurdle in the path of attaining sustainable development goals (SDGs) worldwide.

A majority of the global decline in poverty is explained by the reduction of poverty rates in East Asia and Pacific and even South Asia to an extent, due to the thriving economic growth experienced by these regions. However, a large population continues to suffer from poverty and a major portion of the rest remains vulnerable and at risk of falling back below the poverty line. A glaring spatial disparity can be perceived, accompanied by low levels of human development. If the qualities of health, education, employment and overall standard of living continually fail to cope with income growth, it may ultimately further hinder the capability of the masses; reinforce poverty and impede the process of growth. A similar picture can be admonished for Sub-Saharan Africa, which currently hosts the largest number of poor compared to other regions. This region’s multidimensional aspect of poverty is reflected in economic, human and social deprivation, explained by the very slow progress in Human Development Index (HDI) from the 1990s and the elevated rate of income poverty. Inequality also remains a significant crisis in the Latin American countries, in the form of chronic and transitory poverty, despite the recent upsurge of economic development in this region.

As the gap between the rich and poor widens, across and within nations, it becomes imperative to ensure a sustained resilience and global initiative against all dimensions of poverty. With that aim, the first SDG is assigned to “end poverty in all its forms everywhere” and its seven associated targets focus on various approaches to universal eradication of poverty and inequality, with a special attention to implementing necessary social protection programs, ensuring equal access to basic utilities, mobilizing global resources to extend cooperation towards the developing countries and constructing national and international policy and strategy frameworks.

In order to understand the current state of the cross-country differences in the poverty rates, we compared poverty rates across 72 developing countries (for which data is available from the World Bank’s World Development Indicators database) for the time period of 2010-15. Table 1 and Table 2 present the top 10 and bottom 10 performing countries with respect to poverty rates based on US$ 1.9 and US$ 3.2 poverty lines respectively.

Table1

Table2

Table3

According to Table 1, all the 10 countries with highest rates of poverty, in terms of US$ 1.9 poverty line, are from the Sub-Saharan African region, with Madagascar displaying the staggeringly highest rate of 77.8%. In contrast, the list of top countries with lowest poverty rates is dominated by the European countries, with countries such as Belarus, Poland, and Romania displaying almost no population below the US$ 1.9 poverty line. Few countries from Asia also make it to the top with minimal levels of poverty.

Table 2 provides a similar scenario for poverty rates calculated at a poverty line of US$ 3.2. Most countries on the list of bottom 10 or highest poverty rates remained unchanged. Madagascar and Burundi have almost 90% of the population below poverty line. Among the countries which possess the lowest rates of poverty at US$ 3.2, Belarus again tops the list, while Malaysia and Hungary make an entry in the top 10 rankings.

Table 3 illustrates the situation of all South Asian countries (except Afghanistan, due to unavailability of data), in terms of poverty. The countries have been ranked from the lowest to the highest rate of poverty for US$ 1.9 and US$ 3.2 poverty lines. Sri Lanka and Bhutan top both the lists, while India and Bangladesh stand at the bottom of the list with the highest share of the population living below the poverty line.

It has long been argued in the economic literature that public spending on education and health can be a powerful policy tool in the developing countries to reduce poverty, as these expenditures not only address the symptoms of poverty but also the causes of poverty. Public spending on education and health is argued to contribute to economic growth of a country by strengthening the human capabilities of the poor people. However, empirical literature to support this view has been limited due to the unavailability of time-series data on poverty. In this article, we use a cross-country panel data of poverty, constructed by Raihan (2017), to explore how public spending on education and health can affect poverty. This dataset has been constructed by considering periodic poverty rates (of US$ 1.9 poverty line) and average values of other variables for those corresponding periods. The constructed data has seven periods between 1981 and 2015. These are 1981-1985, 1986-1990, 1991-1995, 1996-2000, 2001-2005, 2006-2010 and 2011-2015. The missing values of the poverty rates have been filled-in using extrapolation and interpolation methods. This constructed data has 72 countries and the source of the data is the World Development Indicators of the World Bank.

The fixed effect panel regression results suggest that the coefficient of the per capita GDP is negative and significant suggesting that increase in the per capita GDP is strongly associated with a reduction in the poverty rate. Also, the ratio of remittance to GDP appears to have a positive and statistically significant association with the reduction in the poverty rate. After controlling for differences in per capita GDP and remittance-GDP ratios, one percentage point rise in the share of public spending on education in GDP is associated with 1.33 percentage points fall in the head-count poverty rate, and one percentage point rise in the share of public spending on health in GDP is associated with 2.4 percentage points fall in the head-count poverty rate. Both the fixed effect coefficients of public education and health spending are highly statistically significant.

Results from the aforementioned empirical exercises have important policy implications. A large number of developing countries, with the incidence of high poverty rates, are seriously lagging behind in terms of ensuring the critical levels of public spending on education and health in proportion to their GDPs. The business-as-usual scenarios of public education and health spending will not help these countries achieve the first SDG of ‘no poverty’ by 2030. There is thus a need for some extraordinary efforts in bringing large positive changes in the business-as-usual scenarios.

Raihan, S. (2017). “A cross-country panel dataset on poverty”, mimeo. SANEM

Dr. Selim Raihan, Professor, Department of Economics, University of Dhaka & Executive Director, SANEM: selim.raihan@gmail.com

Mehzabeen Ahmad, Research Associate, SANEM: mehzabeenahmad@gmail.com

First published in the Thinking Aloud on 1 December 2017

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The arithmetic of poverty in Bangladesh

Selim Raihan

Bangladesh has made important progress in reducing poverty over the past one and half decades. According to the national estimates, the overall head-count poverty fell from as high as 48.9% in 2000 to 24.3% in 2016. Also, the extreme poverty fell from 34.3% to 12.9% during the same period.

Despite its progress in reducing poverty, there are some major concerns regarding whether Bangladesh will be able to achieve the targets set by Goal 1 of the Sustainable Development Goals (SDGs) by 2030 with the business-as-usual scenarios. Goal 1 of SDGs sets the targets of eradicating extreme poverty and reducing at least by half the proportion of people living in poverty according to national definitions.

First, Bangladesh still remains a country with a very high incidence of poverty. In 2016, there were about 40 million poor people as per the national poverty line income. The number of extreme poor is also staggering with about 21 million people living below extreme poverty line in 2016. If we consider World Bank’s Lower Middle Income Class Poverty Line, which has a value of US$3.2 (PPP, in 2010), in 2010, 59.2% people in Bangladesh were under the poverty line income in contrast to 31.5% poor people as per the national poverty line income. This suggests that small adjustments in the poverty line income can change the poverty statistics quite significantly.

graph_poverty

table-poverty

Second, the annual average reduction in poverty rates has declined gradually over the past one and half decades. During 2000-2005, the annual reduction in overall poverty rate was 1.8 percentage points, which declined to 1.7 percentage points during 2005-2010, and further declined to 1.2 percentage points during 2010-2016. The most alarming trend is that while during 2000-2005, the annual reduction in extreme poverty rate was 1.8 percentage points, the rate declined to 1.5 percentage points during 2005-2010 and to 0.8 percentage points during 2010-2016. This suggests that the scope and success in reducing overall and extreme poverty rates in Bangladesh have become limited in recent years.

Third, the poverty elasticity of economic growth declined over the past one and half decades, indicating a declining effectiveness of economic growth in reducing poverty. The poverty elasticity of economic growth shows the percentage point change in poverty rate due to a percent change in real GDP (gross domestic product). In case of overall poverty, such elasticity declined from 0.32 in 2000-2005 to 0.16 in 2010-2016. For extreme poverty, the elasticity had a larger fall as it declined from 0.33 to 0.1 during the same period.

Fourth, despite that during 2010-2016, the country witnessed the highest average annual growth rate in GDP, both the annual reduction in poverty rates and poverty elasticity of economic growth had the lowest values. This suggests that economic growth alone cannot take care of reduction in poverty. As per the calculated elasticity values of 2010-2016, and with the business-as-usual growth rate of GDP, Bangladesh will have an overall and extreme poverty rates of around 10% and 4% respectively by 2030. Even with an accelerated average growth rate of GDP of 8%, overall and extreme poverty rates, by 2030, will be around 6.5% and 2% respectively. This means that, though there will be some progress in reducing overall poverty, neither the business-as-usual nor the accelerated growth scenarios will be able to eliminate extreme poverty by 2030. Under the business-as-usual growth scenario, there will still be around 8 million extreme poor, and under the accelerated growth scenario, there will still be around 4 million extreme poor by 2030.

Despite accelerated economic growth in recent years, why has there been much slower progress in poverty reduction? Three critical factors can be attributed to this. First, the annual average number of generation of employment declined from 1.7 million in 2000-2005 to 1.3 million in 2005-2010 and further to 0.9 million in 2010-2016. This means the accelerated economic growth during 2010-2016 was not ‘employment-friendly’. Second, the annual average share of public expenditure on education in GDP remained frustratingly unchanged at around 2% throughout 2000-2016. Bangladesh is among the bottom list of countries in the world with the lowest ratio of public expenditure on education to the GDP. In contrast, such ratio is around 5% for most of the Southeast Asian countries. Third, the annual average share of public expenditure on health in GDP declined from around 1% in 2000-2005 to 0.9% in 2010-2016. The public health expenditure as the percentage of GDP in Bangladesh is one of the lowest in the world, whereas, such ratio is around 2.5% for most of the Southeast Asian countries. All these three factors contributed to a rising inequality too in Bangladesh over this period. While in 2000, the ‘gini’ coefficient, a measure of income inequality, was around 0.45, it increased to as high as 0.48 by 2016. There are now strong global evidence that the effectiveness of economic growth in lowering poverty falls with the rise in income inequality.

What needs to be done? In order to increase the effectiveness of economic growth in reducing poverty, the ‘jobless’ growth phenomenon needs to be avoided. For this, the economic growth momentum needs to be tuned for ‘meaningful’ structural transformations of the economy where promotion of labor-intensive and high-productivity sectors would be fundamental. Also, poverty reduction is not simply about raising household income, but also about expanding human capabilities. In this context, Bangladesh has to increase the shares of public expenditure on health and education in GDP quite substantially in the coming years.

Dr. Selim Raihan. Executive Director, SANEM. Email: selim.raihan@gmail.com

First published in the Thinking Aloud on 1 December 2017