Environment, Economic Growth, and Poverty

March. 2012

Yong-seong KIM

Research Fellow Korea Development Institute (KDI)

I. Introduction

II. Environment and economic growth, and poverty

III. Economic growth and poverty

IV. Policies for Pro-poor growth

V. Conclusions

Part-I Introduction

I. Introduction: Pro-poor growth

“Pro-poor growth” as a goal for twenty-first century.

MDG (the Millennium Development Goals) proposed the reduction of

poverty through a sustainable growth

Environmental issues as a key ingredient of a sustainable growth in G20

meeting in Toronto (2010)

The concept of “Pro-poor growth”

Rate of income growth of the poor > Rate of GDP growth (A and E)

Rate of income of the poor > 0 (A, B, C, and D)

I. Introduction: Pro-poor growth

0

45

E

A

B

D

C

rate of income growth of the poor

rate of GDP Growth

The Concept of “Pro-poor growth”The Concept of “Pro-poor growth”

Part-II Environment, economic growth

and poverty

II. Environment, economic growth and poverty

Environmental impacts on economic growth and poverty are

controversial.

Environmental awareness can bring welfare gains and new innovative

technologies: high growth rate and low poverty rate

Concerns that drastic measures for environmental protections might

cause economic distortions and instability: low growth rate and high

poverty rate

Focus on the impact of environmental issues on economic

growth and poverty from a macro economic perspective.

Examine the relationship between economic growth and poverty.

Investigate how environmental issues affect economic growth.

II. Environment, economic growth and poverty

Environment and economic growth: empirical perspective Inverse U-shaped relationship between environment and economic

growth(Environmental Kuznets Curve, EKC)

Results of empirical analyses are mixed and the relationship is ambiguous

Economic development

Environmental pollution

0

Environment and economic growth: EKC Environment and economic growth: EKC

II. Environment, economic growth and poverty

Economic growth and income distribution Inverse U-shaped relationship between income inequality and economic

development(Kuznets Curve)

Results of empirical analyses are mixed and the relationship is ambiguous

Stylized fact is “Economic growth is distribution neutral on average”

Economic growth and income distribution: KC Economic growth and income distribution: KC

Economic development

income inequality

0

II. Environment, economic growth and poverty

Environment and economic growth: theoretical perspective

Conventional approach predicts that measures for environmental

protection make an economy to operate below its production possibility

frontier, causing a decline in economic growth

A few theoretical model shows the possibility that environmentally

oriented economy can not necessarily experience a slowdown in

economic growth

Overlapping generation model shows that introduction of environment

measures may not necessarily decrease economic growth

Part-III Economic growth and poverty

III. Economic growth and poverty

Economic growth and poverty: Empirically stylized facts

Economic growth tends to reduce poverty rate in the long-run.

Policy attempts to lower inequality reduce poverty rate in the short-run

Economic growth together with appropriate efforts to reduce income

inequality is necessary for poverty reduction and sustainable growth

III. Economic growth and poverty: Korean case

Economic growth and poverty: Korean Case

Dramatic reduction in the absolute poverty rate:

82%(1982) → 9.2%(2007)

Rapid economic growth during those periods is a main determinant in

the reduction of the poverty rate

III. Economic growth and poverty: Korean case

Absolute poverty: Korea 1982~2007Absolute poverty: Korea 1982~2007

0

20

40

60

80

100

82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07

Source: National Statistical Office, Family Income and Expenditure Survey, various years

III. Economic growth and poverty: Korean case

Decomposition of growth and distributional effect: Korean Case

‘Pure growth effect’ is dominant in reducing poverty over time in Korea.

Currently, the ‘distributional effect’ operates in a direction to raise

poverty rate.

III. Economic growth and poverty: Korean case

Decomposition of Growth impacts on the poverty rate: Korean CaseDecomposition of Growth impacts on the poverty rate: Korean Case

Year Elasticity of poverty rate Pure growth effect Distributional effect82/83 -0.55 -0.54 -0.0183/84 -0.66 -0.67 0.0184/85 -0.67 -0.76 0.1085/86 -0.97 -0.94 -0.0386/87 -1.17 -1.19 0.0287/88 -1.46 -1.55 0.0988/89 -2.16 -1.98 -0.1889/90 -3.31 -2.50 -0.1890/91 -2.92 -2.65 -0.2891/92 -3.46 -3.12 -0.3392/93 0.94 -2.99 3.9393/94 -3.26 -2.67 -0.5894/95 -1.87 -2.63 0.7595/96 -3.32 -2.77 -0.5596/97 3.04 -3.24 6.2797/98 -4.11 -2.52 -1.5998/99 0.36 -2.10 2.4699/00 -5.48 -2.49 -2.9900/01 -1.27 -2.61 1.3501/02 -3.38 -2.87 -0.5102/03 -6.99 -1.50 -5.4903/04 -1.15 -1.79 0.6304/05 3.70 -1.80 5.5005/06 -1.02 -2.18 1.1606/07 -0.96 -1.64 0.68

Source: Yoo (2008)

Part-IV Policies for Pro-poor growth

IV. Policies for Pro-poor growth

Economic growth and income inequality

Positive relationship between income inequality and growth: For

investment to happen, someone need to be rich and redistribution policy

generally discourages economic Incentive

Negative relationship between income inequality and growth: In an

unequal society, majority favors progressive tax, reducing growth

Policy choice for sustainable economic growth

Unequal distribution is detrimental to economic growth and capital

accumulation.

Human capital investment is a useful policy tool for sustainable

economic growth

IV. Policies for Pro-poor growth

Determinants of growth and investmentDeterminants of growth and investment

(1)INEQ on GR, INV

(2)DEM on GR, INV

(3)HUMCAP on GR,

INV

(4)INEQ on INSTAB

(5)INSTAB on GR,

INV

1. Alesina-Rodrik (94) 2. Alesina-Perotti (96) 3. Alesina et al (96) -4. Barro (96) M= F= 5. Benhabib-Spiegel (96) (-) 6. Bourguignon (94) (-)7. Brandolini-Rossi (95) 8. Clarke (92) 9. Deininger-Squire (95) (-) (±) +10. Easterly-Rebello (93) (±)11. Keefer-Knack (95) (-) 12. Levine-Rebello (93) -13. Lindert (96) 14. Perotti (92) + 15. Perotti (94) 16. Perotti (96) M= F= 17. Persson-Tabellini (92) 18. Persson-Tabellini (94) - 19. Svensson (93) + 20. Venieris-Gupta (86)

Note: Symbols: , : consistent, sign and generally significant; +, -: consistent sign, sometimes significant; (+), (-): consistent sign but generally not significant, (±): inconsistent sign with significant coefficient; ; inconsistent sign or close to zero, and not significant; : inverse U-shaped, significant. INEQ: Measures of inequality DEM: Measures of political rights and degree of democracy HUMCAP: initial stock of human capital INSTAB: socio-political instabilitySource: Benabou(1996), NBER Working Paper No. 5658.

IV. Policies for Pro-poor growth

Socio-economic policies for sustainable growth: OECD case Tax policy appears to be ineffective

Unemployment benefits and public health policy improve income distribution without causing negative effects on economic growth

Policies, economic growth and income distributionPolicies, economic growth and income distribution

Growth Inequality

Social Expenditures

Old age cash benefits -2056*** -0.463

Family cash benefits -0.292 -0.513**

Active labor market -0.419 -1.439

Unemp benefits 1.625*** -1.648***

Health 1.524** 0.237

Tax

Income tax -0.248*** 0.087

Sales & VAT -0.802*** 0.311

R-square 0.770 0.495

Note: *** = 99%, ** = 95%.Source: Kim(2004).

Part-V Conclusions

V. Conclusions

Economic growth, poverty reduction and environment

Environmental regulations may not be necessarily growth-reducing.

Growth is not a sufficient condition for poverty reduction due to growth

and distributional effects

Policy recommendations for sustainable growth

Tax on capital may not be a good choice, while environmental tax may

be.

A government cautiously selects distributive policies : human capital

investment, welfare to wotk, and public health may be desirable.