International Institute of Social Study University of Economics Erasmus University of Rotterdam, Ho Chi Minh City, Vietnam The Netherlands VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONMICS THE ROLE OF GROWTH AND INCOME DISTRIBUTION IN POVERTY REDUCTION: THE CASE OF THE SOUTH-EASTRN ASIAN COUNTRIES by Hồ Quốc Tuấn A Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Art in Development Economics Under the Supervision of Assoc. Nguyễn Trọng Hoài Vietnam – Netherlands Programme, August 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com International Institute of Social Study University of Economics Erasmus University of Rotterdam, Ho Chi Minh City, Vietnam The Netherlands VIETNAM – THE NETHERLANDS PROGRAMME FOR M.A IN DEVELOPMENT ECONMICS THE ROLE OF GROWTH AND INCOME DISTRIBUTION IN POVERTY REDUCTION: THE CASE OF THE SOUTH-EASTRN ASIAN COUNTRIES by Hồ Quốc Tuấn A Thesis Submitted in Partial Fulfillment of the Requirements for the Degree of Master of Art in Development Economics Under the Supervision of Assoc. Nguyễn Trọng Hoài Vietnam – Netherlands Programme, August 2013 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com DECLARATION This is to certify that thesis entitled “The Role of Growth and Income Distribution in Poverty Reduction: The Case of South-Eastern Asian Countries”, which is submitted by me in fulfillment of the requirement for the degree of Master of Art in Development Economic to Vietnam-The Netherlands Programme. The thesis comprises only my original work and due supervision and acknowledgement have been made in the text to all other material used.
Hồ Quốc Tuấn LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CERTIFICATION LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com v ACKNOWLEDGEMENT I would not be possible to write this master thesis without the help and support of people surrounding me. Above all, I am grateful to my supervisor, Assoc. Nguyễn Trọng Hoài, for his helpful comments and supervisions. This thesis research would not be feasible without the advices, supports and guidance from him.
I would like to acknowledge all the lecturers at the Vietnam – Netherlands Programme for their knowledge of all the courses, during the time I studied at the program. Besides, I would like to thank all the academic and technical staffs of the Vietnam – Netherlands Programme for supporting me during that time. I would like to express my gratitude to my family, especially my parents. I would not complete this thesis, as well as study in this program, without their scarification, encouragement and important support.
Additionally, I am also grateful to my better half for her personal support and patience at all times, which accelerate my thesis writing process. For the love and expectation of my family, which motivate my effort to complete this master degree, my mere expresses of gratitude here have never been sufficient. Last, but not least, I thank my friends and people, who have any help and support for my thesis but are not above-mentioned. LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com vi ABBREVIATIONS FE Fixed Effect GDP Gross Domestic Product Gini Gini coefficient GLS Generalized Least Squares GNP Gross National Product MDG Millennium Development Goal OLS Ordinary Least Squares P1 Poverty Headcount ratio P2 Poverty gap index P3 Poverty squared gap index RE Random Effect LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com vii ABSTRACT This thesis research contributes to exploring the impact of economic growth and inequality on poverty.
In detail, this research aims to identify the effect of income growth on poverty and the impact of inequality on the rate at which growth reduces poverty. This research use unbalanced-panel data for South-Eastern Asian countries in the period from 1981 to 2010. The research argues that for all three measures of poverty, i. headcount ratio (P0), poverty gap (P0) and poverty squared gap (P2) income growth has a significant and negative impact on poverty.
The estimated growth elasticity of poverty for the whole region is -3. Additionally, inequality as well as the level of initial inequality is found to affect the impact of income growth on poverty reduction significantly. Higher inequality as well as higher initial level of inequality decelerates the growth elasticity of poverty in absolute value. Finally, the impacts of income growth and inequality are larger on the more sensitive measures of poverty.
LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com viii TABLES OF CONTENTS LIST OF TABLES. xi LIST OF FIGURES .xii Chapter 1 INTRODUCTION .4 Research Scope and Data .5 Organization of the Thesis. 3 Chapter 2 LITERATURE REVIEW .2 The Important Role of Economic Growth in Poverty Reduction .3 Growth and Redistribution Components of Poverty Reduction .4 The Impact of Inequality on the Responsiveness of Poverty to Growth. 16 Chapter 3 RESEARCH METHODOLOGY.3 Measurements of Variables.
22 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.4 Initial Inequality and Initial Income or Consumption .5 Growth Rate of Poverty, Income and Inequality .1 The Constant Coefficients Model .2 Random Effects Regression Model .3 Fixed Effects Regression Model. Choosing between the FE Model and RE Model: The Hausman Specification Test. 30 Chapter 4 DATA ANALYSIS .1 South-Eastern Asian Countries: An Overview on Poverty, Income and Inequality .2 Poverty, Income Growth and Inequality: The Interrelationship .2 Choosing the Most Appropriate Model .3 Discussions on the Research Results .4 Estimating the Growth Elasticity of Poverty. 43 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com x Chapter 5 CONCLUSION AND POLICY IMPLICATION .3 Limitation and Suggestion of Further Research.
48 APPENDIX A: DESRRIPTION OF THE DATASET. 53 APPENDIX B: DESCRIPTIVE STATISTICS OF VARIABLES. 59 APPENDIX C: RESULTS OF HAUSMAN TEST. 62 APPENDIX D: REGRESSION RESULTS.
65 APPENDIX E: ESTIMATION OF GROWTH ELASTICITY OF POVERTY. 68 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com xi LIST OF TABLES Table 3.1 Summary of expected sign of coefficients .1 Summary of Hausman Test Results .2 Choice between FE model and RE model .3 Summarized Estimation Results .5 Estimation of Growth Elasticity of Poverty. 42 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com xii LIST OF FIGURES Figure 2.1 Income growth and poverty .2 Inequality and poverty .3 Income and inequality. 34 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 1 Chapter 1 INTRODUCTION This chapter begins the thesis research by introducing the research topic and states the research problems in terms of social and scientific point of view, which motivate this thesis project.
This chapter also includes the research objectives and research questions that will be solved by the thesis. In addition, this chapter provides the research scope of this thesis. It will end in bringing out the organization of the thesis.1 Problem Statement Reducing poverty is the first and conceivably the most important goal of the Millennium Development Goals (MDGs). In detail, the target of the MDG1 is to halve “the proportion of people whose income is less than $1 a day” (United Nations, 2010, p.
6) during the period 1990-2015. For the South-Eastern Asian countries, in terms of poverty reduction, the poverty rate (measured by headcount ratio) falls from 39% in 1990 to 19% in 2005 (United Nations, 2010). This is a great achievement that the South-Eastern Asian countries have early met the target of MDG1 in 2005, ten years before the MDGs deadline. Moreover, although poverty in this region was reduced sharply (more than a half during this period), there stills a large proportion of people in these countries living on less than the poverty line.
According to United Nations (2013), the poverty rate of the South-Eastern Asia region, measured by headcount index, is 14% in 2010. Therefore, this successful poverty alleviation progress must be maintained. For these reasons, analyzing the sources of the successful poverty alleviation progress of these countries is of interest in both policy and scientific perspectives. Economists have debated about how economic growth and declines in income inequality can reduce poverty.
In the first side of the debate, researches emphasize that economic growth is crucially important for poverty reduction, and they neglect the role of inequality. For example, change in poverty is attributed to the major role of growth by Squire (1993), Bruno, Ravallion, and Squire (1998), and Dollar and Kraay (2002). In the second line of researches, economic growth and income inequality have been argued influence poverty together. For instance, Datt and Ravallion (1992) and LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 2 Kakwani (1993) decompose changes in poverty into income (growth) and distribution (inequality) effects.
The final group of thoughts argues that beside the important role played by growth in poverty reduction, income inequality also matters because it affects the rate at which income growth can reduce poverty. Some remarkable researches in this group are Ravallion (1997), Collier and Dollar (2001), Ravallion (2001), Adams (2004), Fosu (2008) and Heltberg (2002), who discuss that the growth elasticity of poverty strongly depends on the level of inequality. In light of these conflicting points of view, this thesis is intending to identify the role of economic growth and inequality in terms of poverty reduction in the case of South- Eastern Asian countries. This thesis pays attention on the South-Eastern Asian countries because of their successful progress of fighting poverty.2 Research Objectives The thesis aims to identify the role played relatively by growth and inequality in poverty reduction.
In other words, it intends to analyze the impact of growth and inequality in poverty. In particular, this thesis has two main research objectives: (i) To analyze the extent to which growth can affect poverty by using of elasticity approach (ii) To identify how inequality can affect the relationship between growth and poverty by considering a function of growth elasticity of poverty For the first objective, this research aims to estimate the growth elasticity of poverty, which shows how much poverty will decrease if income increases by 1 per cent. The second purpose of this thesis is to identify the impact of inequality on the responsiveness of poverty to income growth. This indicates how the growth elasticity of poverty can be affected by changes in inequality.3 Research Questions This thesis aims to answer two questions: (i) How much can economic growth reduce poverty? LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com 3 (ii) How can inequality affect the ability of growth to reduce poverty? 1.4 Research Scope and Data This thesis concentrates on the South-Eastern Asian countries because of two reasons.
Firstly, the region is more successful than some other regions of the world in poverty reduction from 1990 to 2010. For instance, according to United Nations (2013), the Sub-Saharan Africa reduces poverty rate from 56% to 48%, Southern Asia from 51% to 30%, Latin America from 12% to 6%, and all developing countries from 45% to 22%. These amounts of reductions (in relative means) are smaller in comparison with the South-Eastern Asia region, which achieves the reduction from 45% to 14% over the same period. The second reason is that there still being almost one fifth of the population of this region still living below $1.
Hence, the root cause of poverty reduction in this region must be considered in order to perform effective policy in favor of maintaining poverty alleviation and improving well-being of the poor. The empirical analysis section of the thesis will be implemented by employing unbalanced panel data from 8 countries in the South-Eastern Asia region over the period from 1981 to 2010. The data was collected from ‘PovcalNet: the online tool for poverty measurement developed by the Development Research Group of the World Bank’.5 Organization of the Thesis This thesis includes five chapters, which are organized as follow: Followed by this introductory chapter, chapter 2 will survey the literatures in the debate about the role of growth and inequality in poverty reduction. As mentioned above, there are three sides in the debate.