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  • Published on: 14th September 2019
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This essay will argue that history has taught us that a pathway focusing exclusively on narrow economic growth risks overlooking inequality and extreme poverty, particularly of the poorest 10% of society. Subsequently, it will outline the importance of job rich growth as a pathway to poverty reduction and the necessity of a multipronged approach that promotes job creation. It will draw upon rural electrification to demonstrate the limitations of uncoordinated grass-roots movements and the need for coordinated structural change and, as Amsden argues, a focus on production (Amsden, 2012). A case study on South Korea (“S.Korea”) will analyse their successful pathways to poverty reduction through structural transformation, focusing on agriculture, education, industry and technology strategies. Leading systematically onto the importance of the role of the state in lifting a country out of poverty in the long-run. Concluding that rather than narrow economic growth, history has taught us that key pathways to poverty reduction must concentrate on broader economic, employment-centred growth with underlying structural transformation of the economy. Whilst this essay acknowledges that poverty is a multidimensional concept, to facilitate comparison it restricts attention to absolute poverty.

From 1980s onwards there was a distinct move away from associating structural causes with poverty, focusing almost exclusively on economic growth (Choudhury, 2011:1). Dollar and Kraay's study concludes that pro-growth macroeconomic policies are beneficial for the poor, raising mean incomes with “no significant effect on the distribution of income” (2002:219). Wuyts explains that we need to break this assumption that growth is always pro-poor. Notably, this can be seen by analysing the US economic expansion from the 2000's up until the financial crisis. Mishel, Bivens and Gould's analysis demonstrates that whilst the US was highly productive in this period, poverty in fact rose due to inequality, arguing that the growth boom only benefitted the top and middle echelons of society (2013:419). In reality, earnings in the bottom “10th percentile of the earnings distribution” in the US were less than many other countries (Mishel, Bivens and Gould, 2013:420). Ravallion explains that generally in countries with high inequality the poor benefit less or at a slower rate from overall economic growth (2004:12). Interestingly, besides goal 3 to promote gender equality, inequality was essentially ignored in the 2000 Millennium Development Goals (“MDG”). It wasn't until the 2016 Sustainable Development Goals (“SDG”) that the value of equity and its influence on pro-poor growth became recognised:

Goal 10: Reduce inequality within and among countries.

The World Bank's rationale behind this goal is telling:

“while growth is necessary for improving economic welfare in a society, progress is measured by how those gains are shared with its poorest members” (2016:64).

Therefore, history has taught us that to combat poverty in the long-term, whilst it is undeniable that economic growth is instrumental, particularly in the short-term, understanding has matured to incorporate distribution into the pathway of ‘true' poverty reduction. From a policy perspective, this means promoting inclusive growth and ameliorating income distribution. A narrow focus on economic growth creates narrow benefits.

Another core difference between the MDG and SDG is the focus on employment. In the MDG there is a distinct lack of focus on job creation to increase employment. Conversely, the SDGs actively promote “development-oriented policies that support productive activities, decent job creation” (Goal 8.3). History has taught us that narrow economic growth does little to reduce unemployment. Take the example of South Africa, between 2000 and 2013, despite relatively stable economic growth, the proportion of vulnerable employment in total employment only declined from 77.9% to 77.4% (Kayenze etal., 2016:348). Therefore, countries must engage a multidimensional strategy, with job creation at its core. The Egyptian education and unemployment paradox perfectly demonstrates the failure of a unidimensional approach. Between 1950-1960 the Egyptian government invested in and restructured its education system which led to the quadrupling of university attendance by 1965. Nonetheless, a key failure of these reforms was the inadequacy of long-term planning, resulting in an education-occupation mismatch. Per an ILO survey in 2012, 44.5% of university educated people in Egypt were unemployed (Barsoum, Ramadan and Mostafa 2014:17). This mismatch is by no means exclusive to Egypt, in fact, between 1990 and 2000 the number of tertiary educated workers emigrating to OECD countries increased by 63.7% (Docquier and Marfouk, 2006). In the short-run, education reforms without job creation may be a temporary solution to fill current needs, however, this is unsustainable for poverty reduction in the long-run. In short, if the demand isn't there then neither economic growth nor successful education reforms will equate to lower unemployment in the long-term (Amsden, 2012).  

Analysing rural electrification demonstrates the insufficiency of certain grass-roots movements, highlighting the need for coordinated structural change. It has become widely recognised that electrification generates economic growth and lower unemployment. A report by McKinsey&Co (2015) demonstrated that countries where < 80% of people lack access to electricity almost always have a lower GDP per capita. Figure 1 show this positive correlation between GDP and electrification rates:

REFERENCE

At a local level, this is being tackled through the distribution, by private companies and NGOs, of small solar home systems (SHS). A typical SHS supplies around 50-100 watts and in many sub-Saharan countries, such as Tanzania and Uganda, they fall below regulation (Electricity Act 2008) (Electricity Act 1999). This limited energy supply isn't enough to run equipment for businesses, such as fridges or drills, that create jobs and prosperity. Rather, SHS can only typically be used for self-consuming and therefore have a limited ability to move individuals up the poverty ladder. The alternative to SHS are typically 20 kW-500kW mini-grids, which enable individuals and businesses to increase their energy supply incrementally as they grow and prosper. So, why aren't these mini grids being implemented? Because mini-grid installation, that can power an entire community, requires facilitating regulation and political coordination. Reiterating Amsden's argument that successful poverty reduction pathways need “central political coordination” and must focus on production rather than consumption (Amsden, 2012:14).

East Asia is often heralded as the imperfect ‘blueprint' for growth (MacIntyre, 1992:158). For the ‘Asian Tigers', economic growth increased by 1.1% between 1990-1994 (Tang, 1998:69). State-led industrialisation is central to these East Asian developmental states' expediential poverty reduction strategy. Absolute poverty in S.Korea reduced from 41% in 1965 to 5% in 1985 (Lee, Ludwig and Wessel, 1997:140). This fall is one of the largest in history. So, what can be learned from S.Korea and its structural transformation from a relatively backwards economy, dependent largely on subsistence agriculture, into a highly productive economy?

The exponential industrial growth of S.Korea wouldn't have been possible without its agricultural transformation. There are clear systemic interactions between the two sectors. Lewis's dualist development model explains that a surplus of labour in the unproductive, subsistence agriculture sector is absorbed by the manufacturing sector, attracted by the higher wages (an increase that Lewis puts at 30%). This capitalist sector has a higher output of productivity and increased profits which can be reinvested into the economy. This results in gradual industrialisation and a more productive agricultural sector (Lewis, 1954). S.Korea's agricultural sector grew from small-hold, subsidence farming in the 1960s into a highly productive farming system. Growth in agricultural productivity is essential to enable long-term structural transformation and industrialisation because it; (a) generates foreign exchange; (b) keeps food prices low; and (c) and can be heavily taxed to provide financial capital to invest in industry (Kay, 2002:1082). During the initial stages of development, S.Korea focused on policy which increased staple-grain self-sustainability, production and security. This was achieved through initial land reforms, the creation of marketing boards, bolstering subsidies e.g. for fertilisers and rice, investment in infrastructure such as rural roads and irrigation, investment in technology and R&D and the establishment of farming cooperatives and associations (Storm, 2015:685). Resultantly, productivity per household in S.Korea increased from 2,465 to 9,593 (KRW/hour) in 1995 (AfDB, 2016:3) and the agricultural share in the GDP reduced from 40% to 7 % between 1965 and 1991, a reduction that took the US 92 years (Brooks, 2012:33). Analysing Tanzania's agriculture sector facilitates an effective contrast to S.Korea, a recent IFAD report revealed that around 80% of production in Tanzania derived from subsidence farming and they are still heavily reliant on imports of staple-grain. This is due to a lack of structural transformation in Tanzania's agriculture sector, with insufficient investment into agricultural infrastructure, a lack of incentives and uncertain land rights. Leading to increased food prices and reduced food security, which have a direct effect on the poor, resulting in low productivity and an absolute poverty rate of 47% in 2016 (World Bank, 2017). Therefore, the successful structural transformation of the agriculture sector in S.Korea demonstrates how underlying transformation is key to long-term and future poverty reduction.

Education and training were central to S.Korea's growth strategy. From 1945-1970 adult literacy rates increased by approximately 65.6% (Savada and Shaw, 1997:115). S.Korea's strategy was successful in comparison to Egypt because investment in human capital was implemented in conjunction with selective industrial policy that generated jobs, sweeping up this able workforce. S.Korea initiated its industrialisation by focussing on import substitution of labour-intensive light industries such as textiles. This enabled them to generate the capacity and capital to implement an export-led industrialisation strategy focusing on the development of heavy industries such as steel and chemicals in the 1970s (Seth, 2016:182). Alongside this, the government controlled foreign direct investment and implemented protective trade policies and a range of market incentives such as tariff exemptions, credit facilities and tax incentives to bolster domestic production (Hong, 2007:347). This successful industrialisation resulted in increased job creation and raised productivity, which accordingly reduced poverty. Distinctly, S.Korea's interventionist policies are contradictory to the post WWII development of free trade zones and advocacy of foreign investment which, as attested by Taylor, resulted in “low-income, dead-end jobs” (Taylor, 2011:55). Therefore, we have learned from the history of S.Korea that structural transformation of industrial policy can successfully generate industrialisation and reduced poverty.

INNOVATION S.Korea invested in institution building, R&D and technology. Taylor describes the Washington Consensus's “destruction of institutional capacity” as “devastating in most of the developing world” (2011:57). In Indonesia, the post-Suharto dissent into political and economic crisis can be predominantly attributed to a lack of institution building during the New Order, resulting in instability due to weak political institutions (Soesastro, 2008:152). With regards to technology in S.Korea, initially there was focus on reverse engineering and importation of foreign licensing absorbing knowledge from developed countries. Then in the 1980s focus honed in on R&D and innovation. Fan, Zhang, and Rao's study on Uganda concludes that government spending on R&D, particularly in the agriculture sector, is a key pathway to poverty reduction which Uganda must undertake (Fan: 2004). For Choi, the “planned promotion” of technology and science is an essential strategy for reducing poverty and should be directed by national governments (Choi, 1991:296). S.Korea was one of the first developing countries to follow this strategy with the establishment of the Korean Institute of Science and Technology in 1966 and its creation of the Ministry of Science and Technology in 1967. Resultantly, S.Korea is now the home to the likes of Samsung, rated 15th on the Fortune 500 in 2016, and Hyundai Motor, rated 78th.

We can learn a lot from history about the importance of the role of the state by comparing economic growth in the 50s and 60s, the ‘golden age' of capitalism, with the post 1980's rise of laissez-faire policies. Chang describes the golden age as the ‘middle way', a time of deepened state intervention with centralized coordination and an interventionist policy regime which promoted domestic production via import substitution (Chang: 1997). Many liberal economists contended this overreaching role of the state. Friedman, influenced by Hayek and Mises, maintained that the market should lead the game and the government should be demoted to a mere “umpire”, thus minimising politics and consequently coercion (Friedman, 2009:15). After the 1970s recession, countries began to turn towards this neoliberal ideology, curtailing the role of the state whilst emphasising the benefits of a free society and more specifically the importance of self-realization. The 1980s, with the introduction of the Washington Consensus, was a time of financial liberalisation, deregulation, privatization, and reduction of social spending (Fine, 2016). Overall, these reforms caused increased inequality and slowed economic growth (Amsden, 2014) (Milanovic, 2012). This is evidenced in Table 1 in which the rate of GDP (1993 PPP) growth in Sub-Saharan Africa, Latin America and the Developing World, excluding China and India was c.2.25pp lower on average in the period 1980-2000 vs. 1960-80.

Amsden metaphorically describes the two eras as heaven, 1950-1980, and hell, 1980-2000, whilst acknowledging the blue diamond, Asia, as rising “like a phoenix” with its “unique mixture of market and state” (Amsden, 2014:14). As outlined with the case study of S.Korea, in East Asia governments played a central, positive role with regards to structural transformation. What we can learn from this is that history has taught us that a central, interventionist state is key in facilitating rapid poverty reduction in the long-term. Undeniably, there are negative outcomes associated with excessive state power. In East Asia rapid poverty reduction wouldn't have been possible without a great deal of worker oppression and exploitation, the eradication of many smaller companies and significant human rights issues. Further analysis of social welfare and human rights is beyond the scope of this essay, however, it is necessary to recognise that in a complete analysis of poverty reduction this is needed.

This essay by no means wishes to homogenise experiences across or within countries. It recognises that context, culture and experience formulate different poverty reduction strategies for different countries and regions. However, a generalised approach is useful to the extent of facilitating understanding of the key strategies through history which have been effective at reducing poverty in the long-run. This essay has shown that analysing poverty reduction in the US between 2000-2007 demonstrates that narrow economic growth should not be used as an exclusive strategy for poverty reduction. Furthermore, the example of SA shows that narrow economic growth does little in terms of increasing employment. In Egypt, the education-employment paradox exposes the need for multifaceted policy reforms and employment creation. The example of rural electrification via SHSs exhibits the inadequacy of certain grass-roots movements and accordingly the need for a coordinated government response and focus on production. The case study of S.Korea evidenced that structural transformation can steer industrialisation - creating jobs, increasing productivity and raising prosperity, resultantly reducing poverty. More importantly structural transformation, unlike a narrow concertation on economic growth, creates positive future externalities which ensure long-term poverty reduction. This essay has argued that the success of the interventionist states in the 50s and 60s surpassed that of the post-1980s laissez-faire governments, underpinning the importance of the role of the state and illustrating the need for a strong, central government. However, the most important lesson learned from history is that these pathways are interdependent and only a multidimensional strategy will succeed at reducing poverty in the long-run.

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