Public Disclosure Authorized

Pollcy
Research

WOI*KING'PAPERS

Poverty
andHuman
Resouroeo

PolicyResearchDepartment
TheWorldBank
April1993
WPS1130
Public Disclosure Authorized

Poverty and Policy

Public Disclosure Authorized

Michael Lipton
and
Martin Ravallion
Public Disclosure Authorized

Healthy economic growthis crucial to the well-beingof poor

people,who derive incomemainlyfrom theirlabor.Alleviating
poverty should begin with reducing biases against the rural
sectorandtheurbaninformalsector- notreversingthebias,but
aimingfor neutrality.Public actionshouldfoster the conditions
for pro-poorgrowth,and shouldprovidea safetynet for those
who cannotbenefit from such growthor who do so only with
exposureto unacceptablerisks.

PoEicyRcscaihWa kingPaps dtnatethtfi&ndings of wo In pgrm nd icnm ctheexangh

cf idea anigBank tf and
of Dyt,
n~ eanlxitaead tonth oddvDtian ithepapoads i mchAdvi-aStdagcfnt
ths R ornynfafkonrmsfa.wsfc
only thinie,andshouldbeused and dted accori81y.Tefindings.indopatis. atd ocuinarehwuthonseown They should
not be amunl to th Wodd B 1k.is Bond of Diom, its nmganageett, or any of its tnesbar countnC
 ; ~~Policy
Research

PovertyandHumanResourco

WPS1130

This paper - a productof the Povertyand HumanResourcesDivision,PolicyResearchDepartment-

is part of a larger effort in the deparumcntto review and disseminateresearch findings on povertyin
developingcountries,andthe implicationsforpolicy.Copiesofthe paperareavailablefreefromthe World
Bank, 1818H StreetNW, Washington,DC20433.PleasecontactPatriciaCook,roomS13-064,extension
33902 (April 1993, 120pages).

In this analysisof publicpolicyto reduce fightingpoverty.There have been a numberof

poverty,Lipton and Ravallionpointout, among
other things,that typicallythe highestincidence
and severityof povertyare still found in rural
areas,especiallyif ill-watered.For manyof the
ruralpoor, the only inmediate route out of
povertyis by migrationto towns,to face a higher
expectedincome,althoughoften a moreuncer-
tain one. This may or may not reduceaggregate
poverty.We ca- be moreconfident,theysay,
that growthin agriculturaloutput- fueledby
investmentin human and physicalinfrastructure
- is pro-poor,thoughnot because the poor own
muchland.
The policies pursuedby most developing
countriesup to the mid-1980s- and by many
still - have becn biasedagainst the ruralsector
in various ways.The same is true - although
differentpoliciesare involved- of the other
major sectoralconcentrationof poor, namely,the
urban informalsector.There are clear prospects
for reducingpovertyby removingthesebiases.
Lookingahead (far ahead,in somecases), it is
less clear how much furthergainto the poor can
be expectedfrom introducinga bias in the
oppositedirection.Neutralityshouldbe the aim.
We need good data and measurementto
identifywhich public actionsare effectivein
advancesin householddata and analyticcapa-
bilitiesfor povertyanalysisover the last ten
years. We are in a better positionthan ever to
devisewell-informedpolicies.
Liptonand Ravallionidentifytwo important
roles for public action. One is to foster the
conditionsfor pro-poorgrowth,particularlyby
providingwide accessto the necessaryphysical
and humanassets, includingpublic infrastruc-
ture. The other is to help those whocannot
participatefully in the benefitsof such growth,
or whodo so with continuedexposureto unac-
ceptablerisks.
Here there is an importantrole for aiming
interventionsby various meansto improvethe
distributionof the benefitsof public spendingon
socialservicesand safetynets in developing
countries.Those means rangefrom the selection
of key categoriesof public spending(such as
primaryeducationand basic health care)to more
finelytargetedtransfers (includingnutritionand
health interventions)based on povertyindicators,
or on some self-targetingmechanism.Though
disappointingoutcomesabound,manycountries
have demonstratedwhat is possiblewith timely
and well-conceivedinterventions.

The PolicyResearchWorkingPaperSeriesdisseminatesthefmdingsof workunderway intheBank.Anobjectiveofthe series

is to get these findingsout quickly,even if presentationsare less than fullypolished The findings. interpretations,and
conclusionsin thesepapers do not necessarilyrepresentofficialBank policy.

Producedby the Policy ResearchDisseminationCenter

POVERTYAND POLICY

Midael Upton
Insdtute of DevelopmentStudies
Universityof Sussex

Martin RavalUion
Policy Research Department
Ihe World Bank

Contents
1 Introduction
2 The history of ideas about the poor
2.1 Ithe first transition
2.2 The second transition
3 Measurement
3.1 Living stndards
3.2 Poverty lines
3.3 Poverty measures
4 Dimensionsand causes
4.1 A global *snapshot"
4.2 Demographiccharacteristicsof the poor
4.3 Labor and poverty
4.4 Nutrition and poverty
4.5 Inome variability
4.6 Sectoral and locationalcharacteristics
5 Growth, inequalityand poverty
5.1 Growthand poverty, with inequalityconstant
5.2 Growthand inequality
5.3 The sectoral pattern of growth
5.4 Macroeconomicadjustmentand poverty
6 Interventions
6.1 Evaluatingtargeted interventions
6.2 Methods of targeting
6.3 Transient poverty
6.4 Chronic poverty
7 Conclusions
Notes
References

.For their commentswe are grateful to Harold Alderman,Jere Behrman,Tim Besley,Hans Binswanger,
Gaurav Datt, Shanta Devarajan,Jean Dreze, Aly Ercelawn, Paul Glewwe, Peter Lanjouw, Lyn Squire,
T.N. Srinivasan, Dominique van de Walle, Donald Winch, and participants at the First Asian
DevelopmentBank Conference on DevelopmentEconomics,Manila. We also thank Rupert Baber and
Kirsty McNay for research assistance.

Chwpter42 IHandbook D af amIL Econo (Volwme3), edited by Jere Behrmanand T.N.

forthcoming).
North-Holland,
Srbwvasan(Amsterdam:
1 lntoducdion
By commonusage, 'poverty' exists when one or more persons fall short of a level of economic
welfare deemed to constitutea reasonableminimum, either in some absolute sense or by the standards
of a specific society. The literature on poverty in developing countrieshas often taken a fairly narrow
definitionof 'economic welfare' to refer to a person's consumptionof goods and services. "Reasonable
minimum" is then definedby pre-determined"basic consumptionneeds", especiallynutrition. Both these
steps are controversial.
This definitionof "economicwelfare' can be made more or less comprehensive(in the goods and
services embraced),but it is intrinsicallylimited. It may reveal nothing aboutthe disutilityof work, the
length or health of the life over which consumption is expected, risk and variability etc. While
recognizingthe limitationsof the concept of "economicwelfare" as "commandover commodities",we
will largely confine ourselves to that definition, in order to review the many importantissues treated in
the literaturethat has evo ved around it. Even this naow definitionposesseriousproblems, such as how
to aggregate across commodities,across persons within households,and over time. We will return to
some of these issues. However, it is not controversialthat inadequatecommandover commoditiesis the
most importantdimensionof poverty, and a key determinantof other aspectsof welfare, such as health,
longevity, and self-esm. And it has been one of the most powerfiu motivesfor public policy.
"Economicsis, in essence,the study of poverty" [Hartwell(1972:3)J.1The structure, efficiency
and growth of productionaffect - and are affected by - the distributionof consumptionbetweenpoor and
non-poor, and amongthe poor. Poverty analysishas three tasks: i) to define and describe 'poverty", ii)
to understandits causes, and iii) to inform policy. Each task overlapswith other branchesof economics,
but the second takesone far into the economicsof (inter alia) humanresources, labor markets, trade, and
growth. We will often refer readers to other surveys of these topics.
In section 2 we sketch the history of economicthought on poverty since the Mercantilists,
concenrating on relevance to current economic analysis and policy. Section 3 then examines how
consumptionpoverq is defined and measured. These two sections- history and measurement- lay the
foundations for the subsequent discussion, which moves from the "grand" (the dimensionsof global
poverty) to the "small" (the farm-household). In section 4 we provide a "snapshot"of poverty in the
developingworld today, lookingfirst at the globalpicture, and then turning to the village and household
levels. Evidence from modernhousehold surveys has allowed us to examinethe interactionsbetween
demographic, nutritional, and labor-force characteristics of poverty groups; in this process, modern
economics is developing some of the central insights of the classical economists, though with
measurementand modelingmethods not availableto them. New knowledgeaboutpoor householdshas

1
 also greatly Informedour unde.standingof how the economyand policy impinge on the poor, the topics
of sections 5 and 6. In Section 5 we look at how a typical developing economy works - or, more
accurately,how it has been modeled as working - from the point of view of the poor. Here we look at
the classic developmentissue of the effect of growth on poverty and inequality,and (the recent classic)
adjustmentand the poor. From this base, and the evidenceof section 4, we can then explore several
issuesthat arise in governmentalattemptsto reduce povertythrough direct interventions. Secdion6 takes
up these issues. Our conclusionsin section 7 suggest some directions for future research.

2 The history of Ideas about the poor

2.1 -hefirst transition
Most cultureshave soughtto explainpoverty, and to devise a moral approachto it [Illiffe (1987)].
However, a transition in thought and policy aboutpoverty emerged in Europe around 1750-1850. This
transition can help us understand a similar transition since 1945 in the LDCs. Before about 1750 in
Europe2 - and before about 1945 in Asia, Africa and Latin America - poverty was, by and large,
trendless; subsequently,its secularreduction,by economicgrowthand by publicaction, becamea widely-
held expectation. Both transitionshad similar correlates: acceleratedinvestmentin human and physical
capital; faster technicalprogress in food production and diseaselimitation; some degree of demographic
transition;diversificationout of food-growingagriculture;and some political empowermentof the poor.
The 18th century transition from mercantilistto classicaleconomicanalysisof poverty is also paralteled
(in more sophisticatedand quantified form) in the economics of LDCs since 1945. And both the
economicsand economiesof LDCs were linkedto Westernmodelsby emulation,colonialism,advicewith
strings, and world markets.
Today's underdevelopedworldis heterogeneous,and facesdifferentproblemsto those confronting
the initiators of modern economic growth. Nevertheless, the insights of the founders of modern
economics, as they analyzedthe impacton poverty of the first 'great transition", help us to understand
the second. In respondingto Smith (1776), Maithus (1798, 1824)asked a key question: to what extent
is poverty a consequenceof the impactof demographicchangeon real wages? While moderneconomics
rejects Malthus's answers (mainlybecausehe does not adequatelyendogenizeeither fertility or technical
progress), his and other "classical"questionshave influencedthe modern economicsof poverty.
Before about 1750, there was little durable growth of wor.d productper person. Partly for this
reason, moves to reducepoverty by peacefulredistribution- from the land reforms of the Gracchi [Tuma
(1965: 31-6)] to the proposals of radicals within Cromwell's army [C. Hill (1972)1- proved politically
unviable. In such a world, poverty did not seem curable, either tdropSh economicgrowth or deliberate

2
public action. 'There were four approaches to poverty: acceptance, palliation, insurance, or theft.
Poverty might be accepted: 'embraced as a sacred vow [or] tolerated (or railed against) as an unhappy
fact of life' [Hlimmelfarb(1984:2-3)]. Poverty might be palliated, by private charity: normally by the
works of the devout, financedby the alms-givingof the better-off, which most religions saw as a pious
duty. Poverty might be socially Insuredagainst: exceptionallyby the state (as with England's relatively
comprehensivePoor Law of 1597); sometimesby implicit informalcontractamong membersof a group
or tribe [compare Platteau (1988)]; but usually by a lord or chief, providing insurance to free or serf
laborers becauseof his interest in maintainingtheir militaryor productivepower and loyalty in bad times
as well as good [compare Bardhanand Rudra (1981)].
In the absenceof palliationor insurance,theft was an ethicallyaccepted cure for life-threatening
poverty. A person 'in imminentdanger [who] cannot be helped in any other way ... may legitimately
supply his own wants out of another's property" [Aquinas,ed. Gilby (1975: 2a. 2ae.q. 66.a.7)1. This
view dominatedjurisprudential and ethical theory from Aquinas through Pufendorf to Locke and his
successors. The safety, as well as the morality, of capital required its owners "to provide with shelter
and to refresh with food any and every man, but only when a poor man's misfortunecalls for our alms
and our property supplies means for charity" [Locke,cited in Hont and Ignatieff (1983:37)1.
Tbis was normativeeconcnics, recognizingconstraints,but concernedwith rights and duties, not
allocationsand utilities. Althoughproductionwas secularlystatic, prto-economics recognized:a right
to assistancein extreme deprivation,and a correspondingduty to work; a duty of the well-offto provide
such assistance,and a correspondingright to the securityof property. Long before Smith, several major
problems with achieving these rights and duties were recognized. For example, legislators sought to
avoiddisincentivesto work for the able-bodiedpoor (the 'sturdy beggars"deniedrelief in England's 1597
Poor Law). Also, meanssuch as tithing or poor-rateswere used to avoidfree-ridingby those rich people
who chose to leave the duty of charity to others [Olson (1982)].
Such problemswere manageable. However, any duty to succor the poor createda deep problem
for the first attempt to construct a rigorous economicsof means and ends: Mercantilism. The end was
to maximizea nation's export surplus. A strengtheningcurrency,and hence import capacity, couldthen
permit one countryto grow, but in a static global economythis couldonly be at the expenseof the rest
of the world. The means to maximize the export surplus was cheap, and therefore poor, labor.
Mandeville's epigram that "the surest wealth consists in a multitude of laborious poor" outraged
fellow-economists[Home (1978: 68-9)], but followedfrom his and their assumptions.
Into this dark world of necessarilylow real wages,zero economicprogress(at least for the poor),
and (for extremists such as Mandeville)the belief that even basic educationwould do the poor and the

3
economy more harm than good, came twin beams of light. First, from around 1740-1780in England
and somewhat later elsewhere, technical progress in producing both food and manufactures rapidly
accelerat!d. Second, at the level of supportiveeconomictheory, the light came from the Hume-Smith
view of a progressive economy. The gains from specialization,rising demand for labor, and technical
progress (embodied in rising rates of capital accumulatioa),taken together, would increase both the
money-wageand the availabilityof corn for it to buy. Instead of low real wages to build up an export
surplus, countrieswouldtrade freelyat homeand abroad, wouldexperiencerising real wages, and would
balancetheir foreign accounts.
The view that economic developmentis feasible, that it can reduce poverty, and that such
reduction is the main theme of economics, is thus quite recent. It stems from Smith's deeply
anti-Mercantilistobservationthat "no societycan surely be flourishingand happy, of which the far greater
part of the membersare poor and miserable" [Smith(1776: bk.I, ch.8), (1884: 33)]. Torrens epitomized
classicaleconomists'rejection of any "plan of financialand commercialimprovenwent... unless it raises
the real wage rate" [1839: cited by Coats (1972: 160)].
It remained controversialto what extent a route through free-marketgrowth to the reductionof
poverty was feasible. Even for the first-comer (Britain 1740-1850),there were two importantobjections
at the time. Malthus(1798) arguedthat not only free-marketgrowth, but also policies such as poor-laws
to underpinor increase real wage-rates, would self-destructby inducingearlier marriage and therefore
greater fertility, "..thus at once driving up the price of food while forcing down the price of labor"
[Himmelirb (1984:129)] until the living standards of the burgeoning poor had been reduced to
subsistencelevel. However, in the second (1803)edition of his Esay, Malthus concededthat technical
progress might raise wage rates and reduce poverty, provided "moral restraint" - delayed marriage and
abstinence- prevented excessivefertility [Winch (1991: 42)]. By 1824, he was citing Swiss and other
data to show how higher incomes, lower mortality, and better educationcouldreduce fertility.3
Malthushimselfdestroyedthe argumentsfor his earlierradicalpessimismaboutpoliciesto reduce
poverty. Ibis pessimism (unlike Nassau Senior's view that a disincentive to work would arise if
poor-relief were insufficientlystigmatizingand unpleasant)played no part in the increasinglyrestrictive
application of English poor relief after 1834 [O'Brien (1975:281-2), Williamson (1991)]. Nor did
Malthusian fears about the fertility consequencesdeter European governments (notablyBismarck's in
Germany)from attemptingpro-poor policies [Ahmad(1993)]. The fears became even more remote with
the spread of contraception- opposedby Malthus, but expectedand vigorously advocatedby the high
priest of mid-centuryclassical economics,J.S. Mill [Himmelfarb(1984: 115)]. This further de-linked
the reductionof povertyfrom any subsequentincreasesin population. All this anticipatesmodem theory

4
of the demographicimpact both of poverty and of its remedies.
The sewondobjectionto tho Smithianview - that povertyreduction was at once the aim of policy
and the outcome of growth in a now normally progressiveeconomy- came from Ricardo. He came to
accept [Coats (1972:152-3)] that mechanization.lducei inter ali by higher real wage-rates, could
permanently displace workers. Yet he did not advoca.e stopping it, or doubt its contributionto the
embodiment of technical progress, ultimately enhancing national and labor income. Hence serious
economics, building on Ricardo's concerns, did not relate to the Luddite (or Ruskinian) view that
machinery was damaging, but to Marxist and Owenite advocacy of working-class action to own and
accountsof the paths
manage the machines,and later to neoclassicaland underconsumptionist/Keynesian
to full employmentwhateverthe capital/laborratio.
Economics, from Adam Smith, generallysaw the accumu;ationof physical capital (especiallyif
it embodied technical progress) as reducing poverty. What of 'human capital", both as a long-term
preventer of poverty and as a short-terminsurancefor the poor? Better health was seen by Smith[(1776:
bk. I, ch. 8), (1884: 34)] as a consequence,and subsequentiya cause,of greater working capacity,higher
wages, and improvedliving standards. We do not know if the classicaleconomistsadvocatedpublicly
mediatedhealth provision. Yet institutionalcare in old age and chronic infirmitywas available to the
poorest in manycountries,long beforethe industrialrevolution. In Englandeven after 1834, workhouses
offered the infirm pauper a refuge 'more agreeable than life outside" [Himmelfarb(1984:164-5)].'
Bismarck's reforms of the 1880sbrought some security to the aged and infirm in Germany.
Public and/or subsidizA "'mass" basic education was strongly advocated by the classical
economists,partly becauseit was expectedto reduce total fertilityrates [Himmelfarb1984: 120-1]. But
human developmentwas the main argument [Smith(1776: bk. V, ch. 1), (1884:327-8)]. The classical
economistssaw that educationcould well enhance ,he labor-productivityand hence living standards of
the poor. But that outcome, and possible effects on growth, was viewed as a desirable but incidental
by-product. Recent work on the returns to educationin LDCs [Schultz(1975), Welch (1970), Jamison
and Lau (1982)]provides some support for the classicalinsighthere: that the transition to a progressive
economyis what permits ed.cation to provide substantialincomebenefits for the poor as a whole.5
The demoistration by the classicaleconomiststhat this transition could complementrising real
wage-rates, and a healthier and better-educatedworkforce, was accompaniedby a shift in moral and
politicalphilosophy. This took the view that, as capitalistcivil societyemerged, public institutionsshould
acceptresponsibilitynot only for mass education,but also for povertyprevention ziid/orreduction[Wood
(1991: xix)]. For this shift, Hegel was partly responsible. Hegel (1821/1991:paras. 238, 241) saw
competitivepolitical and economicaction, by individualsand groups, to achieveboth private and public

5
 goals as characterizingthe emerging "civil society", which
...tears the individualaway from family ties [sothat] he has rights and claims in relation
to it, just as he had in relationto his family. For th. U, the universal power [State]
takes over the role of the family. The contingent character of alms-giving ... is
supplementedby public poorhouses,hospitals, street lighting, etc.

Smith had argued that (i) the modem economyrequires divisionof labor; (ii) this risks deskilling the
working poor; (iii) hence the State should provide means to educatethem. Analogously,Hegel argued
that (i) the modem progressiveeconomyis associatedwith a strongrr civil society; (i) this endangersthe
kinship links that had previouslyprotectedthe poor; (iii) hence the State shouldprovide new safety-nets.

2.2 Thesecondtransition
The ethical and economicthinkersat the dawn of European industrializationwere tacldingmany
of the issues of poverty theory and policy that are cent' d to developmenteconomics today. This is
because. in some respects, the Europeantransition that inspiredthe analysis of Hegel, Smith and their
successors- and the effect of the transitionon the poor - have close parallels in Africa, Asia and Latin
America today. There too, civil society is gaining at the expense of familial society. Progressive
(accumulating, specializing, innovating) economies are replacing stationary economies. There is
temporary, but apparentlyalarming, populationacceleration. And, on the whole, States are becoming
less patrimonial, more dependent on consensuallegitimacy. The first transition (so central in Europe
after 1750)also had delayed effectson the economicsof povertyand of anti-povertypolicy in developing
countriessince 1945. Three effects can be identified.
First, the Western transition drove the colonizationprocess. To some extent, though less than
envisagedby Marx (1853/1951:312-324),thatprocess reproducedEuropeanprogressive economies,and
the associated changes in poverty problems, in the Third World. Colonizationhelped to form the
institutions,power-structuresand intellectualclimates for LDCs' post-colonialpoverty policy.
Second, the first transition led to importantexperimentsin anti-povertypolicy. These ranged
from the 1834 Poor Laws and the FactoryActs in Britain, via the more comprehensivesocial insurance
pioneered in Bismarck's Germany in the 1880s, to the US "war on poverty" in the 1960s. These
experimens are relevantto poor cowittriestoday [Ahmad(1993), Ahmad et al. (1991)].
Third, the transition in the Euiope of 1750-1850 - to a stronger civil society, to a progressive
economy, to "modem" demographics,and to more consensualStates - was a precursor of the second
transition in LDCs during the past half-century. This is not to support the crude, self-satisfiedanalogies
of modernizationtheory and cultural evolutionism.' Yet there are approximatesimilarities (alongside
big differences) in processes and power-structures- and hence in changes in, and policies towards,

6
poverty- as betweenthe Europeof Smith,Hegeland their successors,and the post-colonialThird World.

2.2.1 Awakenings
One should not confuse a belief in what were to become (with the benefit of hindsight) failed
theories and policies with a lack of poverty-orientationin policy design. It is sometimes said that
economicsunderlyingearly developmentpolicy in the 'ex-colonies" paid little regard to poverty. This
is doubtful even as a judgement of the theorizing of western developmentpioneers, whether in the
Clark-Kuznetsor in the Rodan-! :wis-Nurkseschools. More seriously, thejudgementslights the poverty
concernsof ecenomists and politiciansin the "ex-colonies"themselves[Quibriaand Srinivasan(1992)].
Eff¢yf anti-poverty actions (even in some fast-growing ex-colonies) proved elusive in the early
post-colonialperiod. However, this was not a result of a lack of concernfor the poor in policymaking,
but of the structuresof power, technology,factor-intensity,and the 'soft state" [Myrdal(1968:895-900)].
These structures often diverted, captured or frustratedthose who (whetherthrough markets or through
public action)sought to enhancethe prospects of the poor. This process led to "the diLaributionof public
largesseto the not-so-poor"[Minhas (1972: 26)], as in the Indian case, which is instructive.
The Indian elite that took power in 1947 was trained in the school of Gandhi, but also of
Macaulay, J.S. MDI and (much less) Marx. It was certainly concerned with poverty. Both Indian
nationalistsand establishmentintellectualshad long focusedthe debate on "Poverty and un-BritishRule
in India' [Naoroji(1901)]. Mann's still classicvillagestudy of 1909in PimplaSaudagar[Tborner(1968:
xxiii), Mann (1916/1968:82-103), consciouslymodelledon Rowntree (1901)], like many others in the
next few decades, was centeredupon identifyingand countingthe poor and explainingtheir poverty.
Thus not only Gandhian(and earlier) traditionsof religious and social service enquiry, but also
socio-economicresearch emphases, had long prepared India for poverty-orientedpolicies. As Nehru
(1946: 399-403) emphasized,the National PlanningCommitteeput higher priority on the reduction of
poverty and unemploymentthan on economicgrowth per se. The trouble was not lack of concern for
the poor, but rather the specific policiespursued. After Independence,the First Five-Year Plan [Govt.
of India (1953)]explizitlyrejectedgrowth maximization,in favor of anti-povertyplanning. So did some
other plans of the time, notably Sri Lanka's Ten Year Plan [Governmentof Ceylon (1959)]. The
indigenoustraditions documentedby Iliffe (1987)demonstratesimilar concernsabout poverty in Africa.
Manyof the anti-povertyintentionsof early developmentplanningwere partly frustrated, as with
land reform (section6.4). Many plans (includingSri Lanka's) were largely or whollyshelved. In most
of Asia, and in some of Africa and Latin America, schemesfor land reform, mass education,health,
'communitydevelopment' [Ensminger(1957)J,and rural credit directedat the poor, burgeonedfrom the

7
moment of independer.-e. Many such schemeswere il-consideredor ill-implemented;most, perhaps,
wore not incentive-compatible.But the post-independenceintIlectual climate of economics, in and out
of planning offices, was explicitlysympatheticto the pooi.

2.2.2 A divers1on:forced-drqft
Industrializadon
Yet the early industrializationplans of the post-colonialP:a largely failed the poor. They aimed
at capital-intensive,somewhatautarkic, growth. They turned out to be over-hopefulof the capacityof
such industrializationto raise the demand for lab., and so enrich the poor. Anti-trade biases did not
help; the poor (more, as a rule, than the non-poor)tend to earn their living by converting non-tradable
inputs, especiallylabor. into tradable outputs (section4.2). Also, the poor tended to lose to the extent
that acceleratedindustrializationis financedby extractinga surp:usfrom agriculture,which providesmost
of their income, and produces their food (section5.3). Agriculturallyextractiveand/or trade-restrictive
paths to industialization not only slow growthdown; they reduce its benefits to the poor.
Some of these criticismswere made at the time [e.g., Vakil and Brahmanand(1956) on India's
Second Plan]. But, by and large, they appearedto carry little weight with the theorists of industrializa-
tion via the 'big push", balancedgrowth, and aboveall labor transfer, such as Rosenstein-Rodan(1943),
Nurkse (1963), and Lewis (1954, 1955)respectively. These theoristsshared the classicaloptimismabout
"triclde-down",but not the classical worries about real wage trends. Yet these worries should have
loomed large; populationgrowth since 1950has been muchfaster than during the first transition.
The impact of closed-economyassumptionson the poor was also little discussed in the 1960s.
Indian approachesto industrialization- Nehru, Mahalanobis(1957), Pant - were heavily influencedby
Preobrazhensky's(1921) modelof the extractionof a surplusfrom agriculturevia the intersectoralterms
of trade (the "price scissors") and by Fel'dman's model of the Lmpacton growth of acceleratedsavings
and investment [Domar (1957: 223-261)]. These we.; essentiallyclosed-economymodels, and were
based on the then heavily protectedeconomyof the USSR.
The costs to the poor of an industrializing"big push" were unexpectedlyheavy. Compared to
the predictions of the planning models, forced-draft industrializationdemanded less unskilled labor,
supplies of unskilled labor grew faster, and the supply ;. food staples (typically50-60 percent of poor
people's spending) grew more slowly. This last problem arose partly because, as Hansen (1969) and
others showed, the marginalagriculturalproduct Oostwhenunskilledlaborerswere attractedto industry)
was far from zero. Contrary to Lewis's (1954) model, when labor movedfrom farms to factories (and
there was no "green revolution") capital moved as well, and food output per person declined. Also,
industry proved unexpectedlycapital-intensiveas it grew. Hence unskilled wage rates, but not food

8
prices, were sluggish. The poor fared worse than expected,and to little industrializingeffect.

2.2.3 Counterblasts
to plannedlndustrrallzatlon
The policy approach of the Second and Third Indian rlans, and of many other (usually less
operational)LDC planning documentsprior to the mid-1970s,was in one key respect classical. Growth
was to be achieved via accelerated capital accumulationand industrialization,thereby bidding up the
demand for labor and th.ecapacityto import; that was to be the main weapon against poverty.7 Not at
all clasAicalwere central planningitself; anti-trade-biasedpolicieson quotas, tariffs and exchange-rates;
and, aboveall, neglectof Smith's warning that food supply wouldconstrainurban growth [Lipton(1977:
94-95)]. These elementscombinedto discredit closed-economy,forced-draftindustrialization.
Taiwan and SouthKoreawere outstandingexceptionsboth in the successof their industrializatians
and in their managementof poverty. Yet theytoo had directiveplanningprocesses, "distorting' domestic
relative prices and foreign trade, and ,xtractive from agriculture. The key difference was that in these
countries current-account rural etraction was offset by capital-account rural recirculatio . This
comprised(i) publicinvestme:ntin infrastructurefor agriculturalproduction(especiallyirrigationand crop
research); (ii) public support to human capital formation (health and education);(iii) support, including
8 Probably essential to the big, fast response of food output to
subsidy, for rural non-farm enterprise.
such stimulihad been prior, radicallyredistributive,land reform. Althoughimposedfrom abroad, it led
to productiveand dynamic owner-farmedsmallholdings,along late-classicallines [Mill (1848-71/1965:
142-52, 342-36)]. There are a numbe; of similaritiesto China's experience[WorldBank (1992d)].
Some developing countriesmade less full-blcodedefforts at land redistributions, investmentin
education and health, and irrigation and agricultural research. Such countries - often despite
anti-agriculturaland anti-employmentpolicies on exchange rates, protection and prices - avoided the
extremes of retarded industrialgrowth (strangledfor want of wage-goodsand/or of human capital) and
of deepeningrural poverty as agricultural employmentand output failed to keep up with unexpectedly
high population growth. However, these countries typically achieved only modest growth in real
income,9 nX failed to convert this slow (but cumulativelysubstantial)growth into a detectabledecline
10
in poverty incidence,despite poverty-orientated"add-ons"to the inadequatemacro-policies.
From the mid-1960s to the early 1970s, counterblaststo the failed consensusaround poverty
reduction by planned industrializationcame from a numberof sources.
* Seers (1972), Usher (1963), Bauer (1965) and others (from diverse ideologicalstances) denied
either that GNP was correctly measured by LDC statistics, or that, if it was, it could itself correctly
measure changes in welfare. Seers questionedthat an economyin which GNP per person, unemploy-

9
 ment, and inequalitywere all increasing,could be countedas 'developing' at all.
* The model in which the poor largely comprisedunemployedor "underemployed"persons - to
be absorbed productively in a labor-intensive (and probably industrializing) process of planned
mod -sectorgrowth- also cameunder attack. Theoretically,prevailingnotionsof "underemployment"
- and indeed 'unemployment' [Myrdal(1968: ch.21 and Apps. 6 aud 16)1- were increasinglyrecognized
to lack micro-economicfoundations:the poorest must work. Empirically, followingHansen (1969), a
succession of studies confirmed that farm labor had non-zero (albeit seasonallyfluctuating) marginal
p) Auct; and that overt and prolonged urban unemploymentwas largely confined to the educated and
better-off, in search of "a good job" and able to afford to wait for it. The ILO reports on Colombia,
Kenya and Sri Lanka [ILO (1970), (1972), (1971)]confirmedthat the urban and rural poor were more
sc in "underemployed"than overworked, especially as casual laborers and in the informal sector
(section4). From the rural end, it became clear that the poorest seldommigratedsuccessfullytowards
durable, adequatelyearning urban employment[Connellet al. (1976)].
* The celebrated "Nairobi speech" [McNamara(1973)] signalleda shift in donor priorities, away
from the heavy (and largely urban) infrastructural lending of the 1960s, toward rural development
designedto benefit the "poorest40 per cent" of populations,seen then as mostly 'small farmers" rather
than as landless laborers. "Urban bias" was increasinglyrecognizedas bad for growth as well as for
poverty reduction, though rooted in political structures in much of the developing world [Mamalakis
(1970), Lipton (1968, 1977), Bates (1981)]. Apart from past disappointments,two facts supportedthe
hope that a new, rural emphasis could accelerate growth a reduce poverty. First, the "green
revolution"was seen, from the late 1960s,as potentiallyable to enrich evenvery "small"farmers [Lipton
with Longhurst(1989: Ch.2)]. Second, there was increasingevidencethat farm size was inverselyrelated
to both employmentand annual outputper hectare [e.g. Berry and Cline (1979), Binswangeret al, this
volume]. Thus an emphasison small farms wouldreconcile anti-povertyand pro-growthpolicies within
the rural sector. This process was to be supported,in attackingpoverty, by investmentsin rural health,
education,roads etc. However, there was no clear evidencethat a given ouday would have most impact
on poverty or growth if divided among several sectors, let alone if also managed as multi-sectoral
"integrated rural development projects".11 These projects - at least while conceived as localized
exercises in central planning - also overstretched the administrative capabilities of agencies and
governments."2 As regards agricultural
spending (and rural anti-povertyemphasis)itself, the donors'
new initiativefrom the mid-1970s,and much domesticspending too, suffered from two weaknesses. It
dependedheavilyon the efficiency- and genuinepoverty-orientation- of bureaucraticallydirected credit
labelled "For the Poor" (section6.4.2). And it carried no insuranceagainstfungibility,i.e. againstextra

10
agro-rural aid being offset by reduced domesticagro-rural investment[Singer (1965)].
* Policies to increase the earned incomes of the urban poor had been neglected in the swings of
intellectualfashion. But one set of urban anti-povertypolicies did emergein the 1970s. The urban poor,
it was argued, lived largely in slums or near-slums. They wouldthus be helped by a shift of investnent
away from publicly built, so-called "low-cost"housing for middle-classcivil servants, towards loans for
private site-and-servicehut building (with provisio-.of water and electricity),and for slum upgrading.
* The earlier emphasison forced-eraft industrializationhad been partly driven by the identity
betweenthe rate of growth and the productof the savingsrate and the marginalcapital/outputratio. This
identity was interpreted as explaininggrowth i terms of savings embodied in physical capital. The
resulting neglectof the social sectors led to a counterblastin both thinking and policy. Berg (1973) and
others arguedthat better nutrition couldbe instrumentalin raisingthe productivityof the poor. The role
of human-resourcedevelopmentin equitable growth was emphasizedby Adelman and Morris (1973).
Schultz (1981) summarizedhis earlier evidencefor the importanceof investmentin human capital for
growth; others, in analysesbased on neo-classicalproductionor earningsfunctions,had establishedhigh
privateand social returns to education,especiallyprimary [Psacharopoulos
(1981)].13
* The tilt towardspoverty-orientationin the mid-1970swas informedby a view of public objectives
summarizedin the words "redistributionwith growth" (RWG)[Cheneryet al. (1974)1. RWG reflected
disillusionmentwith the poverty-reducingpotential of triclde-down industrialization, S with radical
redistributionof income or land, in view of the interlockingpower and self-interestof the rich and the
bureaucracy. It has become fashionableto dismiss the povertyemphasesof RWG, and of the 1970sas
a whole, as unsophisticatedlyreliant on the notion that the State is a benevolent"Platonicguardian" of
the public interest, when in realitythe state is permeatedby rent-seekingand pressuresto achievepolitical
stabilityby distributingthe fruits of growth to its friends. However,this is a caricature of RWG, which
was quite explicitabout such obstacles [Beil(1974: 52-61)],but arguedthat some redistributiontowards
the poor could still be induced out of a growing GNP. First, there were pro-poor islands - whether
idealisticor self-interested- withinthe power-structureof most countries. Second,RWG envisageddonor
support, foreshadowing"povertyconditionality"[compareWorldBank (199Ia) and World Bank (1975)].
The severe slowdown of growth after the mid-1970s meant a harsher climate for both aid and
redistribution. When PWG was written, however, this couldnot be foreseen.
* Data and analytic capabilitiesrespondedto the growing focus on poverty. While the collection
of data on poor householdshad been used to generatesocial awarenessand motivatepolicy since the 19th
century, nationallyrepresentativesurveysof householdliving standardsare relativelynew. From 1951,
India's National SampleSurvey had been trackinghouseholdexpenditures. Using these and other data,

11
 Bardhan(1970) and Dandekarand Rath (1971)were instrumentalin setting in motionongoingmonitoring
of poverty data in India [Kadekodiand Murty (1992)]. Bell and Duloy (1974, chapter 12) helped to
advance reorientationsof statistical services, in order to track the performance of particular countries,
groups, projects and policy interventions. A sutcession of experimentswith the prediction of policy
imnpactson the poor using SocialAccountingMatrices [Pyattand Round (1980)]and computablegeneral
equilibriummodels[Dervis et al. (1982)]offeredpromise, particularlyin LDCs with relatively advanced
basic data. A number of new initiativesfor gatheringdata on poor householdswas also initiated in the
1970s. The UN National HouseholdCapabilityProgramme[UN (1989)]helped put householdsurveys
on a sounder and more consistent basis. The World Bank began its efforts to collect high-quality
householddata on a wide range of welfare indicators [Chanderet al. (1980), Glewwe (1990), Grootaert
and Kanbur (1990)]. The collectionof panel data, even for small samples [Walker and Ryan (1990)],
has proved of great value in illuminatingthe dynamics of poverty. These and other initiatives in
household-leveldata collectionfacilitatedboth moresystematicpov-ertymonitoringand more sophisticated
- and progressivelymore convincing- econometricanalysesof the determinantsof poverty and impacts
of policies asd projects; see Ravallion(1992d), and Strauss/Thomasand Deaton in this volume.
However, these data initiatives have not yet spanned more than a narrow range of countries.
Also, there has been concern that, in some data-poor settings, national statistical systems have been
diverted from other poverty-orienteddata needs, such as reliable smallholderfood production data.
Furthermore,the developmentin data and analyticcapabilitieshas been slowto permeatepolicy analysis;
for example, despite well founded critiques from Sen (1976, 1981a) and others, uninformativeand
potentiallymisleading"head-cowunts"
of poverty have tended to dominatepolicymakers'attention.

2.2.4 "Basicneeds and "capabiities":za

constructive
diversion
Almost all these componentsof the counterblastconcentratedon what McNamaratermed 'the
productivityof the poor": income correspondingto retainedvalue added. However, many poor people
earn no such income:children and the sick are heavily over-representedamongthe poor; old people are
currentlyunder-represented,bi- this is changingin Asia and Latin America (section4.2.3). The "basic
needs" (BN) approach instead stresses "... human needs in terms of health, food, education, water,
shelter, transport" [Streeten (1981:7), Richardsand Leonor (1982), Streeten et al. (1981)]. Two main
argumentswere advancedfor trackingpoverty reduction by observing -RN,rather than incomes. First,
increases in real income, especially in rural or sparsely populated areas, may be unable to command
better health care, education,safe drinkingwater, sanitation,police protection,or other commoditieswith
public-goodsor merit-goods character (and/or produced under economiesof scale or agglomeration).

12
Second, householdsvary greatly in their capacityto convertcommoditiesinto well-being. For example,
there is notable 'positive deviance' in the capacity of some poor households to convert income into
adequatenutrition [Zeitlin et al (1987)].
Closelyrelated to the BN approachin motivation,but entailinga more fundamentalre-definition
of 'poverty' and its reduction, is Sen's (1985, 1987)subsequent "capabilities"approach, Its roots lie
in the rejection of the "welfarist"paradigm in which individualutility is taken to be the sole metric of
welfare, and the sole basis for social choice.'4 Here commoditiesmatter as one determinantof people's
capabilitiesto function (rather than as a source of "utility"). The strength of this view is its emphasis
on commoditiesnot as ends, but as meansto desiredactivities. This explicitlyrecognizesthe contingent
nature of benefits conferred by any claim over commodities:what these do for well-beingdepends on a
host of factors, includingthe circumstances- personal and environmental- of an individual. In focusing
on commoditiesand utilities (but not capabilities)we may thus be looking in the wrong space.
Unfortunately, focusing on capabilitiesis beset with its own problems. We rarely observe
capabilities,but rather certain "achievements".The mappingfrom the latter to the former is not unique,
but depends on factors such as preferences. For example,to concludethat a person was not capableof
living a long life we must know more than just how long she lived; perhaps she preferred a short but
merry life. The role ascribedto preferencesin BN and capabilitiesapproachesis not entirelyconvincing;
it is one thing to reject the strict welfaristview that ogly utilities matter, and quite anotherto claim that
utilities are not at least a part of the objective[Ravallion(1992c)]. For a great many choices,people do
know what is best for themselves." If so, one should be cautiousin formingjudgementsabout poverty
which are inconsistentwith those choices. The capabilitiesapproach has not established why higher
consumption- especiallyfor the poor - should not remain an objectiveof policy, even if it does nothing
for capabilities. There is also the unresolvedissue of howone should aggregateover capabilitiesor basic
needs. SingleBN measures, such as the "physicalquality of life index" or PQLI [Morris (1979)], are
16
arbitrary in what they include, and in the weightsattachedto the included items.
The early 1990shave seen some ambitiousattemptsat operationalizingthe capabilitiesapproach,
by measuring each nation's level of "human development". In the 1990s, the UNDP's "Human
DevelopmentReports" sought in large part to explore the impact of the economic vicissitudes and
adjustmentsof the 1980son key measuresof "humandevelopment". However, it is muchmore difficult
to draw convincinginferencesaboutthe effect of adjustmentpolicies, over a decade or less, on outcome
variables (such as health or literacy)than on income(section5.4). There are various reasons, including:
weak and out-of-datenumbers; long (and varying)time-lagsbetweenmacro-policiesand BN outcomes;
and reciprocal causation(simultaneity). Even the effect of adjustmenton public spendingfor health care,

13
education, etc. is controversial.17 And the aggregationproblem bites once again: the UNDP's attempt
(1990)to finesse these problemsvia a singleindicatorof 'human development' is subjectto insuperable
objections [Kanbur(1990b), Anand (1991)].
The surviving lesson from these approaches is: recognize the limitations of a commodities-
centeredconceptualizationof well-being. It is agreed that commandover commoditiesmatters - at some
level - to well-being. Where these approachesdiffer is in the view they take on mhy incomes matter.
On the most simplisticcommodities-centeredapproach, aggregateaffluencedrives attainmentsof BN, or
capabilities. This seems consistent with cross-countrycomparisons;there is a quite good correlation
(after appropriatetransformationsto reflect the non-linearities)of a country's average real income with
the main indicators of BN satisfactionin nutrition, health, education,shelter, etc. [Preston (1975), Sen
(1981b), Isenman (1980)1.13However, this correlation may well be spurious, in that it reflects other
omittedvariables correlatedwith averageincomes, such as the incidenceof absolutepoverty, and access
to key socialservices; on controllingfor these, incomesmay matter far less than is often thought. There
is evidence for that view: when health spending and the incidence of poverty are held constant in
cross-countryregressions, the formerly strong relationshipbetween a country's income-per-personand
its health outcomes disappears [Anand and Ravallion (1993)1]9.There is other evidencethat capacity
for both private and public spending is required to achieveBN in health. The messagehere is not
that affluence is unimportantto well-being,but that we must be careful in identifyingthe precise ways
in which affluence maters. Ipso facto, this approach can also throw light on what can be done to
enhancewell-beingat low levelsof average income:China, Costa Rica, Cuba and Sri Lanka show much
better levels (or improvements)in BN than are predictedby income per head (or its growth) - sometimes
even allowingfor other variables such as poverty measures [Sen (1981b), Dreze and Sen (1989)J.2
The pressurestCatemerged[Corniaet al. (1989)]to give adjustmenta more humanface - spurred
by the BN approaches- probably helped the poor. In the early 1980s, it was almost impossible to
persuadedonorsto design adjustmentassistancewith a view to improvingits impacton the poor. By the
late-1980s, add-on programs to "compensatethe losers from adjustment" were common, though often
focusing on the articulate and somewhatpoor, rather than the inarticulate and very poor. Today it is
increasinglyrecognizedthat poverty mitigationhas to be designedinto adjustmentprograms inidally -
not added as a tranquillizerlater on - if otherwisedesirable reforms in food pricing, foreign trade and
exchange, public expenditureand employmentare not to harm the poor in the short term.
It would be flatteringto economistsif these pro-poor "adjustmentsto adjustment" had resulted
mainly from theory (such as Sen on capabilities)and/or major advances in empirical methods and
measurement(suchas the new householdsurveysand econometrictools). Thesedid illuminatethe social

14
dimensionsof adjustment.Buta moreimporta sourceof pressureto protectthe poorduringadjustment
analysesof the specializedagencies,UNICEF,ILO,and later UNDP.
camefromthe less sophisticated
Thoughhonest,theseanalyseswereoftendubious.Keyneshastaughtus thatsuch"essaysin persuasion"
can do moreto shifta stubbornpolicythan bettertheoryand evidence- but alsothat theseare needed
as well, if policiesare to be durablyimproved.

2.2.5 States,marketsandpoverny
In the 1980sthere were strongreactionsagainststateinvolvementin developmentpoliciesand
processes. It was widelyseen as rent-creating,price-distorting,protectionist,inherentlycorrupt,and
destructiveof enterprise- and as preventingthe state, with its limitedresources,from providingthe
privatelyunder-suppliedgoods (roads, education,health, etc.) that comprisedits potentiallyuseful
contributionto development.Muchstate interventionwas also deemedto harm the poor directly,by
rningthe termsof tradeagainstpoor producersof tradables,andby creatingdiscretionaryaccessto
inputs,subsidies,licensesandcredit. These,evenif labelled'for the poor", oftenwentto the wealthy-
partlyas rents, sharedbetweenpowerfulbureaucratsand theirprivateclients. A smallerstatewould-
it was claimed- accelerategrowthand helpthe poor.
Someaspectsof this "neo-liberal"positionare betterdevelopedthan others. The policiesit led
to entaileda partial removalof distortions,implyingambiguouseffectson efficiency[Lipseyand
Lancaster(1956)].Evidencethat the new(ess-distorted)policyset woulddo whatis promisedhas often
been either lackingor unconvincing.=And, while the wastefulrent-seekingbehaviorof elites was
emphasized,the powerstructureswhichcreatedthoseelitesweretypicallyignored.
The lastpointmaywellbe the mostimportant.Shiftingthe boundariesbetweenstateandmarket
may matterlittleto the poor whilethe balanceof power is unaltered. Supposethat the poorare rural,
dispersedand weak,but that "thestate" is inducedto desistfrom turningthe termsof trade againstthe
rural sector. On its ownthis is likelyto help the poor. But,if the power-structure
is unaltered,sucha
changewill presumablybe offset,dueto the continuingpowerof non-poorgroups. Hencethestatewill
be pressuredto makeconcessionsto the non-poor,e.g by increasingthe shareof publicinvestmentsand
expendituresin non-agriculturalactivities. Perhaps:his is why, alongsidethe reductionof domestic
terms-of-tradedistortionsagainstagriculture,the proportionof governmentspending(in oil-importing
LDCs)fell from7.9 per cent in 1975to 4.5 in 1988,registeringa fall everyyear [Lipton(1992:232)].
The neo-liberalcritiqueprovideda valuablecorrectiveto paststatistexcessesanderrors, butwas
probably"a reactiontoo far" [Kilhick(1991:1)),requiringcorrectionby a morebalancedview of the
developmental
"comparative
advantage'of statesand markets,andof how citizensin civil societycan

15
 control abuses of each.

2.2.6 A new consensus?

In the mid-1980s, it was widely alleged that poverty reduction had lost salience for LDC
governments and donors. Pressures for fiscal stabilizationand market liberalization would raise food
prices, reduce public expenditure and employment, and curtail poverty programs. Even primary
educationand health were exposed to cuts and user charges. The poor would be the main losers, and
the most defenseless. The counter-argumentswere that non-adjustmentwouldbe worse. The 'poverty
programs" and social services had often missed the poor. The poor would gain most, as governments
switchedtowardsa moreefficient,labor-intensive,pro-rural, tradables-orientated,and non-interventionist
policy set. The pain from public-sectorcutbacks, food price rises, etc. wouldprove a brief evil.
The evidence is mixed. There was mass poverty long before adjustment- indeed, long before
the imbalancesand distortionsthat adjustmentseeks to reduce. So it is not likely that either adjustment
or its absence causes or cures most poverty. Neither theory nor evidenceare conclusiveon the impacts
of adjustmenton thepoor (section5.4). They gainedwhere adjustmentwas not needed, or worked. They
lost where adjustmentwas needed but not tried, or was tried but failed.
Early claims, that relaxing trade and other distortions alQoncould greatly stimulate poverty-
reducinggrowth, have given way to more sober assessments. The emergingconsensusis that successful
adjustment,while it can help reduce poverty, is harder than had once been thought. It requires a large
and not too slow aggregatesupply response. Markets may achievethis best where states do mMre- by
providinginfrastructural,public, or merit goods - to enable the poor to be part of that response.
Where does this leave the poor? The World Bank (1990, 1991a), UNDP (1990), the Asian
DevelopmentBank (1992), the IFAD (1992), and other agencieshave publishedcriteria for anti-poverty
lending or spending. Several have been followedup. For example, the World Bank (1992a) has set
operationalguidelinesfor supportiveanalysisand lending; implementationis completedor under way for
most countries to which the Bank lends. These documentshelp us evaluate the current consensuson
poverty [Lipton and Maxwell(1992)1.
Some commonprinciplescan be found in UNDP (1990)and World Bank (1990). Central is the
latter's strategy of combining labor-intensivegrowth with investmentin poor people's human capital.
ITe growth is to be based on 1.,ivateproduction,releasedin part by the removal of state-imposedmarket
distortionsthat discriminateagainstagricultureand exports. The humancapital is to be expandedthrough
primary education and basic health care, largely provided (not necessarily produced) publicly.
Additionally[but secondarily in World Bank (1990)1there is a perceived need for well-targeted social

16
 safety nets, provided by the state, to guard the poor and vulnerableagainstfood and other insecurities.
While there are differencesin emphasis,there Is broad agreementon these basic elements of a poverty
reduction strategy. But some unsettled questionsstill disturb the waters of consensus:
* If all distortionsare removed, but many of the poor can find work only by accepting a return
insufficientto prevent poverty, are further incentiveor expansionarymeasurestoward 'labor-intensive
growth" justified - or are the risks of inflation, new distortions,or logrollingtoo great?
* What is the role of asset redistributionin reducing poverty? The consensusis uneasy about
unearned rents, but also about unstable regimes of property rights, and is somewhat evasive on this
question (however, see the chapter by Binswanger et al,. Asset redistributionmay be essential for a
reasonable rate of poverty reduction in some circumstances:when intial inequality is so great that
distribution-neuLalgrowth brings few gains to the poor; when poverty is so severe that growth and
redistributionare both needed; or when rapid growth is for some reason unattainable.
* Shouldsome safetynets (guaranteeingfood or work)alwaysbe available,-whileprotectionagainst
extreme or localized hardships is provided on an ad hoc basis? Under what circumstancesdo private
insurancemarkets, informalinsurancearrangements,or evenpublic investmentssuch as irrigationwhich
help stabilizeincomes, provide more cost-effectiverisk reduction for the poor than formal safety nets?
3 Although poverty often induces its victims to degrade natural resources, so do some of its
remedies [Barbier (1988), Dasgupta and Maier (1990), Leach and Mearns (1991), Vosti and Reardon
(1992), Leonard (1989)1. Is there a trade-off, and if so, how should it be handled?
* The "country poverty strategies" [WorldBank (1992a)]seek to reduce poverty mainly through
economy-widepoliies. Does this divert resources from, or does it stimulate, efforts to improve the
poverty impact of major public-sectorprojects at each stage of the project cycle, from identification
through post-evaluation? Or are such efforts uselessbecause of fungibility[Singer (1965)]?
* What is the economicsof inteional non-aid actionsto reduce poverty? If a given amount of
trade liberalizationor debt restructuringis on offer, how (if at all) should it be allocated so as to favor
the poor?
The smoke has cleared in the state-market battle. The extreme positions are deserted. A
consenss about some key issues of anti-povertypolicy has emerged. Yet this consensusstill contains
omissions and obscurities. Economicanalysisand testing can help to improvethe position.

3 Measurement
Assumptionsmade in measuringpoverty can matter to policy. We give two examples:
I Will a developmentstrategywhich transfers income from the rural (agricultural)sector to the

17
urban (manufacturing)sector increaseor decreasepoverty? The answerdepends in part on the economy's
poverty profile; is poverty incidence,depth, and/or severity higher in rural than urban areas? That is
actuallya difficultquestionto answerconvincingly,and little of the policy discussion(summarizedin the
previous section)has been based on good evidence. And some commonmethodologies(discussedfurther
below) could be quite deceptiveon the answer.
ii) Should a poverty reduction scheme aim to reach the poorest, even if no beneficiary gains
enough to escape poverty, or should it concentrateon those closer to the poverty line? The answer
depends on the poverty measure used. The most commonmeasurefound in practice - the percentageof
the populationdeemedpoor - would suggestthat one should only be concernedaboutgetting people over
the poverty line. Other measures will put little or no weight on this, and will instead indicatethe need
to raise the living standards of the poorest first. The choice of measure inevitably makes a value
judgement, and can have considerablebearing on policy choices.

3.1 LvIng sandards

r sure of current consumer spending on all goods and services is
A suitably comprehensive-n
generally preferred to income as a measure of current living standards in LDCs.2' There are two
reasons. First, current consumptionis oftentaken to be a better indicatorthan current incomeof urnt
standardof living; it is assumedthat instantaneousutilitydependsdirectlyon consumption,not on income
per se. Second, current consumptionmay also be a good indicatorof longterm average well-being, as
it will reveal informationabout incomesat other dates, in the past and future. This is because incomes
(includingthose of the poor) often vary over time in fairly predictableways - particularly in agrarian
economies. In suchcircumstances,there are typicallyconsumptionsmoothingand insuranceopportunities
available to the poor, such as thrcugh saving and community-basedrisk-sharing;for recent surveys see
Aldermanand Paxson (1992), Deaton (1992), and Besley's chapter.
A number of tactors do, however, make current consumptiona noisy welfare indicator. First,
people will not in general prefer constant consumptionover the life-cycle (even with unrestricted
opporunities for smoothing). Two householdswith different lifetime wealth - one "young", the other
"old - may have the same coasumption at the survey date. Second, different households may face
different constraintson their consumptionsmoothing. The chronicpoor tend to be more constrainedthan
the non-poorin their borrowingoptions, so that not only lifetimewealth but its distributionover the life-
cycle affect lifetime welfare. Third, even if current consumptionvaries less around long-termwell-being
than current income for a given household, it may not be the best ordinal indicator of who is poor in
terms of typical long-term living standards. That also depends on how the various living standards

18
 indicators rank differenthouseholds;one cross-sectionalindicatormay vary less around long-termliving
standards than another, but cause more re-ranking and, hence, perform less well in identifyingthe
chronicallypoor [Chaudhuriand Ravallion(1993)].
We rarely have data on the differencesin living standardswithinhouseholds. Usual practice is
to measure householdconsumptionand assumearbitrarily that it is divided equallyor according to some
conceptof need (discussedfurther below). However, in realitya change in total householdconsumption
may affect the welfareof differenthouseholdmembersin different ways, and evenin differentdirections.
This has implicationsfor both measurementand policy [Haddadand Kanbur (1990, 1993)].2
Householdsize and demographiccompositionvary, as do prices and access to publicly supplied
goods. So the same total expendituremight leave one household poor, and another comfortablyoff.
Welfaristapproachesto this problemexist, basedon demandanalysis;these include'equivalence scales",
*true cost-of-livingIndices", and "equivalentincomemeasures".26 These methods assumethat demand
patterns reveal consumerpreferencesover market goods; the consumermaximizesutility, and a utility
functionis derived which is consistentwith observed demand behavior, relating consumptionto prices,
incomes, household size and demographiccomposition.27 In all such behavioral welfare measures, the
problem arises that one cannot (in general) deduce preferencesover both market and non-marketgoods
from preferences over market goods alone [Pollak (1991)]. Observedbehavior in the marketplacemay
thus be consistent with infinitely many reasonableways of making interpersonalwelfare comparisons;
it is a big step to assume that a particular utility function which supports observed behavior as an
optimum is also the one which shouldbe used in measuringwell-being. 2 This is an important
problem
because some non-market goods will always determine well-being: children, many publicly provided
goods and services, and commonproperty resources-2
Identifyingassumptionsare essential. One shouldlook criticallyat the assumptions(implicit or
otherwise)used in demand-basedwelfaremeasurement;for example,modelsof unequalbargainingpower
can yield quite different interpretationsof empiricalequivalencescales to the more commonassumption
of equalitywithinhouseholds,with implicationsfor anti-povertypolicy [Ravallion(1992d)]. What looks
like a difference in *consumptionneeds" may well be due to discriminationbased on unequal power.
Consider householdsize. In developedcountries,even poor people consumecommoditieswith
economies of scale in consumption;two can live less than twice as expensively as one [Lazear and
Michael (1980), Nelson (1988)1. In LDCs, such commoditiespay little part in the budgets of the poor -
their consumption bundle is dominated by goods such as food and clothing for which few scale
economiesexist. For this reason, the developingcountryliterature on povertyhas tendedto use a 'flat'
equivalencescale; the most commonpractice is simplyto divide household consumptionor incomeby

19
householdsize. As a first-orderapproximation this is defensible,thoughIt almostcertainlyunderstates
the extentof the scale economiesin consumptioneven for the poor. However,that is not the only
consideration.Welfaremeasurement may alsobe influencedby the purposefor whicha measureis used.
For example,recognizingthe likelihood,but un-observabflity, of largerintra-household inequalitiesin
largerhouseholds,a policy-makermaywantto puthigherweightonhouseholdsizethan impliedby scale
economiesin consumptionalone.
In viewof the abovedifficultiesin choosingbetweenvariousindicators,it is usefulto knowhow
muchthe choicematters. A strandof recentresearchhas been concernedwiththe comparisonof how
differentindicatorsat the individualor householdlevel identifydifferentindividualsas poor.3 For
example,surveysof individuals in a householdcanindicatewhetheran indicatorof "householdpoverty",
derivedfromthe morecommononi-shothouseholdsurvey,cerrectlyidentifiespoorindividuals.Panel
surveyscan similarlyindicateto whatextenta one-shotsurveyrevealschronicpoverty[Chaudhuriand
Ravallion(1993)].Thetoolsof dominance testing(section3.3) alsoofferhopeof achievingrobustpartial
orderingswhenthere are multipledimensionsof welfarebut the precisewelfarefunctionis unknown
[AtkinsonandBourguignon (1982, 1987)].

3.2 Povr lines

There exist levels of consumptionof variousgoods (food, shelter)below whichsurvivalis
threatened. It is not clear whatthese levelsare for any individual. Furthermore,in most societies-
includingsomeof the poorest- the notionof what constitutes"poverty"goes beyondthe attainmentof
the absoluteminimumneededfor survival. Henceviewsdifferon the locationof povertylines.'1
However,for manypurposes,whatmattersmostis notthepreciselocationof somepovertyline,
butratherthepovertycomparison thatis impliedacrossdates,sub-groups,or policies.A seriousconcern
here is that the comparisonshouldbe consistent;two individualsdeemedto enjoythe samevaluesof
whateverindicatorsare beingusedto constructthe povertymeasureshouldnot thenbe deemedto be at
differentlevelsof poverty. Fow do existingmethodsperform?
Themostcommonapproachin defininga povertyline is to estimatethe costof a bundleof goods
deemed to assure that basic consumptionneeds are met.32 The difficultyis in identifyingwhat
consttutes 'basic needs'. For developingcountries,the most importantcomponentof a basic needs
povertyline is generallythe foodexpenditurenecessaryto attainsomerecommended foodenergyintake.
Tnis is then augmentedby a modestallowancefor non-food.
The first problemis settingfoodenergyrequirements.Ihese are usuallyset by US standards,
andare oftennotevencorrectedfor loweradultsize,andhenceenergyneedsto maintaina healthybody-

20
weight. There is little direct evidenceon energy requiremerts." The most widelyused 'official'
esdmates[FAOIWHO/UNU (198S)1,give energyrequirementsrelativeto alternativelevelsof activity
and bodyweight. Requirements also vary acrossindividualsandover time for a givenindividual.An
assumptionmustbe madeaboutdesirableactivitylevels,and thesethen determineenergyrequirements
beyondthoseneededto maintainthe humanbody'smetabolicrate at rest. Activitylevelsare, however,
variablesrathet than exogenousphysiological
endogenus socio-economic ones, and are jointlychosen
(underconstraints)togetherwithincomeanddiet [Osmani(1987),Payneand Lipton(1993)].
The secondproblemarises in makingan allowancefor non-foodconsumption. There is no
obviousanchor(analogousto nutritionalrequirements)for settinga relevantbundleof non-foodgoods.
Also comprehensive andcomparablenon-foodpricesare rarelycollected.Onewayroundthe problem,
the "foodenergymethod",proceedsby first fixinga food energyintakecut-off(in caloriesper adult
equivalent),andthen findingthe consumptionexpenditureor incomelevelat whichan adultequivalent
typicallyattainsthat food energy intake[Osmani(1982, ch 6), Greer and Thorbecke(1986 a,b,c),
Ravallion(1992d)J. This can be estimatedfrom a graph or regressionof calorie intake against
consumptionexpendituresor income. The methodautomatically includesan allowancefor non-food
consumption.It also has the appealthat it yieldsa povertyline whichis consistentwithlocaltastes,as
well as prices. A variationon this methodis first to find the minimumcost of a foodbundlewhich
achievesthe stipulatedenergyintakelevel,andthen dividethisby the share of foodin totalexpenditure
of somegroupof householdsdeemedlikelyto be poor. Thisis the 'food sharemethod".
If one is comparingliving standardsin terms of consumptionthen comparisonsof absolute
povertyacrossregions,sectorsor datescanbe misleadingunlessthe povertylinehas constantpurchasing
power (basedon a cost-of-livingindexappropriateto the poor3). However,the abovemethodsare
quiteunlikelyto generatepovertylines whichare constantin termsof real consumption or Income. In
the case of the food energymethod,the relationshipbetweenfood energyintakeand consumptionor
incomeis notgoingto be thesameacrossregions,sectorsor dates,but willshiftaccordingto differences
in affluence,tastes,activitylevels,relativeprices,andpubliclyprovidedgoods. Thereis nothingin the
foodenergymethodto guaranteethat thesedifferencesare oneswhichwouldbe consideredrelevantto
povertycomparisons.For example,povertylines constructedby the food energymethodwill tend to
be higherin richerregionsor sectors,wherehouseholdschooseto buy moreexpensivecalories(suchas
by consuming"luxury"foods). It is even possiblefor the differencein povertylines to exceedthe
differencein real consumptionor income, so that the povertygap appearsto be higher for richer
households[Ravallion(1992d)J.In thefoodsharemethod,differencesarisesimplybecauseof differences
or incomeacrossgroupsor dates;thosewitha highermeanwilltend to have
in averagereal consumption

21
a lower foodsharewhichwill thusleadone to use a higherpovertyline. The differencescan even be
large enoughto cause a rank reversalin measuredpovertylevels across sectorsor regionsof an
economy.'3 This can be worryingwhen there is mobilityacross the groupsbeing consideredin the
povertyprofile,suchas migrationfromrural to urban areas.
Therearerefinementsto thesemethodswhichofferhopeof makingmoreconsistentcomparisons.
These aim to purge the measuredpovertylines for each sub-groupor date of the implicitpositive
correlationwithmeanlivingstandards[tavallion(1992d),BidaniandRavallion(1992d)1.For example,
in the food-sharemethod,one can use a model of the Engelcurve to estimatethe food share of a
householdin eachregionat a givenfoodpurchasingpowerof totalincomeor expenditures.The most
importantpoint,however,is that (recognizingthat a certainamountof arbitrarinessis unavoidablein
defininganypovertyline in practice)oneshouldbe carefulabouthowthechoicesmadeaffectthepoverty
comparisons,for theseare generallywhatmattermost to the policyimplications[Ravallion(1992d)].
A soundpracticeis to considera second,lowerpovertyline. Lipton(1983b,1988)arguesfor focusing
on the "ultra-poor",identifiedas that sub-setof the poor who are at seriousnutritionalrisk.3 An
extensionof this approachis to considera (potentially)
widerangeof povertylines;thisis the mainidea
underlyingthe "dominanceapproach"discussedfurtherin the followingsection.

3.3 Poverty measures

Supposenowthat a measureof .ndividual well-beinghas been chosen,and estimatedfor each
personin a sample,andthat the povertyline is known. How do we aggregatethis informationinto a
measureof povertyfor eachof the distributionsbeingcompared?

3.3.1 Alternadvemeasures
There is a largeliteratureon povertymeasurement,and a numberof goodsurveys;for useful
surveyssee Foster (1984)and Atkinson(1987). Our aim here is to introducethe main issueswith
bearingon policyanalysis,usinga few illustrativemeasures.
Let y denotethe livingstandardindicator,whichhas densityfunctionJty), and a cumulative
7
distributionfunction(CDF)F(y) = fi(x)dx.Thepovertyline is denotedz. Allvaluesof y and z are
0

associatedwitha measureof povertyp(,z), andthisfunctionis non-increasing

in y andnon-decreasing
in z. An importantclassof measureshave the propertythat p(y,z)is homogeneous
of degreezero in
y and z i.e., they are "invariantto scale".'

22
 Following Atkinson (1987) we consider the class of additive poverty measures; the value of
aggregatepoverty is then givenby:

f(y*)dy
to= (1)
0

Additive measures satisfy sub-group consistency, as defined by Foster and Shorrocks (1991). This
requires that when poverty increasesin any sub-groupof the population(such as rural areas) without a
decrease in poverty elsewhere, then sggregate poverty must also increase. Sub-group inconsistent
measures may mislead policy analysis; a well #argetedpoverty reduction scheme - in which poverty is
reduced in a target region, say - may not then show up in a reduction in nationalpoverty.'$
The widely used bead-countinde (H) is simply the proportion of the population for whom
consumption(or another suitable measure of living standard)y is less than the poverty line; H - Ft),
obtainedby setting p(y,z) = 1 in equation (1). 1 is easilyunderstoodand communicated,but for some
purposes (includinganalysesof the impactson the poor of specific policies) it has a serious drawback.
Supposethat a poor personsuddenlybecomesvery muchpoorer. What willhappento measuredpoverty?
Nothing. H is totally insensitiveto differencesin the depth of poverty.
The Wp M gap index PG is obtainedby settingp(y,z) = 1-y/z (the proportionatepovertygap).
This indicatesthe average depth of poverty, in that it depends on the distancesof the poor below the
poverty line. PG indicators the potential for eliminatingpoverty by targeting transfers to the poor
(whetherthat potential can be realized or not in practice will be taken up in section 6).3 The widely
used income La ratiQis I= 1 -pPIz=PG/H, where iP is the mean consumptionor income of the poor;
this measuresthe averageproportionateshortfallbelow the povertyline. However, it can be a deceptive
measure. If a poor person with a standardof living above ,p? escapespovertythen the incomegap ratio
will E_, yet no-one is worse off, and one of the poor is actuallybetter off. PG is a better measure.
One drawbackof PG and I is that they neglectincome inequalityamong the poor; they may not
convincinglycapture differencesin the severityof poverty. For example, considertwo distributionsof
consumptionfor four persons; the A distributionis (1,2,3,4) and the B is (2,2,2,4). For a poverty line
z=3, A and B have the same value of PG=.25 (=[(3-1)/3 + (3-2)131/4fo, A). However, the poorest
person in A has only half the consumptionof the poorest in B. The poverty gap will be unaffectedby
a transfer from a poor person to someonewho is less poor [Sen (1976) (1981a)1.
The Foster-G.eer-Thorbecke (FGT) (1984) measure P2 has p(y,z) = (1-y/z)2 (the squared

23
 proportionatepoverty gap). This reflects inequalityamongstthe poor. In the above exampleof A and
B distributions,P2 is [(2/3)2+ (1/3)1/4 = 0.14 for A and 0.08 for B, indicatingthe greater severity of
poverty in A. The general class of POT measures P. is obtained when p(y,z) (I -y/z) (a 20). (The
head-countindexhas a=0, whilePG has a=l.) Other distribution-sensitivemeasuresincludethe Watts
(1968)measure,p(y,z) = log(z4y),andthatproposedbyClarketal. (1981),p(y,z) = (1-(yz)F)/P (Bs1).
Poverty measures are typically calculated from sample surveys, and so they have sampling
distributions. Like any estimate of a populationproportionfrom a random sample, H has the standard
error V[H.(1-H)/n] in a sample of size n. Kakwani (1993) has derived the standard errors of other
commonpoverty measures; for example,the standard error of the P. measure is V((P2.-P2 )/n). ThUS
one can test whether (for exampleja measuredincrease in poverty is statisticallysignificant.
A long-standingpoorly resolvedissue in povertymeasurementis whetherthere is a jump in well-
being as one crosses the poverty line. The answer alters the effects of risk on expected poverty
[Ravallion(1988)], and the properties of optimal poverty reduction policies [Bourguignonand Fields
(1990), Ravallion (1991b)1. For measures such as P2 (and others in the FGT class for a> 1), the
individual poverty measure vanishes smoothly at the poverty line, i.e., in equation (1)
pz-z) 5 p,(z,) = 0. Thisdoes not hold for al distribution-sensitiveadditively
separablemeasures;e.g.,
for the Watts measure. Nor does it hold for non-additivemeasures,such as the Sen (1976) index.
Shouldpovertymeasuresembodysuchkinks? There clearlyare thresholdsin food energyintakes
below which health - and survival - is threatened. However, the poverty lines found in practice are
typically well above such thresholds (sectiop 3.2). Also, the uncertainty about the location of such
thresholds, and their inter-personalvariability, can make it hazardous for some purposes to rely on
poverty measureswhich are nft smooth at the poverty line [Ravallion(1992d)1.
Does the choice of measuresaffect the policy choices? If all personsgain (ose) then clearlynot;
poverty cannot increase (fall). Otherwise,the differencesbetweenthese measures can be pronounced.
Consider, for example, two policies. Policy A entails a small redistributionfrom people around the
mode, which is also where the poverty line happens to be located, IQthe poorest households.0 EPoiy
P.entails the oppositechange - the poorest lose whilethose at the modegain. A moment's reflectionwill
confirm that the head-count indexH will indicatepolicy B; HA> H. since H depends solely on which
directionpeople cross the poverty line. However, P2 will indicatethe oppositeranking, P2 < P2s,since
it will respondmore to the gains or lossesamongstthe poorestthan amongstthe not-so-poor. The choice
here concernsboth value-judgementsabout interpersonalcomparions,and the empirical questionof how
closely poverty lines coincidewith points at which there are discretejumps in welfare.

24
3.3.2 DecomposItons ,, ,
Additivepoverty measures,such as the FGT class and all measureswhich can be represented in
the form of equation (1), can greatly facilitatethe constructionof '= myprofiles", which are simply
decompositionsof an aggregatepoverty measure, showing how poverty varies across sub-groups of
society, such as region of residenceor sectorof employment. A consistentpovertyprofile can be useful
in assessinghow the sectoral or regionalpatternof economicchangeis likelyto affect aggregatepoverty.
For example, if the poverty profile shows that there is significantlyhigher poverty incidencein region
A than B, then a transfer in equal amount to all residents of A financed by a lump-sum tax on each
resident of B holding their populationsconstant will reduce the aggregatepoverty gap index [Kanbur
(1987, 1990),Besleyand Kanbur(1988, 1993)]. Thepoverty indicatorfor allocatingadditivelyabsorbed
transfers (wherebyeah income,within a given sub-group,changesby the sameamount)to minimizethe
aggregatevalue of the FGT measureP, is P,,Ij. To see why, considerregions A and B with population
is fixed. The
shares n, (i=A,B) each resident of which receives a transfer xi (i=A,B), and nAxA+nBxB
aggregatevalue of P. is given by

P, =APA + nNP. (2)

where

I-xe
Pat f1(1-(y+x)Iz)'f/y)dy (3)

for i=A,B. Consider the marginalimpactof an increasein xA(at the expenseof B). On differentiating
equation (2) one finds that (for a 2 1):

dP, - [P., - P.UwA.nA,fAJz (4)

Poverty will fall if (and only if) region A has the higher value of the a-1 poverty index. Taking this
argumentfurther, it is also instructiveto characterizethe poverty minimizingallocationof a given budget
across sub-groups. For example, consider again the additivelyabsorbed transfer between two groups
which minimis the aggregatevalue of P2 . With unrestrictedpowers of redistributionbetween groups,
1
P2 will be minimizedwhen P, is equalizedacross groups.4'
Similarly, the povery indicator for allocating multiplicativelyabsorbed transfers (whereby all
incomes increase by the same proporion) is (P,,1I - P,,/p4 [Kanbur (1987)1.42 Since multiplicatively
absorbedtransfers leave the Lorenzcurve unchanged,this result also impliesthat the elasticityof P. with

25
 respect to the population mean holding the Lorenz curve constant is given by a(l - Pci/P.) for a2!:1
[Kakwani(1990a)J. In the case of the head-countindex (a=O), that elasticity is (minus one times) the
elasticityof the cumulativedistributionfunctionof living standardswhen evaluatedat the poverty line.43
Changes in poverty measures can also be decomposed.It is co interest to ask: how much of a
change in poverty is due to changesin distribution,as distinctfrom growh in average living standards?
The usual inequalitymeasures, such as the Gini index, can be misleadingin this context. One cannot
conclude that a change in any measureof inequalitywill change, in the same direction, any measure of
poverty (e.g., H d if people just above the poverty line lose income to the poorest). Even when it
does, the change in the inequality measure can be a poor guide to the quantitativeimpact on poverty.
A number of recent papers have looked at this problem." Datt and Ravallion (1992a) discuss the
relativemerits of alternativeapproaches,and proposea simpledecompositionfor any change in measured
poverty which allows one to quantifythe relative importanceof growth versus redistribution.
When analyzingthe sources of reductions in poverty, we can also make use of another simple
decompositionformula, also exploitingthe additivitypropertyof measuressuch as those in the FGT class,
as discussedabove. The idea here is to throw light on the relative importanceof changesxiithJi sectors
versus changesbetwn them, such as due to inter-sectoralpopulationor work-forceshifts [Ravallionand
Huppi (1991)]. The rapid rate of urbanizationtypical of many developingcountries can make such a
decompositioninsightful,though it tells us little about the underlyingcauses of the changesobserved.

3.3.3 Assessingrobusness
At a number of points in the discussionso far we have seen that there is pervasive uncertainty
in povertymeasurement. There are likely to be errors in our living-standardsdata, unknowndifferences
in needs betweenhouseholdsat similar consumptionlevels, uncertaintyand arbitrarinessabout both the
poverty line and precise poverty measure. Given these problems, how robust are our poverty
comparisons? Would they alter if we made alternativeassumptions? A recent strand of research in
poverty analysishas shown how we can answer such questions, drawing on and developingresults from
45
the theory of stochasticdominance.
Supposewe do not knowthe poverty line z, but we can be sure that it does not exceedz. Nor
do we know the precise poverty measure, though we do know that it is additive, as in equation (1).16
Then it can be shown that poverty cannothave risen betweentwo dates if the CDF for the latter date lies
nowhere above that for the former date, up to z" [Atkinson(1987)]. And poverty must have fallen if
the new F(z) is everywherebelow the old one. This holds no matter what the poverty line or precise
povertymeasure. If the CDFs cross each other (and they mayi=tersectmorethan once), then the ranking

26
is ambiguous. Then we know that some poverty lines and some poverty measures will rank the
distributionsdifferentlyto others. We need more information. One can restrict the range of poverty
lines, or one can imposemore structure on the poverty measure. For example, if one restricts attention
to additive measures which do reflect the depth of poverty such as PG and P2 (but excludingH) then
poverty cannot have risen if the area under the new CDF is nowhere greater than that under the old
one.'7 If this test is inconclusive,one can further restrict the range of admissiblepoverty measures;see
Atkinson(1987) and Foster and Shorrocks(1988).
Such tests can also allow robust poveny comparisons in the presence of certain sorts of
measurementerrors in the welfare indicator. Supposethat different households fall into poverty at
different, but unknown, levels of real consumptionper adult equivalent. This may happen becauseof
inter-individual variation in dietary energy requirements; or because of errors in measuring the
demographic composition of households, or differences in the prices they face. Provided that the
distribution of measurementerrors is the same for the two (or more) situationsbeing compared and is
independentof the distributionof living standards,non-intersectingCDFs implyan unambiguouspoverty
ranking. This holds no matter what the underlyingdistributionof the measurementerrors.48
In summary: recent practice has started to move away from preoccupations with the
cardinalizationof poverty, toward a searchfor consistentand robustpoverty comparisonsof distributions,
whether viewed as a single variable or many variables for which only quite weak properties of their
aggregaton are known. A numberof principlesfor guidingsuch comparisonscan now be laid out: The
poverty assessmentshould aim to treat identicallevels of living identically. It should respect at least a
weak version of the Pareto piznciple,in that a distributionin which no one has a lower standardof living
could not have more poverty. It should also give higher weight to gains at lower levels of living. It
shouldnot demandidentificationof a precise 'poverty line", but rather a range of admissiblelines; it may
well be that the qualitativecomparisonis unaffectedby choice withinthat range.

4 Dimensions and causes

This section will try to provide a "snapshot"of poverty in the developing world from recent
available data. We will begin with a broad regionaloverview, and move on to a summaryof what we
kmowabout the characteristicsof the poor.

4.1 A global snapshot

International comparisonsof poverty statistics are plagued with both conceptual and practical
problems. It is not clear what meaningcan be attachedto comparisonsacross countriesin which the real

27
 value of the poverty line varies. But then whosepoverty line shouldbe used? Poverty lines appropriate
to the poorest countries, such as India, have been a popular choice in past work [Ahluwalia,Carter and
Chenery (1979), Kakwani (1980a), WorldBank (1980a, 1990), Ravallionet al. (1991)]. There are also
comparabilityproblemsacross the underlyinghouseholdsurveys (Deatonin this volume), though survey
methodologieshave now become somewhatstandardized. An equally worrying problem is converting
currencies, for which official exchangerates can be a poor guide in makingpoverty comparisonsacross
countries. The International ComparisonsProject of the U.N. has helped here, by facilitating the
constructionof PurchasingPower Parity (PPP)exchangerates [Kraviset al. (1975), Summersand Heston
(1988) (1991)]. Though these are not ideal for internationalpoverty comparisons(not being anchored
to poor people's consumptions),they appear to be the best available methodfor setting internationally
comparable poverty lines, and have been used for this purpose by Ahluwalia et al. (1979), Kakwani
(1980a), World Bank (1980a, 1990), and Ravallionet al. (1991).
Recent estimatesfollowingthis methodologyindicatethat aboutone-fifthof the populationof the
developingworld - about 600 million people - in the mid-1980shad a real consumptionlevel less than
India's poverty line of $23 per monthin 1985US prices (adjustedfor cost-of-livingdifferencesbetween
countries).19At a more generous poverty line of $31 per month - one dollar per day - the head-count
index of poverty increases to about one in three, or about one billion people. Tbere are no strictly
comparableearlier estimates,but the proportionof people poor has probably fallen since the mid-1970s,
while the absolute number of poor has probably increased.' However, these aggregateshide great
regional diversity; for example, while the proportion who are consumption-poorhas declined in much
of Asia, quite sharply in some countries, it has probably increased in Sub-SaharanAfrica and Latin
America during the 1980s[WorldBank (1990, 1992b), Chen ?t al. (1993)].
Though the numberwho are poor by Indian standards is large, the aggregatepovertygap in the
developingworld is actuallyquite small. The aggregatepovertygap of the poorest fifth of the population
of the developingworld is about one percent of total consumptionby the developingworld in 1985; for
the poorestthird, the correspondingfigureis aboutthree percent [Ravallionet al., (1991)]. This suggests
that only modestaid to LDCs wouldbe neededto eliminatepoverty, though this assumesperfect targeting
without disincentiveeffects; that would be very difficultin real life (section6.2).
Properties of the static consumptiondistributionin the developingworld can help us understand
how poverty is affected by growth and redistribution. First, the aggregate CDF of persons by
consumptionper person is quite elastic to changes in the poverty line or mean,5" reflecting a high
density of observationsaround commonlyassumed poverty lines. This suggeststhat poverty will fall
quite rapidly with distributionallyneutral growth in mean consumption. Comparisonof the proportions

28
of the aggregatepopulationof developingcountriesdeemedto be poor at $23 and $31 per month Implies
an arc elasticity of the head-countIndex with respect to the mean consumptionof about two, holding
constant all relative inequalities(as Indicatedby the aggregate Lorenz curve). At the average rate of
population growth in the developingcountries, the total number of poor will decline as long as future
growth and distributional shifts are equivalent to a distributionally neutral growth rate in mean
consumptionof about one percent per year [Ravallionet al. (1991)]. The steepnessof the CDF also
implies that aggregateestimatesof the numberof poor will be sensitiveto the choiceof the povertyline.
Second, aggregateprospectsfor povertyalleviationthroughfuture growthare sensitiveto changes
in relative inequalities. Supposethat the Lorenz curve shifts by a constant proportionof the difference
between each incomegroup's actualshare of total consumptionand equal-sharesallocation.Y2One then
finds that poverty would respond very elastically to shifts in the Gini index of inequality for the
developingworld as a whole; for the $23 poverty line, PG for the developing world would respond to
the Gini index with an elasticity of over 13 [Ravallion et al. (1990)]. Thus, while poverty in the
developingworld would fa1lfairly rapidly with distributionallyneutral growth, it would take only small
deviations fr&ii neutrality to wipe out those gains. Consider a one percent rate of increase in mean
consumptionfrom 1985until 2000. It wouldtake only a 0.25% per year increase in the aggregateGini
index to eliminatethe total effect of such growth on the poverty gap index of the developingworld.
As for trends over time, the WorldBank (1990, Table 3.2) comparesH, roughly from the mid-
1960sto the mid-1980s,using a constantreal povertyline over time, in each of 11 developingcountries
(noneof them in SSA). In every casethe incidenceof povertyfell over this period, and numbersof poor
feil in most cases. Estimatesof how poverty measureshave evolvedin the late 1980sare given in Chen
at al. (1993). The methodologyis consistentacross time, and the poverty line is fixed (in terms of
purchasingpower parity)acrosstime and countries. The estimatesused availablehouseholdconsumption
data sets from nationally representativesurveys. The results show negligible change in the aggregate
poverty measuresbetween 1985and 1990. The head-countindex (percentageof personsconsumingless
than $1 per day) has fallen slightly, from 34% to 33%, but this cannot be consideredsignificant.
Poverty measureshave fallen in the 1980sin both South and East Asia, but have risen in Sub-
Saharan Africa (SSA), the Middle East and North Africa (MENA), and in Latin America and the
Caribbean (LAC), though the extent of worseningvaries by povertymeasure and poverty line, and there
have been improvementsin some countries [Chen et al. (1993)]. SSA has now levelled with SA in the
incidenceof absolutepovertyat poverty linesaround $1 per day. SSA is now the regionwith the greatest
depth of poverty, as measured by PG.' Only in East Asia is there good evidence of falling poverty,
and progress has been impressive. From the pointof view of the poor, the low growth rates experienced

29
since the late 1970s - and currently being forecast - in most of SSA are particularly worrying [World
Bank (1990), Walton (1990)1. The proportionof SSA's populationwho are poor by Indian standardsis
now at roughly the same level as in India, and SSA's growth prospects are lower.'

4.2 Demographiccharacteristcsof thepoor

Much of our current empiricalknowledgeaboutspecificcharacteristicsof the poor is in the form
of bivariate correlations;we know far less aboutthe joint interrelationshipswith other characteristicsof
poverty, and attemptsto infer causalityare cloudedin problemsof simultaneity.-" While we shalll try
to cast some light on these issues, better data and testing are needed.

4.2.1 Povertyandfamilysize
Nationalsamplesand micro-studiestypicallyconfirmthat larger householdsize is associatedwith
greater incidenceof poverty, as measured by household consumptionor income per person [Birdsall
(1979: 132), Meesook(1979), Musgrove(1980), Visaria (1980: 47-9), Lipton (1983a), House (1989),
World Bank (1991b,d), van de Walle and Ravallion (1992)]. In most cases, household size and
consumptionor incomeper person are inverselyrelated over the whole range.m
Children are more likely to be poor than adults [Birdsall(1980: 39), Musgrove (1980), Lipton
(1983a)J. Usually this is not because householdsunderfeed children [Schofield(1979)], but because
child/adultratios are larger in poor households. Higher infantand child mortality(leadingto even higher
replacementfertility) is causedby undernutrition;and high child/adultratios causeincomepoverty. Also,
heavy female burdens and child povertyoften go hand in hand.
Poor householdsare thus larger and younger;their members- particularlythe youngest- are less
likely to live as long as the non-poor. Most mortalitydifferencesbetween rich and poor in LDCs arise
in the first five years of life. In Asia and Africa, infant and child mortalityincrease steeplywith poverty
[Lipton (1983a: 15-18)]. Often, poverty is linkedto high child death-ratespartly because it proxies the
impactof low maternaleducation[Hull and Hull (1976: 8,15), Caldwell(1979),Hill (1981: 35), Ruzicka
(1982: Table 9), Roth and Kurup (1989)J;5 of inadequatehousing or water supply [ibid., Mitra (1978:
210)]; of farm labor or insecure tenancy [ibid.: 21; Natrajan, n.d.:12]; or above all of rural residence
[ibi .: 7; Hill (1981: 35), Mitra (1978: 223), Ruzicka (1982: tables 5-6), Irfan (1989)]. However,
poverty is causally related to this whole group of other correlatesof high mortality [Flegg (1982)]. So
the fact that poverty 'proxies" the other correlatesneed not devalue its bivariate link to mortality.
Mortalityis probablya non-linearfunctionof income. Under certainrestrictionson the properties
of the household production furction for health and the distributionof personal constitutionsone can

30
derive a relationship between survival chance and consumptionwhich is concave above some point
[Ravallion(1987a, ch.2)]. At high levels of income, 4utritionand health care, further reductions in
already low death rates are not easily atainable, nor strovgly linked to further income gains. There is
supportiveevidencefor a concaverelationshipbetweensurvival chancesand incomes. In cross-country
comparisons, Preston (1975) finds that the income-slopeof mortality is greater at the low end of the
incomerange, thoughlow incomemay be proxyingfor other variablessuch as low education,poor health
servicesetc [Ahmed(1992), Heston (1992), Srinivasan(1992),Anand and Ravallion(1993)]. Farah and
Preston (1982) for the urban Sudan, and Irfan (1989) for Pakistan, show a strong link of poverty to
mortality rates for the poorest few deciles. Clear discontinuitiesare shown in death-ratesbetween the
landless and others; for Binar, India [Rodgers et al. (1989)1and Pakistan [Irfan (1989)1;and between
those of low status and others [Mukhopadhyay(1989) for caste in West Bengal in 19834].
On its own, high mortalityin poor householdsmakesthem smaller. Higher morality amongpoor
householdsmight, however, be associated with their larger sizes if it (or anythingelse) induced them to
raise fertility - relative to non-poor households- by a larger proportion. Thereis a problem in testing
this; a positive cross-sectionlink between fertility and poverty need not show that high fertility is a
featureof already-poorhouseholds. The associationmight arise mainlybecausehouseholdsbecome poor
after, and perhaps partly becauseof, producingchildren. Only a large, and (becauselife eventsare rare)
long-term, set of panel-datacan resolve this issue convincingly."
There is some evidencethat child deaths do stimulateexcess replacementbirths, especiallyin
rural areas [SchultzT.P. (1981: 137-40)]. This is due pardy to lifetime earningspatterns due to lower
education, especiallyfemale [Birdsall(1980: 52)]. Over-replacementis thus probably correlated with
poverty, and with the associated 'felt need' to insure againsthigh risk of further infant and child death.
In Guatemala[Pebley et al. (1979)], desired family size was positively correlated with previous child
deaths, holding several other variables - but not poverty - constant. However, if poor people's higher
mortalityis actuallyto increasetheir householdsize, then the fertilityresponsemust involveenoughover-
replacementto outweighthepositive effect of siblingcrowdingon death risks. This is a substantialeffect
for the poor; in India the mortalityof infantsborn within one year of a previous birth was twice as high
as that of children born tvwoor more years after a birth [Bennett(1991: 9.62); and cf. Ghosh (1987)].
One shouldlook to ove:all fertility (not only replacement)to explainwhypoorer householdstend
to be larger despitehigher morLlity. Many data sets reveal an inverted-Urelationship[Birdsall(1974:
5-7), (1980: 53-6), Hull and Hull (1976: 9), Schultz(1981: 177)]. As incomeand its correlates(farming
status, housing type, education, etc.) increase from zero to a very low level, perhaps near the 'ultra-
poverty line", total fertility rate (CMR)and its components(especiallyage-specificfertility) initially also

31
increase slightly: extra income from very low levels is associated, via better nutrition, with earlier
menarche [Huffmanet al. (1987), Bhalla and Srivastava(1976)1and more generallywith higher fecund-
ability [Frisch (1978, 1980, 1982), Easterlin and Crimmins(1985)1;the ultra-poor are somewhatmore
exposedto maritaldisruptionand interruptionthan the moderatelypoor (Hull and Hull (1976)1;and rising
child wage-ratesaccompanyincreasedfertility [Schultz(1981: 50-1)]. Fertility decreasesas the level of
living rises above ultra-poverty: women's time becomesvaluable, and it becomes increasinglyfeasible
to delay family income by educatingone or two children, instead of using income from the wage labor
of several [Becker and Lewis (1974), World Bank (1984), Birdsall (1988)]. The entire inverse-U
relationshiphas been demonstratedfor Pakistanin 1979[Irfan (1989)]; for urban Juba, Sudan, in the mid-
1980s[House (1989)]; and (to the extent that husband's educationproxies income) for rural Bangladesh
in 1968-70[Stoeckelet al. (1980)] and Indonesiain the early 1970s(Hull and Hull (1977)].
This is an asymmet-.c inverted-U. Fertility indicators rise initially, reach a peak - though still
at a low standardof living - then fall steadilyto far below their initial level as incomecontinuesto rise.
Thus fertility differencesdo explain part of the size-povertylink.
Although poverty is often positively associated to fertility over most of the range,'mso is
landholding[Mueller and Short (1983), Stoeckeland Chowdhury(1980)]. Schutjerand Stokes (1982),
using data from Thailandand Egypt, show that operational(but not owned)farm size is positivelylinked
to fertility [Mitra (1978: 209-10) confirmsthis for India]. It may be because family labor economizes
transactions-costsin own-accountfarming; or because[Chayanov(1966), Nakamura(1986)]extra hands
and mouths in a family raise the marginal disutilityto it of incomelessleisure relative to that of total
family drudgery. Cain (1984)and Cainand Mozumder(1981)questionthese explanations,relyingrather
upon differentialfrequenciesof spouseseparationand upon local tenurialand institutionalconditions[see,
however, Good et al. (1980), Stokes and Chowdhury(1980)]. There is, however, little questionabout
the reality of the correlations,whatever their causal structure.
The associationbetweenhigh fertilityand povertyhas promptedwide advocacyof familyplanning
programs as an instrumentof ant-povertypolicy [WorldBank (1984)]. Yet, given the circumstancesand
risks in developingcountries, it is feasible, common,and often rationalfor poor couplesto chooseearlier
marriage, and higher marital fertility, than rich couples [ibid., Cassen (1978), Schultz (1981)].° Some
scholars even deny that higher fertility normally slows down the growth of real income per person, or
raises the rate of resource depletiond'[NationalAcademyof Sciences (1985), Simon (19xx)]. The case
for publicly subsidizedfamily planning may then rest heavily on its prospects for helping the poor by
redistributingincome from profit and land rent towards wages. If the typical poor couple, by producing
many childrenbecause this is individuallyoptimal,raises labour supply and food demand, the real wage

32
rate for poor people is reduced [Malthus (1798)]. Thus there is a pecuaniary external diseconomy
[Scitovsky(19xx)]to the poor ioiztWfrom their high fertility. Family planning may then merits state
subsidy. However, to take this further is beyond our scope, requking a deep understanding of the
determinantsof fertility [Easterlinand Crimmins(1985), Cleland and Wilson(1987), Bongaarts(1992)].

4.2.2 Genderandpoverty
Is there widespread "feminizationof poverty"? In some parts of Asia and elsewhere, young
femalesare often exposed to excess poverty-inducednutritionaland health risk withinhouseholds,' and
this appears to be one factor explainingthe 'missing millions" of women [Dreze and Sen (1989)].
However, females are not generally over-representedin consumption-poorhouseholds;nor are female-
headed householdsmore likely to be poor. Evidence against widespread feminizationof income or
consumptionpoverty appears in Visaria (1977, 1980) for Asia; Dreze (1990) on India; H. Standing
(1985)on Calcutta;Svedberg(1991)for Africa;Haddad (1991)and Lloyd and Brandon(1991)on Ghana;
and earlier sources cited in Lipton (1983a: 48-53). Lack of data on intra-householddistribution often
clouds inferencesfrom such studies, but, even if it were true that consumption-povertyincidence is on
average no greater amongstwomen, they are severevictims of poverty in other respects.
First, womenwork longer thanmen to achievethe samelevel of living. The burden of both parts
of the "doubleday" - market labor and domestic labor - is more severe for poor women. Female age-
specific participationrates increase sharply as income falls towards severe poverty; yet so do the ratios
of children to adult women [Visaria(1977, 1980), Lipton (1983a: 43-4)].YThere is evidencethat, as
womenparticipatemore in market work under pressure of poverty, their domestic labor is not substant-
ially reassignedto men [K. Bardhan (1985), G. Standing(1985)1."
Second, womenface lower chancesof independentescapefrom poverty, in part becausewomen's
large share of domesticcommitmentspreventsthem from seizingnew and profitablework opportunities
as readily as men [Haddad(1991)for Ghana,Birdsalland Behrman(1991)for urban Brazil]. ManyLDC
job marketsappear to be segregatedinto 'progressive": poverty-escaping,and usuallymale; and "static":
poverty-confirmingand usually fe,male.65Even more importantthan the domestic burden, in explaining
this povertytrap, may be cultural discriminationagainstfemales in both educationand job assignments.
In Taiwan, in some ways a model of "growthwith equity", a 1978-80survey showed that 25% of sons,
but only 4% of daughters,had been apprenticed;and that, in the poorest 80 per cent of families, as the
number of sisters rose from 0 to 4, the mean schooling per brother rose from 6.8 to 11.4 years,
indicating that girls are sacrificingprospects of independentescape from poverty to pay for brothers'
prospectsvia education[Greenhalgh(1985)]. In Ghana, muchlower female literacy and numeracyafter

33
age 15 greatly reduce female access to good jobs [Haddad (1991)]. In Bangladesh, non-formal and
technical/vocationaltraining - far from correcting the big gender disparities in schooling - generally
makes gQprovisionfor femaleenrolment[Safilios-Rothschild(1991)]. In rural India in 1981, the gender
gap in adult literacy was higher among the far poorer scheduledcastes (22%-6%) and scheduled tribes
(28%-8%), than among the populationas a whole (40%-18%)[Bennett(1991)].
Third, in some cultures widows face effectivebarriers against employmentor ren .iJage, and
are treated as second-classcitizens within the home, leadingto high risks of poverty. One of the few
systematicstudies pDreze(1990)] shows that nuclear, widow-headedhouseholdsin India are by far the
poorest (evenaverage expenditureper person is 70% below the overall average). The youngerthe oldest
male in such households,the deeper their poverty. Age-specificmortalityfor rural NorthIndian widows
is also higher than for otherwise comparablewives [Chen and Dreze (1992)].
Thus an importantway in which poverty is feminizedis that male-dominatedsocieties make the
escape from poverty harder for women. This suggeststhat poverty is more likely to be chronic for
women, and transient for men; individual,panel data are needed to test this, though such data are rare.

4.2.3 Povertyand old age

Poverty is juvenizing and may be feminizing;is it greying? The over-65s comprised3.8% of
SouthAsians in 1980, but are projectedat 4.8% in 2000 and 8.2% in 2025; in other developingregions
the expansionis as rapid, except in Africa where even by 2025 the proportion is projectedat only 3.9%
[Deatonand Paxson (1991: 2)1. In the Ivory Coast, average income within rural and urban areas is no
lower for the elderly, but they are worse off on a national basis because of rural concentratation. In
Thailand, older Thais do not have lower average income [ibid.: 22-7]. That does not tell us whether
proportions in poverty are higher for the old. This was not so in Nigeria and India in the 1970s [Gaiha
and Kazmi (1982: 56), P. Hill (1982: 187-8)1. Given their greater dependenceon the uncertain support
of others, we hypothesizethat inequalityamongthe old is greater than amongthose of prime age. If so,
similar average incomes in these two groups would probably mean higher poverty among the elderly.
With the ageing of many LDC populations,these issues merit further research.

4.3 Laborandpoverty
4.3.1 Pardckaon and employmewnt
As a rule, poor householdsdependheavily on labor income. Its quantumdepends on their age-
structure; their age- and sex-specificparticipationrates (ASPRs);their prospect of employment(or self-
employment)when theyparticipate;and their wage-rates(or net dailyrewards on own account)whenthey

34
are employed. The age-structure of poor households implies high dependency ratios.67 Even if
reflecting privately optimal couple fertility decisions, this is a horrendous drag on their overall
participationin work. The drag appearsto increase with early developmentand associatedurbanization.
The rich-poorgap in the dependencyratio is greater in cities than in villages, and in more than in less
developed countriesand regions [Lipton (1983a)].
It is to be expectedthat the poor will seek high ASPRs. Assumingleisure to be a normal good,
poor people will work more, ceteris paribus. Second, with fewer assets (and often lower wage rates)
the poor wi1lhave to work longer to reach any given income. Third, poor people's high dependency
ratios increasethe marginalhouseholdutilityof income-per-workerrelativeto leisure [Chayanov(1966)].
Among men aged 14-60, ASPRs - except in the agricultural slack season - are seldom much
below 95 per cent for any income group [Visaria (1980: 76-7); Lipton (1983:7,16)1. Therefore, if the
poor are to raise ASPRs significantly,it must be mainly amongthe under-14s,the over-60s, or women.
All we can say with confidenceabout child ASPRs is that they are understatedby large officialsurveys;
child lator is muchmore prevalentamongthe poor [Lipton(1983: 17-18)]. Many studies[Lipton (1983:
16-17)]confirm that women's ASPRs increase, but only modestly, with falling household income per
person. However, the poorest 5-15% of householdstypically show female ASPRs no more than the
moderatelypoor. Also, female ASPRs decline, given mean income, with rising household ratios of
under-fivesto women and older children [Dasgu,'ta (1977: 153)1.0Most seriously, urbanization- even
for the poor - appears drasticallyto cut femaleASPRs [Lipton (1983: 23-5), Visaria (1981: 13), World
Bank (1989)]. Since urban proportions of populations (includingpoor populations)are rising, as are
urban female/male ratios - especially for poorer adults [Lipton (1983a: 51)] - we need to know the
reasons and remedies for poor urban women's low ASPRs.
Unemployment,as a usual statusover a long period, is income-elastic[Udalland Sinclair(1982)]
- a "luxurybad". However, the time-rate of unemployment(TRU) - the proportionof time in workforce
spent in job search - is an inferior bad. It is generally higher among workers from poor households,
often sharply so among the poorest, especiallyin towns. The linkage is stronger for the assetlessand
landless, than for those who can fall back on asset-basedself-employment[Sundaramand Tendulkar
(1988)]. Also, unemploymentis concentratedamongthe assetlessand in areas, age-groups,etc. that are
likely to over-representthe poor [Lipton(1983: 42-54)1.6

4.4.2 Wages
Given the heavydependenceof the poor on unskilledlabor, one wouldexpect the real wage rate
for such 'abor to be an importantdeterminantof poverty. The evidenceon the co-movementof rural

35
povertyIncidenceandreal agriculturalwagerates is mixed;povertyhas oftenfallenwithoutrisingreal
wage rates for unskilledlabor.^ However,the lesson from these experiencesis not that poverty
incidenceis unaffectedby the real wagerate for unskilledlabor, ceterisparibus,but rather that other
variablescan also mattergreatlyto the outcomefor the poor. Skilling,sectoralshifts,increasedcereal
yields even on handkerchief-sized farms, rising employment,and remittanceincomes, have been
importantin explainingfallingrural povertyin mostpoor Asiancountries."'And it is criticalwhether
or not a real wagerate increasecomesat the costof higherunemployment; it cannotbe presumedthat
an exogenously imposedwageincreasewillbe pro-poor.CertainlyKerala'spersistent(andgenuine)25%
unemployment rate - thricethe Indianrural average- alongsidea uniquelyenforcedstatutoryminimum
farm wage,does not suggestthat the latter is very helpful.2 Onlyfor Indiaare there adequatetime
seriesdatato test the strengthof the empiricallink betweenreal agriculturalwagerate andrural poverty
incidencecontrollingfor at leastsomeof theseotherdeterminants;on doingso thereis evidencethat
higher real wageshave resultedin lower povertyincidence[vande Walle(1985)]. Householdcross-
sectionaldatafor WestBengalsuggestthe sameconclusion[Bardhan(1984,ch.14].
Thereis controversyaboutwage-iscrimination, andthe issuesare far fromsettled. Task-specific
earningsdifferentialsbetweengenders,castesor ethnicgroupsreflect (at least in part) differencesin
productivity(dueto educationandexperience)or in workperiod[Lipton(1983:69-72,834), Ashenfelter
andOaxaca(1991),BirdsallandSabot(1991)1.However,suchearningsdifferentialstestifyto inferior
access to better-paidskills and productivetasks; these often themselvesarise from prior forms of
discrimination.Thisisharmfil, notleastbecause,whereit mostreduceswomen'searningopportnities,
there appearsto be greater neglectof (and death-ratesamong)little girls [Rosenzweigand Schultz
(1982)1.Thoughwa discrimination has been observedin a few carefulstudies[Bardhanand Rudra
(1981),Lluchand Mazumdar(1981)],acs discrimination maywell be the moreseriousproblem.

4.4 Nmriton andpoverty

4.4.1 The ncomeelasticityof nurent intakes
Thelinkbetweenpovertyandnutritionhasbeenlookedat mainlyin termsof dietaryfoodeneigy
deficiency,relativeto requirements.Energydeficiencycan be measureddirectly,by recordingenergy
correlates:upper arm
intakesrelativeto supposedrequirements(section3.2), or via its anthropometric
circumference,andbodymassindex(BMI:kg/m) in adults,andheight-for-age (or, as an acuteindicator,
weight-for-age)in children. Exceptwhererootsand tubersare mainstaples,proteindeficiencyis rare
in the absenceof energydeficiency. However,micronutrientdeficienciesare widespread,oftenoccur
withoutenergydeficiency,and mayor maynot be closelylinkedto poverty."

36
 Tne poverty-nutritionlink is conditionedby other variables (behavioraland/or biological), and
involves sinr.taneity. From householdresources, the lncnkruns to expenditures (conditionalon prices
and tastes); thence to calories; to intra-familydistribution;and to the level, variability, and adaptability
of the adequacy of individualintake for normal 'requirements" of resting metabolic rate (RMR: body
requirementsto function at rest), work, growth, etc. This last linkage is mediated by health-affected
capacityto ingest, absorb, and use energy.7' Even given all this, energy absorbed (given requirements,
health, etc.) Is related in highlyvariableways to health-nutritionoutcomessuch as survival, physicaland
mentalperformance, and wellness. Each link can be modelledas "health-seekingbehavior' [Alderman
(1993)]. Furthermore, some of these linkages are likely to have feedtL k effects; nutritionaloutcomes
may affect (in turn) productivityand hence householdresources [Strauss(1986), Deolalikar (1988)].
While the income-elasticityof food expenditurein poor populations is often close to unity
[BhanojiRao (1981),Lipton (1983b),Edirisingheand Poleman(1983), Pitt (1983)], severalpapers report
low income- or expenditure-elasticitiesof either calorie intake or anthropometry[Bouis and Haddad
(1992)]. The ICRISATnutritionobservationsfor SouthIndianvillages, used by Behrmanand Deolalikar
(1987), Bhargava (1991) and others, cannot be properlymatchedwith the times of the consumptionand
incomeobservations. That is not true of other studies, such as Behrmanand Wolfe(1984)on Nicaragua,
and Bouis and Haddad's Philippinesdata (which suggest an income-elasticityof food energy intake of
0.05), and the Ivorian data of Thomaset al. (1992: 27) showingthat most child anthropometrydid not
respond to extra income (though adult BMI, and urban child height, did). Not all careful studies have
confirmedthe very low CIEs found in the abovedata sets; see, for example,most of IFPRI's six studies
on the impactof commercializationon nutrition [Kennedyand von Braun (1986)].
To believe that very poor, hungry and underfedpeople raise caloric adeac - as distinct from
energy intakea - by only 1 per cent or so when income rises 10-20 per cent does seem contrary to
common sense. There is evidencefor several possibilities,not mutuallyexclusive:
o Food energy intakeswere not inadequateat the mean (where the elasticityis typicallymeasured)
to begin with, so that incomerises couldbe devotedto food qualityimprovement,as Behrman,Bouisand
others emphasize. Mean adult weights in most tropical rural places -- and hence approximateenergy
requirements - typically lie 15-30% below reference weights used in estimating energy requirements
[Lipton (1983b: 14-20), (1989a: 12)].
O There are strong non-linearitiesin the calorie-incomefunction [Ravallion(1990e), Holleman
(1991), Garcia (1991: 118),Thomas (1990)]. For example,in Java the CIE rises from 0.15 at the mean
to 0.33 at half a standard deviationbelow the mean [Ravallion(1990e)l.
o Income gains may have more impact on nutritional adequacy than on calorie intake per se,

37
because the poor are clustered around a critical thresholdof caloric adequacy [Ravallion(1990e)J.
o In unhealthyenvironments,the use of income gains solely to obtain extra calories may do little
for nutritional or health status. A health-seekingperson should then spend extra income on health
improvements(e.g., sanitationor even leisure) rather than nutrition. Similarly, low levels of public
inputs, complementarywith incomesin their impacton such outcomes [Tayloret al. (1978), Thomas et
al. (1992: 25), Anand and Ravallion(1993)]may entail that extra income is wasted on nutrition.
o Food energy adequacymay thus be much more elastic to income than is energy quantum. For
Java in the early 1980s, a low CEE(0.15 at the mean) still impliedan income elasticityof the incidence
of undernutrition - relative to fixed caloric requirements- close to unity [Ravallion(1990e)]. To the
extent that incomerises are achievedin a way that reduces(increases)fool energyrequirementsthis will
boost (diminish)the incomeeffect on undernutrition[Lipton(1989a: 11)].
o The value of the CIE is contingent. Female-headedhouseholdsshow a higher CIE than equally
poor male-headedones [Garcia (1991: Table 5), for the Philippines],perhaps due to smaller household
size [Greer and Thorbecke(1986: 86), for Kenya]. The effect appearsto be stronger in poor households,
in Kenya and Malawi (Kennedyand Peters (1992)]. Who receives the income gain may also matter.
Extra incomesgoing to householdmembers (men)with relativelylow marginalpropensitiesto purchase
food implies a lower responseof food energy intake [Kennedyar1 Peters (1992)].

4.4.2 Adaptation
A low CIE may indicateeffective- though seldomcostless - adaptation. In some environments,
poverty is associated with smaller stature, harder work, and therefore worse health; in other
environments,moderatelysmallpersonsselect work requiringbody translation(ratherthan heavylifting),
in which they have a comparativeadvantageover people who are taller or with higher BMI. Some
doubtfuluse has been made of an excellentNorwegianstudy by Waaler (1984), showingsharp rises in
mortalityif BMIfalls below levelsas high as 20-23; but this appearsto be synergisticwith smoking, and
in any event, it need not applyin warm LDCs [Payne and Lipton (1993)]. In India, agriculturallaborers
with BMI as low as 16 appear healthy and hard-working [Shetty (1984)]. In a study of 199 men in
Bangladesh,risk of illness rose sharply when BMI fell, but only below 17 [Pryer (1990)].
The discussionof adaptationto dietary energy stress has emphasizedtwo biologicalpaths: child
growth reduction and adult downward adaptation of RMR/kg. The latter is considerab!e in semi-
starvation [Keyset al. (1950)], but in responseto milder stress may reduce RMR/kg only a little (by 2-
5%, rather than 8-10%). Most important,such biologicaladaptation(i) happens only if victims choose
to maintain 'voluntary' (work or leisure) energy expenditure when intake falls, or intake when

38
expenditurerises, yet do not fully compensateby weight loss; (ii) is an unknownquantity for children,
the most seriously affected by a given proportionate energy shortfall; (iii) is much smaller than
interpersonalvariation in RMRAkg;given income, persons with lower RMR/kg select lower calorie
intakesper day.'
Much more importantis the questionof childgrowth faltering,and of possible consequenthigher
mortalityor lower mentalor physicalperformance. For extremestates - the anthropometriesof the 5-7 /O
of LDC populationsclassifiedas severely undernourished- there is no disagreement:these people are at
substantialrisk of increasedinfant and child mo-tality,and of physical(and perhaps mental)impairment
in adulthood.7 What about the effectsof "mildto moderate' anthropometricshortfalls? It is important,
because correcting such shortfalls - by inducing extra food acquisition among households that now
"choose' a low calorie-incomeelasticity- is not obviously sensible: if children grow up mildly stunted
withoutserious harm, they survive into lower adult energyneeds, and hence (given continuedpoverty)
smaller risks of wasting, which is usually far more dangerousthan stunting.
Pelletier (1991) claims that a continuous positive relationship exists between sub-standard
anthropometryand childmortality. However,his graphs show a greatly weakenedor absentrelationship
once weight-for-ageis at or above65-70% of the US (NCHS) median, height-for-age85-90%, or mid-
upper arm circum-ference 105-115mm [ibid.: 12-14]. A large bulk of evidence,and some supporting
(immunological)theory, now shows clear turning-points,well below NCHS medians, above which few
or no health impacts for stunting can be demonstrated. Further, we can find no evidencefor claims
[ibid.: xii] that 25-50% of "childdeaths are statisticallyattributableto anthropometricdeficits" and that
"33-80 per cent of these deaths are associatedwith mild-to-moderatePEM". Even if it is correct, most
non-genetic"anthropometricshortfalls", and much PEM, are due to infection,and may not be readily -
if at all - prevented by pumping in calories Oet alone income), rather than, say, by sanitation, clean
water, and good primary health care [Payne and Lipton (1993), Lipton (1983b)].
In adults, much the most importantadaptationsof poor people to energy stress are weight loss
and work adjustment. This ranges from rescheduling arduous tasks towards periods of greater food
availability, to inmprovingergonomicefficiency at the cost of discomfort or inconvenience. Little has
been done to study, to assist via price and technologypolicy, or to lower the costs of, these and other
behavioral or biological adaptations. Excessive concentration on the intellectually fascinating but
quantitativelyunimportantissueof intrapersonalRMRadaptation,and on the importantbut oversimplified
issue of child growth faltering, has blinded students of poverty to the many, but currently constrained,
adaptationsto food energy shortageby poor people, and their communitiesand institutions.

39
 4.5 Icome wraby l\ J
Income variability has been a common concern in attempts to reduce poverty through direct
intervention(section6.3). This reflects a belief that intertemporalconsumptionsmoothingpossibilities
are limited, or costly, for the poor. While informalcredit and insurancearrangementsare common, they
do not appear to provide anything like perfect income insurance.' Even if surrogates for state-
contingentcommoditymarketsexistin these settings,they mayperform inadequatelyfor the poor, or may
involvehigh costto longer-termpovertyreduction(e.g., if savingsare shiftedfrom productiveinvestment
to grain storage). Then programs to reduce poverty may be more cost-effectiveIf they steer some
resources into reducing incomedownturns(section6.3).
Of the peak-to-troughquarterlyfluctuationsin ASPRsin India in 1977-8,changesamongworkers
whose main activity is 'casual labor" - a group that overlaps strongly with the poor - accountedfor
almost 70% for rural men, and about 100% for rural women. Where the time rate of unemploymentis
high on average, further seasonal rises produce "discouragedworker effects", so that periods with a
higher TRU also feature a lower ASPR, especially among women. Nigerian and Indian village data
confirm that seasonal variability in gainfiulworktime is greatest for the poorest [Lipton 1983: 34-6].
Moreover, the Javanesevillage in which the poorest workers were most driven to raise the proportion
of workforce participationspent in job search [Hart (1980)] may well typify places where casual labor
is a major source of income for the poor. In villages of West Bengal where uncertainty is greatest,
employersprovide a search-free work fallbackfor poor locals in slack times, thereby ensuring fealty
during peaks [Bardhanand Rudra (1981)1;this transfers instability(and search costs)to poor non-locals.
Domestictasks and catle care do expandin slackseasons[Hopper(1955)]. Yet unirrigated,rural
places with litde non-farmemploymentcontinueto suffer great fluctuationsin labor use. Hired labor,
especiallycasual, shows muchgreater seasonal- and, more seriously because less predictably, annual -
variabilityin employment[Lipton(1983: 54-9)]. Sincerural poverty is associatedwith casual labor and
with residence in places with litte non-farmemployment[e.g. Singh (1980: p. 110 and table 13)], the
impactof agriculturalfluctuationson not very mobilepoor people appearslarge. Poor urban populations
are also characterizedby surprisingly high dependenceon (unstable)aidcultural work [Visaria (1977:
Table 34) for Maharashtra,India].
Unemploymentand ASPRstend to fluctuateinversely,and so the harmfil effectson labor income
are covariant. This is serious because the variability of both employmentand ASPRs increases with
poverty, as does dependenceon labor income, lack of reserves, and non-creditworthiness.Matterswould
improve if falls in ASPRs in slack seasons, or bad years, were large enough (compared with falls in
demand for employees) to bid Xi wage-rates, given elasticities and plasticities of labor supply and

40
 demand. Unfortunately,evidence[Bardhan(1982a), Ravatlion(1987a Ch.5)] confirmscommonsense:
in bad times many poor people must work for whatever they can get, so that (because ASPRs fall
proportionatelyfar less than demandfor labor) wage-ratesfall too. Sincethis often happens when food
is dearest and disease is most rampant, we can see the importanceto the poor of safety nets in bad times.
Nutritional and other impacts of agricultural fluctuations on the rural poor have received
substantial recent attention.' Since poor people have low average monthly income, they face higher
disutility- and perhaps significantextra risks to infantlife - not only from a $1 incomefall, but probably
even from a 1% fall; evidence from several countries indicatesthat poor households - compelledto
maximize productivity in order to survive as units - are likelier to discriminate against vulnerable
members in seasons of energy stress than at other times [Sahn (1989: 6)]. Worse, bad outcomes go
together. The second half of the wet season frequently brings heavier work, dearer food, and more
infections[Schofield(1974, 1979)].Times and places of low employment,wage-ratesand participation,
tend to overlap strongly, especiallyfor the poorest [Lipton (1983: 33-7, 56-60, 845)]. Also, the rural
poor are more dependent than the non-poor on casual labor (which is much likelier to be laid off when
the harvest is bad). Hence the rural poor seam likelier to lose income, in bad seasonsor years, than the
rural non-poor.

4.6 Secora1 and locationalcharacterLsics

It is commonto postulate a "dualistic"structureto a developingcountry, typically based on the
distinctionbetween *urban"and *rural" sectors. Providedthat LDCs compriseclearlydistinct rural and
urban populations,this distinctionis useful in povertyanalysisif levels (or types) of poverty clearlydiffer
between them, or if poverty is clearlyrelated to rural-urbaninteractions,or imbalances.
LDC settlement paerns usually concentrate the large majority of people into clearly rural or
urban places. Around 1980 'intermediate"localities- with 5,000-20,000persons - comprisedonly small
proportions of population in most LDCs." Unless such places have exceptionallysevere poverty - a
topic deserving research - this fiufills a necessary condition for the good sense of a "rural-urban'
approach to poverty and to anti-povertystrategies. The contrast is usually sharp. Typicallythe rural
places (<5,000) are sparsely settled, and employmentis agricultural;the towns (>20,000) are densely
settled, and employmentis 85-95 percent non-agricultural.@
Poverty comparisonsbetween urban and rural areas pose a number of problems. This is partly
because "urban' means different things." National "povertylines' also vary greatly, though this is less
worrying for comparisonsof rural-to-urbanpoverty incidenceratios (RUPIRs) than of absolute levels.
Cost-of-livingadjustmentspose a more worrying problem, as spatial cost-of-livingindices are far less

41
 commonthan inter-temporalindices, such as the CPI. And urban poverty lines are sometimesset at a
higher real level than rural poverty lines (section3.2).
We have no wholly satisfactory method of dealing with these problems, but data based on
consumptionor income per person, allowingfor rural-urbanprice differences, from thirteen LDCs for
the 1980s, suggest the followingRUPIRs:1 Kenya 6.0; Cote d'Ivoire 4.6; Gh3na 2.2; Indonesia 3.7;
Malaysia 2.5; Thailand 1.7; Philippines 1.4; Parama, Peru, Venezuela, each 1.4; Guatemala, Mexico,
India each 1.3 [World Bank (1990: 31)1.3 Similar differences were found in the (fewer) studies that
estimate higher-order poverty measures (such as PG and P); see Ravallion and Huppi (1991) for
Indonesia,Boateng et al. (1991) for Ghana, Datt and Ravallion(1992b,d) for India, World Bank (1992)
for China, and van de Walle and Ravallion(1992) for Morocco.
What aboutthe trends? It has been suggestedthat the very high AfricanRUPIRs mayhave fallen
substantiallyin the 1980s,due to increasingurban poverty and reducedpolicy biases against agricultural
prices. However,there is little evidenceof this. It does not seem very plausible,because even in Africa
most of the rural poor are net food buyers. In India, there is some evidenceof a declining RUPIR,
though this is sensitiveto the choice of price deflatorsfor the 1980s [Ravallionand Subbarao (1992)].
Do RUPIRs understateor overstatethe rural-urbandifferencesin poverty? They allow only for
price-deflated private income per person. The capacity of poor people to convert such income into
well-beingis probably lower in rural areas than in towns, due to worse rural public services, notably
health care and sanitation. While the physicalquality of life index (PQLI)has its limitations(section2),
it is telling that India's urban PQLI in 1971was 61, as against a rural PQLI of 35 [Morris and McAlpin
(1982: 62)]. Infant mortality in rural India in the 1980s was 105, as against 57 in urban areas [World
Bank (1990: 31); for Africa, see A. Hill (1981: 35)]JY This, together with comparable gaps in adult
literacy rates, suggests that urban/rural ratios between poverty measures based only upon private real
consumptionor income are considerablylower than the urban/rural ratios (if such could be obtained)
between poverty measured in terms of inadequate "welfare"or "capabilities". The health gaps are in
sharp contrast to the development process in nineteenth-centuryBritain, where urban death-rates
substantiallyexceededrural rates [Williamson(1991: 127)].
Rural poverty is marked by its common conuectionto agriculture and land, whereas urban
poverty is more heterogeneousin how incomes are generated. A comparative study of seven Asian
developingcountriesin the late 1980sshowedthat the rural poor dependedmore on agriculturethan the
rural non-poor [Quibria and Srinivasan (1991)]; this has also been observed in West Africa [A. Hill
(1981); Reardon et al (1992)]. It remains importantthat one-third of rural income, and one-quarter of
employment,typicallyderive from non-farmactivities[Chutaand Liedholm(1981)],but their prosperity

42
depends substantially on forward and backward production linkages - and even more [Hazell and
Haggblade (1993), Hazell and Ramasamy(1991)]on consumptionlinkages- from farmers. Especially
in view of agriculture's high labor-intensityand relevance to local food availability and price, an
anti-ruralpoverty strategy for production activitiesshould be based substantiallyon agriculture.
No such even moderatelyhomogeneousbase for anti-povertypolicy is usuallyavailablein towns,
with their normally much more diverse pattern of activitiesand problems. It is possible to focus rural
anti-povertypolicy on improving the amount, productivity, stability, and distribution of farm inputs,
employment,and output, and their social and physical infrastructures. This is why - despite the urban
bias of public spending and personnel allocation in most LDCs - there is a much clearer and more
production-orientatedmenu of anti-povertypolicies for rural areas than for towns."5
The urban informalsector (UIS)has traditionallybeen perceivedas a residualcategory, made up
of those who have not obtainedemploymentin the "formal' urban sector, and their fortunes are linked
to those of both the rural sector and the urban formal sector through migration and remittances. In
contrast to the urban formal sector, the stylized view of the UIS is of a sub-sector with easy entry, little
unionization,no legal minimrumwages, weak safety standards at work, low physicalcapital inputs, low
reurns to labor, and mainly small (oftenfamily-based)enterprise units, typicallyproducingnon-traded
goods, disproportionatelyconsumedby the poor. However, views of the UIS have changed in the light
of new data. There is now greater recognitionof its diversity, associated with the heterogeneityof its
products, and the wide range of skills required. Large income inequalitiesare often found within the
UIS, with some UIS workers eraning far more than some formal sector workers [e.g., Telles (1993)].
In explainingpovertyin the UIS, currentthinkingputs greater emphasison individualcharacteristicssuch
as human capitalendowmentsthan on the "structural"featuresof the economyarisingout of Todaro-type
migrationequilibriumwith a fixed urban sector wage. Poverty in the rural sector tends to be explained
more by low access to physical assets (particularly land), farm technology, non-farm employment
opportumities,and health care and schooling,than by labor-marketdistortionsas in the urban sector.
Since the early 1970s, the UIS has increasinglybeen viewed as a sub-sector with substantial
growthpotentialin its own right, rather than as a temporaryholdingarea for the "reserve army" - though
that potential is often seen as greatly hampered by market failures (particularlycredit), and excessive
governmentalregWlationsand biases in favor of the formal sector, such as in the availabilityof credit.
An early and influentialexpositionof this view was ILO (1972), expandedupon in (inter alia) ILO (1985)
and de Soto (1989). This has also led to someoptimisticassessmentsof the prospectsfor reducing urban
poverty by the deliberate promotion of the UIS, e.g, through credit subsidies and protection from
competition;this has been an importantelementof industrialpolicy in India.

43
 Whilethereare likelygainsto the poor(as bothproducersandconsuimers of the servicesof the
UIS) from removingexistingpolicybiasesagainstthe UIS,' the anti-povertycase for a pro-UISbias
in policyis morecontentious.Despitethe stereotype,small-scaleurbanmanufacturingenterprisesmay
or technicallyefficientthan larger enterprisesin LDCs [Little
not significantlymore labor-intensive
(1987),Little,MazumdarandPage(1987)X.The structureof protectionacrossindustriesis nowthought
to be a far moreimportantdeteminantof aggregatelabordemand[WorldBank(1990Ch.4)].
The emphasison housingin urbananti-poverty policymightsuggestthat slum-dwelling
provides
a homogeneousenvironment,andhencean arenafor cure,for most urbanpovertyrisk - as agriculture
doesIn the case of rural povertyrisk. However,the rankingof fifteenIndianStatesby the proportion
of urbanpeoplelivingin slumsin 1981[Malhotra(1988:20)l is mildlynegativelycorrelatedwith their
correctrankingby Incidenceof urban povertyin 1983[Minhaset al. (1991: 1676)1.J Manyof the
urban poor are unaffectedby slums,andmanyof the rural poor live in quasi-slums.
The rural-urbandichotomyhas perhaps divertedsome attentionfrom even sharper regional
disparitiesin povertylevels. Large disparitiesin rural povertyincidencehave been documentedfor a
numnerof countries;for example,in Indonesiain 1990the RUPIRis estimatedto be 2.2, whilethe ratio
of the highestpovertyincidencein rural areasof anyprovinceto the lowestis 4.3 [BidaniandRavallion
(1992)J. The regionalvariationsin the incidenceof rural povertyare often stronglyassociatedwith
rainfall and dependenceon rainfedagriculture[Bardhan(1984),Webb et al (1991),Lipton (1992)1.
Regionalfactormobilityhas plainlynot equalizedpovertyrisk.

5 Growth, inequaliy and poverty

5.1 Growthandpoverty, with Inequaliyconstant
The relationshipbetweengrowthandpovertycanbe complex.Let us firstmakethe simplifying
assumptionthat all incomesgrowat the samerate. Howwillpovertyrespond?Considerthe propertie
of the classof povertymeasuresgivenby equation(1), whichcanalso be writtenin the form:"

p . P(71p, ]) (S)

where P is the measureof poverty, z is the povertyline, i is the mean of the distributionof
consumptionor income, and x is a vector of parametersfully describingthe Lorenzcurve of that
povertymeasure,the functionP is monotonicdecreasingin z,Jt,
distribution."For everywell-behaved
holdingX constant. A growthpath of the meanwhichmaintainsthe same Lorenzcurve impliesa
reductionin absolutepoverty.90Buthow rapidlywillpovertyfall?

44
 Consider the P. class. The elasticityof H (a60) with respect to the mean holdWing
the Lorenz
curve constant is -f(z)z/H,the elasticityof the CDF at z. For a 2 1, the correspondingelasticityof the
P. index w.r.t to the mean is a(l-P,/P,) (section3.3). -Table 1 estimatesthe elasticityof some poverty
measuresw.r.t. the mean for various countries. Absoluteelasticitiesof PG are in the range 1.54, and
they tend to be higher for the P2 index. Thus a 2% annual rate of growth in consumptionper person at
aUconsumptionlevels will result in a 3-8 percent rate of declinein the poverty indices.

Table 1: Elastidtes of poverty messures to mean consumption or Income

Elasticfty of poverty meaure w.r.t.

Country/year distributiontllyrutral growth in the man
Poverty gap Foster-Greer-
index ThorbeekeP2

Batlnh 1988/89 -2.9 -3.5

Neal 1984/85 -2.7 -3.2
India 1987-8a -3.0 -3.8
-i 1987
Indons -4.1 -4.8
1985
Cotod'Ivofre -2.0 -2.2
1990
Morocco -2.9 -4.0
Brazfl1986 -1.5 -1.8

oiurces: Bangtldesh: Ravalion (1990a) (tp-dated usfngdate from Bnltadesh

Bureau of Statistfes); Nepal: Caleulations for this paper from VorLd Bank
data; Indfa: Datt and RavaliUon (199Ma,e) (up-dated); Indonesia: Ravallfon
and Nuppi(1991);Cote dfIvoire: Kakwanl(1990);Brazil:Datt and Ravallion
(19928).All calculations are basedon tocalpovertylfnes.

The impact of changes in the Lorenz curve on poverty is less clear. Inequality can change
without any absolutegains or losses to the poor, and hence no change in povery. The ambiguitygoes
deeper for H (and an expositionalso illustratessome useful properties of the Lorenz curve, as defined
t Inequality increases if there is an unambiguousoutward shift in the Lorenz curve, i.e., the
above)."
changein distributionsatisfiesthe Pigou-Daltoncriterion[Atkinson(1970, 1975)]. By the properties of
the Lorenz curve, H as the value of p at which the SIM of the Lorenz curve equals z/p [Gastwlrth
(1971), Kakwani(1980a)J. An outward shift in L(pj) does not imply a lower slope at any given value

of p, nor, therefore, a higher value of H for given z/p. However, for higher-orderP,, measures(a> 1)
a clearer relationshipbetweeninequalityand povertyemerges; unambiguousoutward shifts in the Lorenz
curve at a given mean must reduce poverty.

45
5.2 Growthand inequality
Now relax the assumptionthat growth is distributionallyneutral. During the 1970sand 1980s,
it was widelybelievedthat growth in low-incomecountrieswould be inequitable. A foundationfor this
view was provided by Kuznets (1955, 1963), and has come to be known as the "Inverted U Hypothe-
sis'". This claims that a process of growth through modern (urban) sector enlargementin a dualistic
developing country will initially result in an increase in inequality, but, beyond some level of mean
income, inequality will begin to fall. This assumesthat growth proceeds under a "Kuznets process".
Specifically, the economyis conceivedof as comprisinga low-mean,low-inequalityrural sector and a
high-mean, high-inequalityurban sector, and the migrationof workers from the former to the latter is
assumed to be 'representative": a representative 'slice' of the rural distribution is transforined into a
representativeslice of the urban distribution, whilepreservingdistributionswithin each sector.
What does such a process imply aboutthe relationshipbetweengrowth and inequality? Assume
that everyone is initiallyin the rural sector. When the first (representative)sub-groupof the rural sector
moves into the urban sector under the Kuznets process inequalitywill appear that was not there before,
namely that between a typical urban resident and a typical rural resident. Inequality will increase.
Considerthe last sub-groupto leave the rural sector; the sameinequalitywill now disappear. Extending
this reasoning,an invertedU can be derived linkingcertain indicesof inequalityand the populationshare
of the urban sector can be derived [Robinson(1976), Anandand Kanbur (1984, 1993), Kakwani(1988)].
What will happento aggregatepoverty? For all additivepovertymeasures [equation(1)], if the
sub-grouppoverty index is initially higher in the rural sector then aggregatepoverty must fall under the
Kuznetsprocess." To see why, note that the aggregatecumulativedistributionfunction is given by

F(z) = n,F,(z) + nF,(z) (6)

where n, (i=u,r) and Fi (i=u,r) are the populationshares and distribution functionsfor the urban and
rural sectors respectively(where n +n,= 1). Under the Kuznets process, the distributionfunctions F1
(i=u,r) are independentof the populationshares. Thus

WF(z)/In
8 = F,(z) - F,(z) < 0 (7)

for all z. Consider the sequenceof CDFs resultingfrom successiveincrementsin n.. From (7), each

CDF will lie entirely below the previous one; all poverty measures and poverty lines will show an
unambiguousdecline in poverty (section3.3.3).
However, the poverty levels of the two sectors do not converge (the vertical distance between

46
distributionfunctionsis also unaffectedby urbanization;see equation7); this followsfrom the assumption
of representativemigration. That assumptionsimplifiesthe analytics, but it is not appealing. Relaxing
it can alter the conclusionthat modern-sectorenlargementis pro-poor. For example, Anandand Kanbur
(1985) show that in Todaro's (1969) model (in which migration is a response to the expected income
differential between sectors), aggregate poverty could increase with migration to the urban sector.'
This is because (under the Todaro model) some new migrants will fail to find formal work in the urban
sector, and will end up worse off than they would have been in the rural sector (though this is stIll an
equiibrium, since expected incomes are equalized). Dependingon the parameter values, economic
growth through urban sector enlargementmay increaseor decrease aggregatepoverty.
The way one models the migration decision could matter greatly to the results. The Todaro
model of migration is quite restrictive. A broader set of motives is now seen to underlie migration
behavior than expectedwage differentials;individualmigrationis also increasinglyseen as an outcome
of family decision-making,particularlyin responseto uninsured risks [Stark (1991)]. It is not yet clear
what this new migrationliterature implies for the effects of modern-sectorenlargementon poverty.
In another strand of researchon migration,a distinctionhas been drawn between two groups of
migrants:the moderately'rich' going to townsto seek educationand knownjobs, and the relativelypoor
who tend to go first to other rural areasor small towns, and then chain-migratetowards uncertainurban
jobs [Connellet al. (1976)]. Such data suggest that the "mainstream"urbanizationprocess may thus be
neutral, or even adverse, in its impactson aggregatepoverty.
Urbanizationis not the only way growth can occur. FollowingFields (1980)one can distinguish
three sources of growth: "modern sector enlargement", "modern sector enrichment"and "rural sector
enrichment". The latter is unambiguouslypro-poor in these models (at least while the rural sector
remains the poorer sector), whilethe effect on aggregatepoverty of modern- sector enrichment- rising
mean income in the formal urban sector, without any change in rural sector incomes - is unlikely to be
pro-poor; there willbe no changein aggregatepovertyunder Fields's (1980) assumptions(in which there
is no urban sector poverty), though under the weakerassumptionsof the Anand-Kanburmodel (in which
there is a poor urban informal sector) there will an unambiguousincrease in aggregatepoverty.
Empirical investigations(typicallyon cross-countrydata) have exploredthese issues. The early
compilation of country-level data on inequality and growth did suggest an inverted U relationship
[Adelman and Morris (1973), Paukert (1973), Ahluwalia (1976), Tsaldoglou (1986)]. However, the
robustnessof these results (such as to the choice of inequality index)has been questioned[Anand and
Kanbur (1993)]. Other studies have not supported the view that inequality will increase in the early
stages of development;from the (imited) time-seriesevidence, it appearsto be just as likely to decrease

47
 [Saith (1983), Fields (1989), World Bank (1990, Ch. 3)]. A careful study that providedsome statistical
support for the inverted U [Lecaillonet al (1983)1suggeststhat the impacton poverty is small, since the
changesin distributionamongstthe 'poorest' 95% of persons were negligible. The current consensus
is that several factors influencethe effects of growth on inequality, notably the initial distribution of
physical and human assets, the way the growth process influencesthe returns to those assets, and the
effectivenessof governmentalredistributivepolicies [Frank and Webb (1977)].
However, even when growth has been associatedwith rising inequality, it appearsthat poverty
has usually fallen [Fields (1989), Wor'd Bank (1990, Chapter 3)]. The comparabilityover time and
across countries of some of the poverty measuresused in such comparisonsis questionable. One recent
study has looked at the experienceof 16 countriesfor which distributionaldata were available for two
points in time during the 1980sfrom nationallyrepresentativehouseholdsurveys [Chen et al. (1993)].
Poverty measureswere estimatedusing the samereal poverty line at each date, with constantpurchasing
power exchange rates to assure that the poverty lines have similar real value across countries, and the
estimationmethodsadjustedfor some of the comparabilityproblems,and allowedfor measurementerrors
in the underlyinghousehold surveys.' About 60% of the variancein the rate of reduction of the head-
count index of poverty could be attributed to differences in the rate of growth in mean household
consumptionper capita;changesin relative inequalities,and differencesin initial conditions(determining
how responsivepoverty is to growth and/or redistribution),accountedfor almost all of the rest of the
variance in rates of progress in reducingpoverty. The regression of rates of poverty reduction against
rates of growth in mean householdconsumptionimpliedan elastictiyof -2, though this was also found
to vary considerablybetween countries, reflectingdifferencesin initial conditions[Chen et al. (1993)1.
However, short-runelastictywith respectto growth in nationalincomeis probably somewhatlower than
this figure, due to consumptionsmoothing.
The abovestrand of the literaturehas concernedhow growth affectsinequality(as one of the links
from growth to poverty). The reverse causation- from initial inequalitiesto growth - has received less
attention. Initial inequalitiesin the ownershipof human and physicalassets will influenceinitialmarket
outcomesEd the efficiencyof those outcomes[Hoff(1992)]. Thus one would expect that the extent and
type of economicgrowth would also depend on initial inequalities, though a unified theory is not yet
available. This link has arisen in a numberof models. A classic argumentassumesthat savingsfunctions
are non-linear, in whichcase aggregatesavingswilldependon the distributionof income. If the marginal
propensity to save rises with income and the growth rate is determinedby the aggregate rate of saving
(though these are stronger assumptionsthan may appear at first glance) then there will be a trade-off
betweenequalityand growth. However,the linkbetweeninequalityand savingsrates is weak [Gersovitz

48
 (1988)1. There are also examplesof the oppositeresult. Withincompletemarkets, there will be potential
efficiencygains from redistribution[Geanakoplosand Polemarchakis(1986), Hoff (1992)1. Equalizing
redistributionsof wealth can increase aggregateoutput in a competitiveeconomy under the efficiency
wage hypothesis rDasgupta and Ray (1987)]. Under certain restrictions on preferences, the initial
compositionof demand (itself influencedby the initialdistributionof assets) will also influencethe type
of growth observed [Murphy et al (1989), Eswaran and Kotwal (1991), Falkinger (1992)], with the
prediction that high initial inequalitycan impede the prospects for a pro-poor growth process. The
political economyof conflicts over distribution can also lead to a similar prediction, and there is some
supportive evidence in country experience since the mid-1960s; countries with more equal initial
distributionsappear to have grown faster [Persson and Tabellini(1991)].9 However, there is still much
we do not know about the link between initial conditionsand growth, let alone the policy implications.

5.3 The sectoralpaern of growth

Some observers have read the recent evidence,that economicgrowth is rarely associated with
sufficientlyadverse changesin relative inequalitiesto preventa declinein absolutepoverty, as suggesting
that the role of governmentin reducingpoverty can safely be confinedto promotinggrowth. That does
not follow. Even though past growth has often helped reducepoverty, some growth processes may do
so more effectivelythan others. One potential role of governmentis then to foster a pattern of growth
conduciveto poverty alleviation.
The sectoral and regional pattern of investment- and hence of the resulting income gains - has
often been identifiedas an importantpolicy instrument. It is now widelybelievedthat many LDCs could
grow faster, as well as more equitably, by shifting investments towards rural, labor-intensive or
'backward activities(section2). However, such a shift need not indefinitelyincreasemean income VA
reduce poverty, because rates of return (as conventionallycalculated)to investmentsacross sectors or
regions need not remain positivelycorrelated with the relevantpoverty indicators.
How much impacton aggregatepoverty is possible by alteringthe sectoral pattern of economic
growth? The answer depends in part on the growth performance of existing allocationsof investment.
If past policies have been biased against growth in regions or sectors where it would have a high return
and it would benefit the poor, then suitable policy reforms may allow bgt higher impacts on current
poverty, and higher rates of growth and, hence, poverty alleviation in the future. There is strong
evidence that this is so in a number of developing countries, notably those which have followed
excessively capital-intensive, pro-urban development strategies through a variety of pricing and
expenditurepolicies [Lipton (1977), Krueger et al. (1988), World Bank (1990, 1991c)].

49
 The key sector identified for pro-poor growth in most LDCs is the rural farming sector.
Agriculturalgrowth, especiallygrowth and stabilizationof food staples production, is likely to benefit
poor people. First, most of the poor - includingthe iural poor - are net food buyers. Smooth and ample
local food supplies, even in open economies,carry specialadvantagesfor them, especially'f international
or nationaltransport costs per ton of food staplesare high. Second, while poor people's entitlementsto
food (rather than local availabilityper se) determinetheir nutritionallevels [Sen (1981a)], poor people's
rural exchange entitlementsdepend largely on earningsfrom growing food.
The empiricaldebate on the effectof agriculturalgrowth on rural poverty continues.7 Counter-
examples to the propositionthat agricultural growth is necessarilypro-poor do exist.' These indicate
that there are some importantcontingentfactorsthat mediatebetweensome forms of growth and poverty
reduction [Prahladachar(1983)emphasizesappropriaterural institutions]. It is also unclear to what extent
agro-technical progress and the nature of rural institutions can be viewed as exogenous in this
relationship.' This has implicationsfor the type of policies that are needed to promote agricultural
growth, though it need not dull the motivationfor a pro-rural emphasisin anti-povertystrategies. The
balance of evidenceis that, globally [Binswangerand von Braun (1993)]and in importantspecific cases
such as India [Mellor and Desai (1985), van de Walle (1985)], times and places of relatively high
(growing)farm output, especiallyfood output, per acre and per worker, have also featuredrelativelylow
(alling) rural poverty."° High-yieldingcereal varietieshave clearly benefitedthe poor, by restraining
food prices, providingrural work, and raising incomesof small farms; but doubts remain about impacts
on regions and countriesunable to adoptHYVs, and on the stabilityof incomesand output [Liptonwith
Longhurst (1989)1. Tractorizationand other labor-displacingsources of agricultural cost reduction,
especiallyif subsidized,are likely to harm the poor, on balance. The impact of irrigation on poverty
depends on the technical featuresof the type of systcm used [Narainand Roy (1980)].
In manyLDCs the policy environmenthas, however, beendecidedlybiasedagainstthe rural farm
sector. Three sources of such a bias can be identified: i) the direct effect of sector-specificpricing
policies, appearing as a wedge between domestic producer prices and border prices for agricultural
outputs; ii) the direct effect of non-price, sector-specific,policies, such as public spending on roads,
schools,services, research etc; and iii) the indirecteffect on the farm sector of economy-widedistortions
operating through exchange rate and external trade policies. The latter bias is more subtle, though it
should be evident in the real exchangerate (the price of tradables - typically includingmost agricultural
outputs - relative to non-tradables)but policiesto protect the manufacturingsector will also depress the
relativeprice of farm outputs. Krueger et al (1988)look at price biases [(i) and (iii), though not (ii)] for
18 developingcountriesin the period 1975-84and find that the indirect effect is stronger than the direct

50
price effect. It would be interestingto expand such an inquiry to include the direct non-price biases,
particularly through the allocationof public spendingon physicaland social infrastructure.
However, once the possibilitiesfor policy reforms eliminatingthese biases have been exploited
(and their reform has been the aim of adjustmentlendingsince the early 1980s;see section5.4), further
targeting of the pattern of growth will probably entail some loss of growth potential. One can still be
readily willing to pay that cost if such targeting has sufficient impact on poverty, relative to the
alternativepolicies. This is a relativelyunexploredarea. To better assess the case for a reverse bias in
favor of rural areas or labor-intensiveproducts, one needs to know more about both its growth costs and
the poverty alleviationbenefits. This informationis not easily obtained. But let us make a couple of
assumptionswhich will load the case in favor of sectoral targeting, so we can at least get some idea of
the poenial benefits. The case for such targeting is questionableif factor mobility is perfect across
sectors or regions. Let us assume that factors are immobile, and that the growth cost of targeting is
negligible. How then is poverty affectedby redistributingaggregateincomesacross regions or sectors?
For India, Datt and Ravallion(1991a) considerthe effects on poverty of transfers among states,
and betweenrural and urban areas. Effects on pre-transferincomesand price effectsare ignored. They
find that the oualitat effect of reducing regional/sectoral disparities in average living standards
generally favors the poor. However, the quantitativ gains are small. For example,the eliminationof
regional disparities in the means across 20 states of India, with each state divided into urban and rural
areas, while holding ia?a-regional inequalities constant, would yield only a small reduction in the
proportionof persons below the poverty line, from an initial 33% to 32%. Regional/sectoraltargeting
may thus be quite a blunt instrument for aggregatepoverty alleviation,although when administrative
capabilitiesallow finer geographical targeting the gains will increase.'l Growth costs of shifting
resourcesout of more profitablelocations- once the gains from eliminatingexistingdistortionshave been
exhausted- are likely to reduce the gains to the poor.
Such experimentsare at best suggestive;providedits growth cost is not too large, regional and
sectoral targetingcan reduce poverty. But the aboveestimatesof the benefits under ideal conditionsdo
make one rather sanguine aboutthe prospects for a really significantreduction in aggregatepoverty by
this means, beyond the likely gains from removingpolicy biases againstthe rural sector.
Cross-sectorallinks have played little role in the literature surveyed above. These can arise in
a numberof ways, includingmigrationacross regions, and remittances. The key questionfor the present
discussion is: to what extent do sectorallyspecific anti-povertypolicies spill over to the poor in other
sectors? Ravallion (1990d) looks at both intra- and inter- sectoral effects of anti-hunger policies in a
dualistic developing economy, with linkagesarising through a migration equilibrium',ndition; in this

51
 case the cross-sectorallinkage creates multipliereffects which enhance impacts on the poor. Modelsof
remittance behavior have suggested the opposite conclusion; policy interventions induce behavioral
responses which dampen the net gains [Cox and Jimenez (1992)].

5.4 Macroeconomicadjustmentand poverty

For most LDCs, the 1980ssaw macroeconomicinstability,with rapidlyrising servicingcosts on
foreign debt, external terms-of-tradeshocks, and rising fiscal and external imbalances entailing an
unsustainableexcess of aggregatedemandover supply."'° An "adjustmentprogram" is a set of policies
to restore macroeconomicbalance. The program combines fiscal contraction - cutting government
spending and/or raising taxes - with supply-sidemeasuresaimed at reducing inefficiency(cutting, for
example, trade distortionsor wastefulparastatalorganizations,or removing trade distortions).
Unless there is a rapid supply-sideresponse,or the cuts are solely in government investment[a
strategy followedby some adjustingcountries; see WorldBank (1990, Ch.7)%,somebody's consumption
must fall. Lack of adjustmentmay thus be an attractiveshort-termoption, though there must eventually
be a (potentiallyhard) landing. The ultimate case for an adjustmentprogramdepends on showingthat
the present social value of the future sequenceof consumptionsis higher with adjustmentthan without.
How will adjustment (relative to not adjusting) affect the poor? To what extent are those impacts
contingenton the initial conditionsof an economyand the details of policy reform?

5.4.1 Theory
The mainmodelunderlyingdiscussionsof the effectsof adjustmenton real incomesidentifiestwo
categories of goods: taded and non-traded. Only for the latter do domestic demand and supply
conditions affect price.'° Adjustmentwill reduce domestic demand for both traded and non-traded
goods. Producers of traded goodscan sell to foreignersinstead, but producers of non-tradedgoods will
initially suffer unemploymentand reduced incomes. To restore full employment,the price of the non-
traded goods must fall, relative to the traded goods - a real devaluation. This stimulatesa switch in
domestic demandfrom traded to non-tradedgoods, and the oppositeswitch in domesticproduction.
How will this process affect the incomesof the poor? Assumethat the poor are net suppliers of
labor, and fairly mobile acrosssectors. From what we knowaboutthe characteristicsof the poor in most
developingcountries, these assumptionsare believable (section4.2) though there are exceptions, which
we commenton below. Then, from the Stolper-Samuelsontheorem, the real wage of labor will rise
during the adjustmentif (and only if) the traded goods sector is more labor-intensivethan the non-traded
goods sector.' Most policy discussionsassume this (because LDCs' comparative advantagelies in

52
labor-intensiveproducts), and therefore predict that the poor will gain as employeesfrom the relative
price shifts associatedwith adjustment.
That predictionmust be qualified. If domesticprices (bothoutputs and inputs) are flexible, and
labor is mobile, then the process will be rapid. However, in reality, some prices adjust sluggishlyand
there are impedimentsto labor mobility;structural adjustmentis very unlikely to remove all distortions.
Some sectorsof the economy,with flexibleprices, willfare differentlyduring adjustmentto other sectors,
where significantunemploymentmaypersist. Then we mustask: are the poor concentratedin the sectors
with relativelyflexibleprices. A commonand plausiblecharacterizationof developingcountries is that
the rural sector tends to have flexibleprices, while the modem sector has more rigid prices. Given that
poverty tends to be concentratedmore in the rural sector, this suggests that the positive impacts of
adjustmentvia wages and employmentmay be felt quite quickly in the rural sector.105
However, it is not just this responsethat matters, but how much the poor must pay for the goods
they consume. If they do not consumetraded goods, then the welfareoutcome is clear: commandover
non-tradedgoods must rise. More generally, the directionof the change in welfare for a worker will
depend on the magnitudeof the real-wage response relative to the share of income devoted to traded
goods.
A key category of goods for the poor is food staples. The commonpresumptionis that (except
for most roots and tubers) these goodsare tradable. Then staple food prices rise during adjustment. In
most countries,however, the poor are quite heterogeneouswith respect to their trading position in food
markets (section 4.2).10 Some will gain and some will lose, and the assessment may then depend
cruciallyon interpersonalcomparisonsof welfare amongstthe poor (section 3.3).
Also, food staples sometimes behave more like non-traded goods in the short term, because
government food storage policies buffer domestic food prices from fluctuationsin world prices, or
because internal market integrationis impeded by inadequaterural infrastructure[World Bank (1990,
ch.7)1. Short-termwelfare impacts may thus be in oppositedirectionto long-term impacts.
The welfare impactsof adjustmentwill also dependon how public expendituresare cut. If the
poor initially benefit little from public spending, then they will lose little from the cuts. That, however,
is often not plausible. Though often poorly targeted, public expenditurein most developingcountries
does yieldpotentiallyimportantgains to the poor. Unlessadjustmentis to be associatedwith a short-term
increase in poverty, public expenditurecuts will have to spare such programs. Several countries have
combined aggregate budget contraction with rising shares (and occasionallyrising absolute levels) of
public spending in the social sectors, includingtargeted transfers."" Elsewhere, 'golden handshakes'
to retrenched workers figure prominently in compensatorypackages, even though such workers are

53
neither poor nor evidentlythreatenedby poverty.140
However, the role of policy here goes well beyond compensatingthe poor for direct losses from
adjustment. Complementaritiesoften exist betweenthe compositionof public spending and the benefits
to the poor of structural adjustment. The supply responseof farmers to higher prices of traded goods
will typically depend on the quality of supportiveinfrastructure(both physical infrastructure, such as
roads, and information),and there are compellingargumentsfor believingthat such infrastructurewould
09 Yet the fiscal "crunch" of adjustmentoften
generally be under-providedwithoutpublic provisioning."
tempts governmentsto cut exactly these infrastructuralsectors.
For these reasons, we shouldbe wary of simple theoreticalargumentsaboutthe welfare impacts
of adjustment. They can offer a useful guideto thinking, but evidencewill typicallybe neededto resolve
the issues; it is difficult to obtain. Fortunately, great strides have been made since the early 1980sin
collectingthe sort of householdlevel data that can informthesequestionsfor developingcountries. Also,
adjustmentlendingto LDCs now commonlyincludesresources for collectingsuch data, and monitoring
welfare impacts.110 Few of the issues can be resolved 1WIxby such data; both theory and casual
will remain essential. However,householdsurveyshave often helped to resolve ambiguities
eampiricism
about impacts of policy reform on the poor.

S.4.2 Evidence
Much of the impact of adjustment on the poor is mediated through its impact on economic
growth. Some household-levelevidenceon the evolutionof poverty indicatorsduring adjustmentis now
1'
available." One of the few clear pattens is that the head-count index tends to move with mean
consumptionor income of households;poverty increasesduring recession, and it falls during recovery,
e.g., in Latin America [Morley (1992a,b)) and East Asia [Ravallionand Huppi (1991), Demery and
Demery (1991)1. For an analysisacross 16 countries in the 1980ssee Chen et al. (1993).
Such observationsdo not, however, tell us the impactof adjusting relative to what would have
happened under the counterfactualof not adjusting. One careful study of Peru's decision to avoid
stabilizationduring the 1980sfound sharply worseningliving standards of the poor [Glewweand Hall
(1992)1. Yet we do not knowhow different the outcomewouldhave been under a stabilizationprogram.
To the extentthat the changein mean incomeis typicallythe main correlateof changesin poverty
measures, a key question is: did adjustmentraise or lower the rate of growth? The answer depends on
the speed of supply-sideadjustment. That depends on initial conditionsin the economy, notably the
flexibilityof price adjustmentand the state of physicaland social infrastructure. Normally, adjustment
is associatedwith initiallyslowergrowth, and hencepresumablywith more poverty in the short term than

54
non-adJustment.The longer-termanswerwilldependon how long it takesfor growthto be restored.
Distributionalshifts can have an Importantimpact. In Brazil,distributionalshiftsduringthe
1980ssignificantlyworsenedtheeffectsof fallinggrowthon poverty[DattandRavallion(1992a)].Yet
a slightimprovementin distributionhelped thepoorin Indonesia[RavallionandHuppi(1991)J.Dorosh
and Sahn (1993)find that the distributionaleffectsof real devaluationswill tend to be pro-poorin a
numberof Africancountries,sincethe rural poortend to be net producersof tradablegoods.
The distributionalimpactsof adjustmentdependheavilyoi the economy'sinitialconditions,
particularlyits openness,and the extentof flexibilityin its outputand factor markets. For example,
CostaRica's large,open, andlabor-intensive tradedgoodssectorallowedthe poor to benefitfromreal
devaluation;oppositeconc.tionsin ArgentinaandVenezualainduceddistributional shifts,associatedwith
adjustment,far less advantageous to the poor [Morleyand Alvarez(1992)]. The importanceof price
flexibilityis alsoclearfromthe resultsofBourguignon et al (1991)for Morocco,whocontrastthe effects
of adjustmentunder a 'fix-price' closure- fixedprices in the modernsectorand flexiblepricesin the
rural sector- witha standardWalrasianclosure. Impactson the poordiffergreatly. Withthe fix-price
closure,quantityadjustmentslargelydeterminethe distributionalimplications.
Thepolicyresponse,particularlyin thecompsitin of publicexpenditurecuts,cangreatlyaffect
the povertyoutcomesof adjustment. For example,the carefulmix of public spendingcuts during
adjustmentinIndonesia,andthe rapidcurrencydevaluations,helpedmitigatetheshort-termconsequences
for the poor of declininggrowthr[horbecke(1991)].
Ourunderstanding ofdistributional
changesduringadjustmenthas beenilluminated by combining
directobservations, basedlargelyon householdlevelsurveys,withmodelsof alternativepolicypackages,
typically in a general equilibrium(GE) model [Demeryand Demery (1991), Thorbecke(1991),
Bourguignon et al. (1991a,b)j. Eachmodeof analysishas its strengthsandweaknesses:household-level
analysistellsus aboutactualimpacts,andaboutkeyparameters;theaggregatemodelssimulatealternative
policies. To be computable,the aggregatemodelsmustsacrificerealism,and the assumptionsneednot
be innocuous.For example,it is commonly effectsareneutralwithinsectors;
assumedthatdistributional
the evolutionof sector meanincomesdrivesthe aggregatedistribution. However,in one test of this
assumptionusinghouseholddata(for Indonesia),there was a greatdeal of distributionalchangewithin
sectorsduringadjustment[Huppiand Ravallion(1991)].
A classof 'meso' level analyseshave also emerged. Theseare less ambitiousthan the GE
models,but still isolatethe mostrelevantlinksof policyto welfare. For example,one mightask what
the distributionaleffectsare of an increasein food staplesprices allowingwage rates to adjust, but
112
assumingthat other inputand outputpricesare unchanged. Comparedto a full-blownGE model,

55
 such analysis loses detail in the channelstrar4smittingpolicy changesto households, but it can often be
tailored more closely to time series evidenceon the way prices move with each other and on detailed
household level parametersestimatedfrom cross-sectionalsurveys.
In these models, the link betweeneconomy-widevariablesand householdincomesis through the
budget constraint and the supply functions for goods and labor. Theoretically, this link is well
understood,and supportsmuchof the economicanalysisbehindpolicy discussionsof the welfare impacts
of adjustment;yet some importantissuesremain poorly understood. For example,the popularity of the
Stolper-Samuelsontheorem in studyingthe distributionalimpactof real devaluationsrests on its power
in identifyingeffectson current factor prices. However, this approachdoes not sit comfortablywith the
abundantrecent evidencefrom microeconomicstudiesand less formal anthropologicalinvestigationsthat
behavioralresponses intervenebetweenprice changesand living standards (sections4.2 and 6.3).
Theway householdliving standardsare measuredis critical. Most studies concur that the best
single indicator is not income, but consumption(section 3.1). This is the outcome of intertmporal
choices by individuals or households. Yet policy discussions about how adjustment affects living
standardsoften assumethat incomeand price effectsimpact immediatelyon living standards. Under the
standardformulationof the consumer's choiceproblem, consumptionresponds to income changesin so
far as they alter life-timewealth;the current impactof a transientincomechange is slight. There remains
much that we do not know about the link between macroeconomicconditionsand living standards.

6 Interventions
The desire to reducepoverty has been used to justify various direct policy interventionsby LDC
go,,;ernments. How well have the specificforms of interventionworked? This sectioncannot survey the
full range of interventions. It seeks only to illustratethe argumentsfor and against them, and to give
detail on a few examples. We focus on the rural sector, recognizingthat - judged by a typical LDC's
poverty profile - rural poverty shouldhave higher priority (section4.6). 113

6.1 Evaluaingtargetedintervendons
Many of the problemsin evaluatingtargetedschemesare commonto other policies;for example,
it is often difficult to quantify the counterfactualof what would have happened without intervention.1'
Here we commentsolely on some selectedissuesconcerninganti-povertypolicies in LDCs.
Most recent policy discussionsagree that anti-povertyschemesshould aim for *cost-effective-
ness", either by maximizingthe gains to the poor for a given revenue cost, or by minimizingthe cost of
a given impact on poverty [World Bank (1990, ch. 6)1. An advantageof this criterion is that one does

56
not haveto spell out any trade-offsbetweenone policyobjective,say poverty reduction, and others. One
Is concernedsolelywith efficiencyin attaininga given objective;could one achievegreater impactat the
same cost? But there Is a potential hazard, particularly when efficiencyrankings of policies alter with
changesin the revenue cost; the most efficientpolicy for one outlay need not be the most efficient for
all, and then one must specifythe trade-offbetween poverty and revenue to rank policies.
In formulatingobjectives,value-judgementsconcerninginterpersonalcomparisonsamongstthe
poor can also affect the policy choice. Should a public employmentscheme aim for the widest possible
coverage amongst the poor, recognizingthat this may entail very low wage rates, or should it aim to
allow a smaller numberof participantsto escapepoverty, by settinga higherwage rate? The answer can
be shown to depend on the available budget, administrativecost, the initial wage distribution, jd the
policy maker's ethical aversionto poverty-severity[Ravallion(1991b)].
A popular policy recommendation for more cost-effective interventions has been "better
targeting", meaning that more of the poor and/or fewer of the non-poor gain. Householdsurvey data
have shown that benefits of undifferentiatedtransfers (such as general food subsidies) often go
disproportionatelytothe non-poor[e.g., Grosh (1991)]. However, this does not mean that targetingwill
have a greater impact on poverty. Participationin a targeted scheme can be far more costlythan an un-
targeted scheme. If the costs of participation(embodyingbehavioralresponses)and the administrative
costs are high enough, then better targetingwill diminishcost-effectivenessin reducingpoverty [Besley
and Kanbur (1993)]. Empirically,the size of those costswill dependon the responsesof participantsand
others; for example, intra-household time allocation responds to new "workfare" employment
opportunitiesin rural India in ways which diminishthe foregone income [Datt and Ravallion(1992b)J.
Targeting can also undermine political support and funding for anti-poverty policies. For
example,the switchfrom universal food subsidiesto targeted food stamps in Sri Lanka in the late 1970s
was associated with a substantialcontractionin real funding over subsequentyears; many of the poor
ended up with a larger share of a smaller cake, and absolutelyworse off [Besleyand Kanbur (1993)].
However, one should be wary of oversimplifyingthe political economyof targeting,as the set of people
who will support an efficientanti-povertyscheme is often far larger than the set of direct beneficiaries;
for example, rural landlords and the urban rich have supported rural relief work schemes in India
[Echeverri-Gent(1988), Ravallion(1991a)].
Policy discussionshave also distinguisheda scheme'sabilityto avoid "type 1 errors" (incorrectly
classifyinga person as poor) versus "type 2 errors" (incorrectlyclassifyinga person as not poor) [Cornia
and Stewart (1992)]. The valuesone attachesto these two errors in targeting are implicitin the poverty
measure one uses;g' the concern with these errors arises because an appropriate measure of poverty

57
did not fail as muchas it couldhave. The essentialmessagefrom this strandof the recenttargeting
literatureis that, whilewe shouldbe concernedwithavoidingleakageto the non-poor,we shouldalso
aim for a desirablecoverageamongstthe poor. Povertymeasurement shouldreflectboth concerns.
There can be no presumptionthat the most cost-effectivepolicy has the lowest "errors of
targeting". Giventhat theremaybe significantcostsof targeting,the deliberateintroductionof leakage
or imperfectcoverage(allowinga reductionin those costs)may well allowa greatertotal impacton
povertyfor a givenbudgetaryouday. Oneshouldbe waryof assessmentsof targetedschemesbasedon
their abilityto "concentrate"benefitson (say)the poorest40% [e.g., Grosh(1992)1.This is only one
determinantof a policy'simpacton poverty.

6.2 Mediodsof targeting

Administrative costsandrelatedconstraintson policyinstrumentsare nowwidelyappreciatedin
analyticaldiscussionsof targetedpolicies. Theseconstraintsare particularlyrelevantin underdeveloped
rural economies. In rural sectorsand the urban informalsector, negativeincometaxes are seldom
feasible. Sometimesa meanstest is imposed,but withoutthe administrative capabilityto implementit
convincingly.And evenwiththat capability,this type of schemewill entailhigh marginaltax rates on
the poor.116 Boththe problemsof observingincomesandthe incentiveeffectsof meanstestinghave
ledto a varietyof schemesfor "indicatortargeting"wherebytransfersare madecontingenton correlates
of poverty,suchas landholding,caste,or place of residence[Besleyand Kanbur(1993)].
Regionaltargetingof transfershas attractions.Substantial
regionaldisparitiesin livingstandards
are commonin developingcountries,and backwardareas can oftenbe readilyidentified. Place of
residencemay thusbe a usefulindicatorof poverty. It canbe manipulatedby migration,whichmay or
maynotreducethe impacton poverty. Localgovernmentsprovidean administrative apparatus.Thishas
alreadybeenexploitedin manyLDCs. For example,the allocationof centralgovernmentdisbursements
across states in India has been determined,in part, by regionaldisparitiesin poverty. Section5.3
disused suchinterventionsin the contextof regional/sectoral 'growth targgeting";
the samecomments
applyhere: whileregionaltargetingof transferscanhelp reducepovertyin developingcountriesif the
growthcostis not too large, it maybe a relativelybluntpolicyinstrumenton its own.
In muchof Asia, and increasing!yin Sub-SaharanAfrica,the mostpromisingsingleadditional
class. Wherelandandwaterarereasonablyadequateandreliable,one
indicatoris probablyland-holding
observesa strongnegativecorrelationbetweenland-holdingand poverty,especiallyin muchof rural
SouthAsia. This has motivatedinterestin a varietyof forms of 'land-contingenttargeting",such as
certainlandreforms,andtransferpaymentsto thelandless(section6.4.1). Thereare inherentlimitations

58
to such targeting; landholdingis an imperfectcorrelateof poverty. Simulationsconfirm the advantages
of targeting poverty alleviation schemes in Bangladeshtoward households owning little or no land
[Ravallion(1989a), Ravallionand Sen (1992)], but also highlight the limitations. Even with complete
control over the distributionof income across (but not within) 10 landholdingclasses in Bangladesh,the
maximumreductionin the aggregateseverityof poverty which is attainablethis way is no more than one
could obtain by an untargeted lump-sum gain to all householdsof about one tenth of mean income
[Ravallion(1989a)1. Various factorsmay enhancethe poverty alleviationimpact,such as any effectsof
the in(. me or wealth gains on future productivityof the poor."17 Other factors will detract from that
impact. For example, plausible restrictions on the government's redistributivepowers would further
diminishthe gains to the poor from such policies. There may be potential for combiningland-contingent
targeting with other types of targeting. For example, there are poor even amongst households with
relatively large landholdingsin Bangladesh[Ravallion(1989a)1. If these householdscan be identified
with reasonableprecisionby other indicators,such as regionof residence, thengreater povertyalleviation
wouldbe informationallyfeasible in practice.
The prospects for reaching the poor also depend crucially on the institutional environment,
includinglocal administrativecapabilities,the incentivesfacinglocal administrators,their socialrelations
with the poor, and the extent of empowermentof the poor, through both governmental and non-
governmentalrepresentation. Options for seemingly effectiveadministrativetargetingat local level do
arise in some settings. For example, since 1980, the Indian state of Kerala has provided a pension to
agricultural workers over 60 who have low self-reported incomes (includingthat of unmarried adult
children). An official local committee including representativesof minority groups is in charge of
verification [Gulati (1990)1. Future comparativeresearch could reveal how much the institutional
enviromnentconstrictspovertyalleviationpossibilities;when comparedto autocraticstructuresof power,
what are the gains from broad-based participatory forms of local political organization in which
representativesand administratorsface incentivesconsistentwith poverty alleviation,and can an open
political environmentprovide suitable checkson their efforts? For example,comparingthe experiences
of India and China, it appears that democracy and freedom of the press can facilitate public action to
prevent or relieve famines [Dreze and Sen (1989)].
Disappointmentwith the prospects for poverty alleviationusing administrativelyand politically
feasible forms of indicator targeting has re-kindled interest in self-targeting. This works by creating
incentiveswhich encourageparticipationonly by the poor. This is illustratedby one of the oldest anti-
poverty schemes: relief work.118 The argument is not that such work alleviates poverty by creating
assets (though all the better if it does), but that work requirementscan provide seemingly excellent

59
incentivesfor self-targeting;the reservationwage rate for unskilledmanual work is negativelycorrelated
with poverty. Some of the largest schemesin South Asia have done well in screeningpoor from non-
poor [Ravallion (1991)1119
at modest administrativecost. There may be lessons for achievingbetter
targetingof other public services. For example,publichealth servicescan be better targeted to the poor
if waiting rooms provide only minimal comforts. Fair-priceoutlets, free clinics, etc., can be located in
the poorest areas (thus combiningindicatortargetingwith self-targeting). Under certain conditions, the
rationing of food or health subsidies by queuing can also be self-targeting[Alderman (1987)], as can
subsidizinginferiorfood staples. However,none of these mechanismsis perfect: the poor maybe unable
to afford the work loss in queuing;the rich mayjump the queue, or send their servants to queue.
There are two main caveats about self-targeted schemes. First, they screen participants by
imposinga cost on them; good schemesensure that the cost is higher for the non-poor than the poor (so
that it is the poor who tend to participate),but it may not be inconsequentialto the poor. An important
cost is foregone income. We know little about its magnitudefor rural public works schemes, though it
is unlikely to be zero; the poor can rarely afford to be idle. Estimatesfor South Asia suggestthat the
net income transfermay be only half of the direct gain in earnings [Ravallion(1991)1. A recent estimate
using survey data for two Maharashtranvillages found that the foregone income from employmenton
public works schemes was quite low - around one quarter of gross wage earnings; most of the time
displaced was in domesticlabor, leisure and unemployment[Datt and Ravallion(1992b)].
Second, some sub-groupsof the poor are not willing to participatein workfare schemes, often
becausethey are physicallyunable to do such work. The non-poorare screened out, but so are some of
the poor. Fortunately there are some obvious, relatively non-manipulatableand easily monitored,
characteristicsfor identifyingsuch households,such as physicaldisabilityand old age. A combination
of self-selectionthrough relief work and indicatortargeting based on such characteristicscould provide
a fairly comprehensivesafety net for the poor [Dreze and Sen (1989)1.

6.3 Transientpoverty
A distinctionis often made betweenattempts to reduce transient poverty (experiencedfor only
a short period of time) versus chronic poverty (experiencedover a long period). Both sorts of poverty
are usually substantial in LDCs,'" though their relative importance depends on how well existing
consumptionsmoothingand insurancearrangementswork. Individuals- including, perhaps especially,
the risk-prone rural poor - act, and set up demandfor local institutions,to defend themselvesfrom both
expectedand unexpectedfluctuationsin well-being(section4.5). Hencethe need to crowd in, not crowd
out, private and communityadjustments to fluctuations (as to much else) is an important theme of

60
anti-povertypolicy [Morris(1974)]. However,evenif optimalindividually,most risk-avoidingresponses
are costly, and reduce the private prospects of escapingpoverty; for example, low-risk crops normally
produce low expectedincomes. Socialinsurancecan exist withoutmarketsor governments,but how well
does it work? Community-basedrisk-sharingarrangementsmay well be less prone to moral hazard and
adverse selection(in traditionalvillage settingsin which participantsare well knownto each other), but
they must still be implementablewithout binding, legally enforceable contracts. This fact constrains
performance for the poor, particularly in spells of transient poverty, or when the threat of destitution
reduces the probability of continued participation in social insurance [Coate and Ravallion (1993),
Fafchamps(1992), Besley's chapter]. All this mayjustify, evenon pure efficiencycriteria, public actions
to partly insure or subsidizepoor people's productionrisks, or to reduce or insure their "background'
risks to health or food security.
What form should such actions take? There are many examples of ineffective interventions.
Governments often try to stabilize foodgrain prices during a famine by banning "hoarding' and
"profiteering";even when current storageis excessive(relativeto a rational expectationof future price)
this policy can fall dismally, even makingmatters worse. A far better approach is to work directly on
current and future food availability, to undermine any destabilizingspeculation. Understandinghow
foodgrainmarkets actually work - and how public action can enable them to work better - is often the
key to successin famine relief [Ravallion(1987)].
Compensatingthe victims is anotherapproachwith mixedresults. Crop insuranceoften succumbs
to problemsof moral hazard [Hazellet al.(1986),Walker et al.(1986)]. Also, it is not obviouswhy this
form of fluctuation should be favored; some of its poor victims might have had good fortune in other
respects, whilefarmworkers- usually poorer, and (via unemployment)worst affected by yield decline -
are unprotectedby crop insurance. There are other options, such as social security[Ahmadet al (1991)],
includingrural public works and employmentguaranteeschemesreadily "switched in' during bad times
[Ravallion(1991a)]. All such approachesface issuesof (i) cost containment,(ii) avoidanceof perverse
incentives (includingmoral hazard), (iii) ensuring coverage of the needy, while not discouraging the
emergence of insurance markets for the better-off, (iv) distributing scarce public resources fairly and
efficientlyamong types of events for which compensationmight be importantto the poor.
Policy may also shift resources toward low-risk areas, or risk-reducing inputs. Agricultural
research, irrigation, or roads may be diverted to rural areas with relatively low variability in poor
people's incomes: Punjab in India, Central Luzon in the Philippines,Sonora in Mexico. This approach
aims, in part, to encourage migration away from riskier environments,but mainly to place a larger
proportion of output and income in "safer" districts. Yet such "bettingon the safe" may paradoxically

61
 increasethe variabilityof gal farmoutputandincome,dueto the covarianceamongthe districts- often
climaticallysimilar - into whichthe policy has concentrateda larger proportionof farm outputand
income[Hazell(1982)].Moreover,unlessthe poorrespondwithsubstantialmigrationtowardstheareas
of low fluctuations,there may be a perversepovertyimpactfrom concentratingresourcesupon such
areas,whereinitialpovertyis oftenlower[Raoet al. (1988)]. A morepromisingapproachis oftento
shiftpublicresearch,extension,or subsidiestowardslocallyrisk-reducinginputs(e.g. irrigationandpest
management),crop-mixes(e.g. frommaize,towardsmoredrought-resistant millets),or formsof work
provision.For example,the incomestabilization benefitsof relief workschemeshaveprobablybeen as
importantas the transferbenefits;thereis no moreimportantexamplethan the role theseschemeshave
playedin faminereliefin SouthAsia[Dreze(1990),DrezeandSen (1989),Ravallion(1991a)1.

6.4 Chronicpmverty
Manyactionsaffectbothtransientand chronicpoverty. For example,certaintraditionalcoping
mechanismsduring a famine- such as the sale of assets - can save lives but foster longer-term
impoverishment.Directinterventions,suchas reliefworkschemes,canhelp the poor, or near-poor,to
avoid such costly formsof adjustment[Binswangerand Rosenzweig(1990),Ravallion(1991)]. An
effectivesafetynet may thus also help reducechronicpoverty. Conversely,one of the best defenses
againsttransientdistressis a longperiodof relativeprosperity.For example,vulnerabilityto a famine
maydependgreatlyon the prior historyof poverty[Ravallion(1987)].
Typically,policiesaimedat reducingchronicpovertytry to makethe poor moreproductive.
Alteredchoicesaboutland,humancapital,andcredit- inputsusuallyassociatedwithextraoutput- can
raise incomesamongthe poor.'2 ' In eachcase, the poor can gain from sevensorts of event, including
policyinterventions, that affectinputs. Thefirstthreerowsof Table2 relateto the impactof eventsthat
improveinputvolumes;the nexttwo, inputproductivity;andthe lasttwo, appropriateprices.
The first wayin whichpoorpeoplemay gain fromextra inputvolumesis by benefitingfroma
risein resourceavailability,e.g.througha settlementschemethatprovideseachperson(pooror not)with
the sameprobabilityof extraland whatevertheir initialincomelevels. Second,at the other extreme,
poorpeople'sresourcesmaybe increasedby pureredistribution fromthenon-poor,e.g. by landreform.
Third, inputvolumeanddistributioncan togethershift in favorof the poor, e.g. by targetingland in a
settlementscheme,or jobs in a publicworksprogram.
Fourth and fitth come events, includingpolicies,that raise factor productivity,'mwithout
necessarilyvaryingthe quantitiesof otherinputs. Theseare typicallyconcentratedon onefactor, such
as land, labor,or irrigationcapital. Poorproducerswillprobablysharein the benefits,sometimeseven

62
 Table 2: Possible Interventions against rural poverty

...._ _ ' _ _ _ _ _ _ _ _ _ _ Inpute _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _

ProductionInputAdumat b c d
Laud LAbor Human capil _Faymoa capital Cedit

I. Dlstrilutioo-nomatl $Settlement * Popuiatioupolicy; Propotionat rie in Rufal noa-fam ratr competitive

volumeehancem sches ucing paticiptioa cos ec type d oc tioa capit aistance; public upply
(eg crhes); of bheath,
education, are-wide irrigation of, or iacentivesto,
employmentInformton etc. (-trickle-down); udallendig
'1iafiuStucu"

2. Volume-nat diutlo. LAndrefom LAw efomnto Uais *Revers dicdmina- Landle to obtain Quoal for
enabncemant diOdminAtIonvc. poor tiona, In access or aew capital (eg tubewe) poor, via
groupsof women sevices,towards andWs its product insructionac
ethaica. caste members, tc. schoolgSir; (eg water) to fanrers lcentives to
poorer tribea or auas; (Proshika) lading i nsuions
placec of high diea directedcredit
incideace

3. Joint Volumeeaddisnution Tran Directed version of ib; Health and education Poor-sleitive Credit expqaion or
enhawoement migration woridfat progam spendi inacresesrurrl Inflasuture; incetives in
of lades sated towards rur supportfor competitive backward- regions
prmary eduction and band-andanimal-tool
balth supply and maintenance

4. Distrlbution-neutralproduct- Yiekd-related 8e#er health servicesfor itnnion to rise Improvedirrgation Trainig and
ivity enhancemn *techology pak- on ines and efficiencyof uNeof deliveryor maintenance .uprvbision-
policy e.g. on ricultural iqruries; skil, e.g. appropiate for banker.or
high-yielding buea to work nonfann stock cotol for borrower.
vaieties

S. PoortoriontatedPoducivity As 4c for Resecb and extmsion for Atisn upgding and As above,concentrated Smal NGO-based
enhancement *poorpeople' sandard agrictua lbor recycling-courses on tail-ends; oarefoot credit user groups;
cropc-, eg task., esp. for women tred to poorer mangment consul- mgement
c"$vA, popbl's trades tenta suppon
miiict

6. Improvingor sabiliro pleie iMicro-pack- Labor-demandingtechnical Prima health/schools Subidies for Poor-seletive
of input bought mniy by the aegd or ituronal change; cheaper, nearer, or Small aet capital or intert
poor appropiate competitiverecnruitaeatand timed for lower purcbases subsidie
feilizer. tnlpon to and from joba opportunity-cost

7. Improvingor isbiirig pr- Coare grin Work aNdwage a. Markting co-operatives Credit iage
of outputs produced markei information;lad ownership, for familymiero- to organized/
intensivelywith ip usd by co-opatives or other teratives, for enterpries coop marketing
the poor employees. Minimumwage
laws.
morethan proportionately to initialIncome. T'helatterhappenedin Islampur,Bangladesh,wherea rise
in landproductivitywasachievedby a subsidyon handpumps; thesebecomeattractivefor irrigationonly
to poorpeople[Howes(1985)1.l"
Sixthandseventh,the poormaygainas producers(withoutdirectchangesin volume,distribution
or productivityof anyfactorinput)fromchangingprices. Suchchangescan eitherreduce(or stabilize)
the pricesof inputsboaghtmainlyby the poor,or raise (or stabilize)the priceof marketedoutputsthat
are intensivein theiruse of poorpeople'spreferredinputs,notablylabor.
Table2 uses thisframeworkfor classifyingevents,includingpolicyinterventions,that can alter
inputs into rural productionand therebyreducepoverty. Each box exemplifiesone such type of
event/inputinteraction(includingsomenon-farmcases). Onlya few boxesare reviewedbelow.

6.4.1 Land
"Moreland' is oftenwhat the rural poor say they need most. Also, when askedto farm in
land-preserving ways- e.g. to reducecattlestockingratios- they oftenreply(demonstrably correctly)
that they need more land beforethey can affordto do so [Drinkwater(1991:14.5)].Indeed,from the
NeolithicSettlementto about1750,the usualresponse,in mostrural areassufferingfrom an increasein
chronicpoverty,wasto farm newlands,oftennearby,or to shortenfailows[Boserup(1965)1.
Spontaneousland expansion,withoutsignificantdiminishingreturns (or increasingmarginal
break-in-costs)per hectare,has untilquiterecentlybeena significantresponseto poverty. For example,
millionsof farmersresettledvoluntarilyin Ethiopiain 1934-77,in responseto environmental problems,
evictions,and other pressures[Choleand Mulat(1988: 165)]. However,suchprocesseshave much
abatedunder pressureof land scarcity. Theyremainsignificantin partsof WestAfricaand Brazil,but
even there the areasof new setlementare experiencingshorterfallows,increasinglyinadequateland
regeneration,and hence long-runthreatsof diminishingreturns. In such circumstances,spontaneous
settlementcan seldomdo muchto curepovertywithoutmajorsupportivepublicaction.12
The direct actions inducingland expansionfor the poor are settlementschemesand land
redistribution.Howmuchcanthesereduceruralpoverty? The rural povertyprofilehas bearingon the
answer. The rural poorusuallydo overlapsubstantiallywiththosewho own and/oroperatelitde or no
farmland. Butthereare exceptions.Ruralteachers,shopkeepers, and artisansare oftenwell-offthough
landless; in parts of WestAfricarural non-farmemployment,not occupancyof farmland,appearsto
predictlowerrisk of poverty[P. Hill (1972),Reardonet al. (1992)]. Conversely,householdsthat own
andoperateas muchas 34 ha. of bad land canbe verypoor: in WesternIndia,they are no likelierto
escapepovertythanarethe landless[Visaria(1980),Lipton(1985)1.In betterfarmingareas,lackof land

63
 is a clear correlateof poverty,but it is an imperfectone: this constrainsthe prospectsfor reducing
aggregaterural povertyby land-basedredistributions [Ravallion(1989),Ravallionand Sen (1989)].
Anotherlimitationon land redistributionor settlement- evenamonghouseholdsderivingtheir
livelihoodsentirelyfrom farmland- is that land inequalityis less than it seems. First, householdsize
almosteverywhereincreaseswith operatedland area [Singh(1990)). In a studyof the IndianPunjab,
the Gini indexof operatedland per householdwas doublethat of land per person[Vulkaand Sharma
(1989)1. Second,in Asia [Bhallaand Roy(1988)],smallerholdingstend to be on higher-quality land,
and to embodymore land improvement(wells,bunds)per hectare,than do larger holdings. Third,
tenancyusuallyenablessomenon-landowners to farm; operatedland is almostalwaysdistributedless
unequallythan ownedland [Singh(1985)].
For settlementschemes (Table 2:1a) to be effective against poverty, there are several
prerequisites.Twoare normatlymet. Theremustbe differencesamongagriculturalregionsin (potential)
marginalproductivityof labor(MPL). Andthe schememustbe needed,andable,to overcomebarriers,
or deterrents,to poor people'sspontaneousmigrationtowardsthe regionswitha higherpotentialMPL.
More problematicare other prerequisites:fiscal sustainablity;low "crowdingout" of spontaneous
settlement;motivationto identifypotentialsettlers,genuinelywillingto moveandmostlypoor, yet able
to benefitfromresettlement;and absenceof severeconflicts,or environmental degradation,in the area
of settlement,suchthat decreasesin povertyamongthe settlersare unsustainableor are outweighedby
increasesamongindigenouspeople. Oberai(1988)reviewsalternativeschemes.
Redistributiveland reform- see the chapterby Binswangeret al., andLipton(1993)- remains
an importantrouteto "moreland for thepoor". Its aims,of advancingthe rural poorby increasingtheir
landrightsandby defangingmulti-market"ruraltyrants"[Bell(1990)1,haveoftenbeenachieved,though
seldomsufficientlyto meetinitialexcessiveexpectations.Andtherehavebeenfailurestoo. Severalhave
involvedincentivesto shiftcontrolof landawayfromthepoor. Restrictionson tenancy,withouteffective
ownershipceilings,have harmed some of the landlesspoor, becauselandlordsha-verespondedoy
reducingthe supplyof land to rent, especiallyby resumingland for personalcultivation. This has
preventedthe poorfrom sellingservicesas farm managersand entrepreneursvia tenancy.5 Stateand
collectivefarmingusuallyexcludespoornon-members relieson economiesof scalethat
(ex-employees),
seldomexist, andcreatesincentivesto individualshirkingand to farm-levelcapital-intensity.
These erroneousmeasureshave often been redeemedby, or convertedinto, classic land
redistribution. In Taiwan and Korea, tenancyrestrictionswere redeemedby effectiveceilingson
holdings,so that incentivesto ex-landlordswere not (as is usuallythe case)to evictex-tenants,but to
sell, or acceptcompensation for, excesslands. AcrossLatinAmerica,collectiveandStatefarmershave

64
"votedwith their feet"to convertthe lands intoprivate smallholdings[Whiesenhusen
(1989)], leavingState
and collectivefarming zs a "detour" on the road from unequal to equal private farming [Bell (1990)J.
Public policy for land settlement, and (much more) for land redistribution, has comprised a
major, and partly successful,responseto the pressurescreated by rural poverty and populationgrowth.
As the composition of the rural poor shifts increasingly from farmers to employees, however, the
employmenteffectsof reforms will becomemore critical. Fortunately,aboveall in the extremelyunequal
circumstancesof (say) Brazil, it is clear that smaller family holdings are not only more labor-intensive,
but more employee-intensive,than large commercialfarms. Moreover, this fact (itself due mainly to
costs involvedin search, screening and supervisionof large hired farm workforces)probablycreat an
"inverse relationship" between farm size and annual output per hectare, as shown in the chapter by
Binswanger et al [also see Berry and Cline (1979), Tbiesenhusen(1988), Lipton (1993)1. Thus land
redistribution- unlike collectivization,or in most cases tenancy reform - normally creates extra GNP,
out of which the losers can in part be compensated.
However, "more land for the poor", whetherthrough settlementor distribution,has limits as an
anti-povertypolicy. First, in India [Dev et al. (1991)],Zimbabwe, and elsewhere,it is often second-rate
land, needingsupportiveexpenditureor infrastructure,that reaches the poor (seldomthe poorest) in such
reforms. Second, there are diminishingreturns to increasingly"difficult" reforms, both economic(as
the poor acquire marginalland) and political. Third, even if the poor do gain some land, old farmland
is being lost, possibly to net desertification,mcertainly to salinity and urbanization [Eckholm (1976)].
Fourth, poor rural populationsin many countries continueto increase. A major part of rural poverty
policy, therefore, dependson higher productivityof land already owned, rented or worked by the rural
poor. Fortunately, a growingbody of evidenceconfirmsthat biochemicaland hydraulic innovationstend
to help the poor (though not generallyto reduce inequality)by reducingfood prices, raising demand for
labor, and often stabilizingfarm-specificoutput. The effects on poor farmers in nonadoptingregions and
countries, however, may be harmful [Liptonwith Longhurst (1989)].

6.4.2 Credk
In much of Asia, Latin America, and parts of Africa, rural credit has been widely regarded as
the key to poverty reduction. In urban production,inputs and outputsusually flow fairly smoothlyover
the year. In agriculture, especiallyfield-op production, (i) input requirementsare concentratedinto P
few critical, climate-relatedperiods, especiallybreakingthe soil and harvestingthe crop; (ii) outputflows
are also concentrated,in rainfedannual crops typicallyinto a month or two; (iii) input costs are incurred
months before outputs arrive. Poor rural r! .,le, with few own resources, appear to need credit to

65
smooth consumption. Farmers, especiallypoor farmers, also need credit, to obtain current and capital
inputs well before farm incomesbecome available.
But can this need be avoided? Seasonsand their risks are obvious; hence farm familiesdo adapt
through non-crop labor inputs [Hopper(1955)], savingsand storage. Yet such adaptationis costly, and
itself risky; credit might reduce those costs. Also, whilerural people may adapt labor supply to the rural
nonfarmeconomyso as to be contravariantwith farmrequirements,the time-distributionof farm-nonfarm
linkages means that some nonfarmlabor demand, especiallyfor processingand transport, is covariant
with farm labor demand. Hence consumptionsmoothing (see Besley's chapter), input finance, and
investmentdemand generate quite exceptionaldemandsfor tutu credit, especiallyamongthe poor.
Is it normally supplied to the poor? It is often alleged that this or that African society, for
example,lacksrural credit. However, almostinvariablythere existnon-cashsubstitutes,and/or 'hidden"
informal cash-creditmechanismssuch as "rotatingcredit and savingsassociations"[Besleyet al. (1992)].
Moreover, many rural transactions, usually analyzed in the context of land and labor, also operate as
forms of credit. For example,sharecropping,as a 'loan' of land for a rent that varies with output, helps
to address an otherwiselargely unprovidedfarmer demandfor equityloans; so does the lendingof cattle
by owners to managers in Botswana'smafisa system. Many of the forms of social insurancediscussed
in section 6.3, too, are imperfectsubstitutesfor credit markets.
To attack "wicked moneylenders" as a cause of rural poverty has long been the mode of
demagogy,but seldomof economics. '2 Yet even those who recognizethe need for rural credit supply,
and hence for incentivesto provideit, fear local moneylendermonopolyand power, sometimesoperating
in "interlockingmarkets" [Bell (1988)] - e.g. lenders who insist that needy borrowersrent their land, or
work for them, if they wish to borrow at all. As general concerns, these fears are exaggerated.
Informal-sectorinterest rates usually reflect costs of administeringsmall loans, together with risks of
de.'ault, rather than substantialmonopolyprofit [Bottomley(1964), Adams et al. (1984)].
Nevertheless,there has been much concern that informal credit fails to reach the poor, and is
inadequate for expanded farm output. Partly due to market responses to that concern, partly to
government actions and subsidies, formal credit has displaced much informal (family, trade, curb,
moneylender)credit in much of Asia and Latin America.
Yet formal credit too, it is often claimed, does not address the needs of the poor. It is usually
restrictedto lending for productiveinputs, to creditworthypersons; the rural poor are increasinglyoften
landless, lacking in non-landassets and hence collateral, and in need of loans mainly for consumption
smoothing. Further, small borrowersoffer formal lenders two serious disadvantages: high fixed costs
per unit of lending [Bottomley(1963)1;and problemsof adverse selection,moral hazard, and above all

66
enforcement(or, in cases of genuine hardship, rescheduling)of repaymentthat are much more readily
met face-to-faceby local informal lenders than impersonallyby banks or other remote organizations.
Even when a means test is applied - aimed at directingsubsidizedcredit to the poor - the outcomeoften
falls far short of perfect targeting; for example,a comparisonof the incidenceby consumptiongroup of
participationin the (credit-basedand incomemeans-tested)IntegratedRural DevelopmentProgrammein
Maharashtra,India, reveals that the schemeis a gooddeal less well targetedthan that state's Employment
GuaranteeScheme (which involvesneither credit nor a means test) [Kavallionand Datt (1992)1.
Some of these problems can be overcome. Group-basedlendingschemes (such as the Grameen
Bank in rural Bangladesh)have often achievedexcellent repaymentrates, though some assessmentsof
the rates of return have been less encouraging[Hossain(1984)]. The default/loanratio of small farmers
in formal credit systems is usually lower than that of large ones [Lele (1974); Lipton (1981)]. The
speculation[ibid.] that this is largely due to more intensivescreening of small farmers - and hence not
replicable if formal lending to such farmers grows substantially- may be mistaken. In India, marginal
farmers (below 1 hectare) operated only 12.2 per cent of farmland in June 1985, yet received 33.0 per
cent of agriculturalcredit from commercialbanks, the main source [ReserveBank of India (1989: 85)].
However, it is hard to maintainhope that chronic povertycan be reduced appreciablyby credit-
based interventions. Chronicpoverty is rarely due to 'market failure" in credit or other markets, but to
one of more of the following:low real total factorproductivity,low endowments-per-personof non-labor
factors, and/or a distribution - of those factors and/or of the skills and resources to use them with high
TFP - which is unfavorableto the poor. If these conditionsprevail, even perfect responsesof all factors,
product, and credit markets to undistortedincentiveswill seldomremove chronic poverty.

6.4.3 Publicservices
To what extent can chronic povertybe reducedby policies concerningthe provision and pricing
of public services? Physicaland human infrastructureis dealt with more fully in the chapter by Jimenez
in this volume; here we only flag some key issuesmeritingfurther research in the context of poverty.
There is evidenceon the productivityeffects of physical infrastructuredevelopment,suggesting
that investmentsin rural infrastructurecan generate sizable income gains (both farm and non-farm) in
underdevelopedrural economies[Antle(1983),Binswangeret al. (1989),Jimenez chapter]. The benefits
to the poor are rarely dealt with explicitly in this literature (except in the context of the use of
infrastructure developmentin relief work schemes; see sections 6.2 and 6.3). However, given the
evidencethat agriculturalgrowth tends to reduce rural poverty (section5.3), there is a compellingcase
that rural infrastructuredevelopment is generally poverty reducing. The causal links that have been

67
 identified in the literature and policy discussionsinclude both direct effects of improved water control
on agriculturaloutput, and more indirect effects (particularlyof roads) in reducing impedimentsto the
flow of informationand commodities.There is also evidenceof positiveproductivityeffectsfrom human
infrastructure development, particularly basic health and education; for reviews see Schultz (1988),
Behrman and Deolalikar (1988), and the chapters by Jimenez and Lau in this volume. Nor are those
benefits confinedto the urban sector [Jamisonand Lau (1982)].
In al such assessments,a recurrent issue is that infrastructureis typicallya locallyprovidedgood.
Public decisionsare made about the locationof such investments,which may be influencedby income
level or growth rate differences between regions. Empirical assessments of income gains from
infrastructuredevelopmentmay then be plaguedby a simultaneitybias. The (few) studies which have
dealt with this problem do confirm the existenceof sizable productivityeffects; see Binswangeret al.
(1989) on physical infrastructurein India, and Pitt et al (1992) on human infrastructurein Indonesia.
Noneof this impliesthat the expansionof publicinvestmentsin local infrastructureat the expense
of other public programs - includinginfarstructurein other regions - is unambiguouslypro-poor. That
is a far more problematic. It depends cruciallyon how well markets can provide those goods (almost
c-ainly markets will under-providedsome componentsof infrastructure,but not all; see the Jimenez
chapter), and at what prices. Infrastructure' is also a heterogeneouscategory; some componentsare
more pro-poor than others. The outcomes for the poor can depend critically on what type of
infrastructureis developed.
Consider human infrastructure. Undifferendatedsubsidizationof human capital formation is
unlikely to be inherentlypro-poor. Income elasticitiesof demand for educationand health care of unity
or higher are plausible for LDCs.,' However, a consensusis emerging in favor of differentiated
expansionin primary educationand basic healthcare, as an instrumentfor povertyreduction [e.g., World
Bank (1990)]. This is seen as desirable in its own right, and as an importantcomplementto achieving
the right conditions(incentivesand infrastructure)for promotinga labor-intensivegrowth path.>
A 'social services trickle-down"argument is often made in favor of this type of intervention.
The argument rests on the assumptionthat the non-poor are now satiated in their consumptionof these
social services in most LDCs, so that public spendingto these services would go disproportionatelyto
the poor.'" However, these services can differ gready in qualiy Oowerstaff-studentratios in schools,
better facilities in health care clinics), and the non-poor (even when they have themselves reached
universalenrollments)are very unlikely to be satiatedfor improvedquality. The extra benefitsof greater
budgetary allocationsto these socialservices may then go to the non-poor in the form of higher quality.
The same factors in a country's political economy which resulted in the bias against the poor will

68
presumablycontinueto operate toward that end.
Another - and somewhat more persuasive - argument is based on the existing utilization of
categories of public spending on social services, as revealed by household surveys (an lncreasligly
importantuse of such surveys).'31 There have been a number of empirical studies of the incidenceof
subsidies.'" These typically find that existing allocationsto primary education and basic health care
tend to be at least mildlypro-poor, in that subsidiesper head receivedby the poor accountfor a relatively
higher proportionof their incomeor expenditure,and (in some cases) are also absolutelyhighei thm for
the non-poor. The explanationappears to lie in a tendency for the rich to shift into the private market
for health and education,and also for familysize to be higher for the poor (so that primary educationand
health care subsidiesact like a familyallowancescheme). Allocationsto educationand health care above
primary level tend, however, to favor the non-poor.
Such studies are informative,but they tell us little abouthow the benefits of public expenditure
reforms - extra spendingon some categories- will be distributed. What they do suggest is that targeting
of primary educationand health care will be pro-poor, providedthat average pre-interventionincidence
reliably indicatesthe incidenceof the benefits from selective expansion. However, that need not hold;
marginaigains to the poor may be high for categoriesof spendingwhich do not currentlyhave a pro-poor
average incidence. Tbis can be assessedby directlyexamininghow the incidenceof benefits of public
spendingon social services evolveswhen budgetaryoutlays alter. Two such studies are Hammer et al
(1992)for Malaysia(comparing1973with 1984)and van deWalle (1992)for Indonesia(comparing1978
and 1987). Both countriesexperienceda sizableexpansionin aggregatebudgetaryoutlays on health and
education; in both cases, aggregate school enrollmentsand public health care utilization expanded
considerably. The distributionof the benefits of subsidiesto these services, already quitepro-poor, did
not worsen; in the case of Malaysia,it improvedsomewhat. Thus the poor gained from the expansion
in social sector outlays. More evidenceof this sort is needed, given the weightattachedto this type of
interventionin current policy discussions.
Similar commentscan be made aboutphysical infrastructure;some components(rural roads) are
almost certainly more pro-poor than others (urban highways). However, the evidence is even more
contentiousthan for human capital investments,not least becausethe measurementof 'who benefits' is
more problematic; few surveys of household living standards surveys, for example, assess road
utilization,and (in any case) the pervasivesecond-roundbenefits would make such assessmentsunduly
narrow. Compellingevidenceis likely to come via the more indirect route of first establishingthat a
particular growth process reduces poverty, and secondly establishing that a particular infrastructure
initiativewill promote such growth. This is a feasible route, but needs further research.

69
7 Condusions
The idea that economicdevelopmentis possible, and that it can reduce poverty, dates from the
eighteenthcentury; there was little sign of it before Adam Smith. This idea came hand-in-handwith a
significant shift in moral and political philosophy. The emerging capitalist civil society was seen to
requirepublic institutionswhich acceptedresponsibilityfor masseducationand basic health care, and also
for protecting the vulnerablein the market economy.
The early translationsof this ideainto the developmentpoliciesof manypost-colonialLDCs were
(with few exceptions)failures. For the most part, the failure was in the translation,not the idea. Smith's
vision of the 'progressive economy"was mistranslatedintooverlyoptimisticplans for a capital-intensive
industrializationpath; that was how - it was believed - poverty would eventuallybe eradicated. (There
was quite wide agreementthat eradicatingpoverty was the goal). And the role of the state in providing
social serviceswas seen more in terms of universities and hospitalsthan primary schools and clinics.
The attempts at forced-draft planned industrializationoffered little for the poor. Growth was
often retarded; even when not, it brought few gains to the poor. Indeed, they were oftenthe hardest hit
by anti-trade biases, since (much more than the non-poor) they earned their living by turning
non-tradablesinto tradables. And, to make matters worse, the forced-draftindustrializationwas financed
in large part by extracting a surplus from the main source of income to the poor: agriculture. The
welfare of today's poor was sacrificed,but not for tomorrow's poor.
The revolt against this failed approach to poverty reduction emerged in the mid-1970s.
Disillusionmentwith the potential of trickle-down industrializationto reach the poor, md with the
prospectsfor radical redistributionof incomeor land, spurred a move awayfrom the policiesand projects
of the previous two decades. "Urbanbias' started to be seen as damaging to both growth and poverty
reduction. Instead, efforts turned to rural development,supported by agro-researchand investmentin
physicaland humaninfrastructurein rural areas. This accompanieda smaller-scalerevolutionin thinking
about urban sector developmentpriorities. Like their predecessors, some of the new plans proved too
optimistic, given the real constraintson finance and organization. However, from the mid-1970s, this
new direction offered greater hope for the poor, and brought real benefits to them in many countries.
In this context, it remains surprisingthat the early responsesto the macroeconomiccrises of the
1980spaid so little explicit regard to the interests of the poor. There were some reasons for believing
that adjustmentmight well benefit the poor even in the short term. The traded goods sector in LDCs
tends to be labor intensive, because that is usually their comparative advantage. Then the poor will
probably gain from the relative price shifts associatedwith adjustment. However, that predictionmust
be qualified. The circumstancesin most developingcountries - the extent of price and wage flexibility,

70
 the r obility of the poor, the extent to which food behavesas a traded good in the short-term, the extent
to which the poor consumetraded goods, the extentto which they lose from cuts in public spending- are
far more diversethan is allowedfor in manyof the modelswhich guide policy-making. With the benefit
of hindsight, many of the argumentsthat adjustment- relative to non-adjustment- had unambiguously
hurt the poor were implausible. But so were some of the high expectationsof supply-sideresponse to
adjustment,and hence of a rapid transition to a more favorable growth path.
A morebalanced, and realistic, consensuson how povertycanbe most effectivelyreducedstarted
to emerge from the late 1980s,though one with deep roots in the history of thought on poverty, going
back to Adam Smith. In this view, the main role of the state is to facilitateprovisionof privatelyunder-
suppliedgoods (infrastructure,but also social equityitself)in an otherwisemarket driveneconomy. With
neutral incentives,growth in such an economyis seen as being in the best interestsof the poor, who are
intensive suppliers of the main factor of productionlikely to benefit, labor. Growth in private-sector
economicactivity is a key part of this story, both as an instrumentfor incomepoverty reduction, and as
one of the means of financing public support where it is needed. But it is only a part. As much
emphasisis given to successfulpublic action, in the areas where it is called for.
What issues endure? A comprehensivelist should include (in no particular order): the political
economyof poverty reduction;country-incentiveissues in pro-poor aid policies; the costs and benefits
to the poor of asset redistribution; the extent to which poverty considerations should influence
macroeconomicand trade policies; fightingchronic povertyversus fighting vulnerabilityto poverty; the
status of the so-called "specialpoverty groups" (women, children, remote areas); environmentaleffects
(positive and negative) of poverty and its reduction; the impacts of developed country polices on
distribution withindevelopingcountries.
However, one generic issue stands out: the need to better understandhow to make a success of
public action in fighting poverty. The history of developmentefforts - including some of the best
intentioned- has clearlydulled expectationsof what governmentscan do effectively. Yet how confident
can we be in those expectationswhile we remain as ignorant as we are about the benefits and costs of
much of what governmentsand donors do? Developmentagencies still devote few resources to proper
evaluation. Granted, it is difficultto properlyevaluateany project or policy after it is introduced, given
that one is aiming to compare living standards "with" and "without' the project (which is quite distinct
from "before" and "after"). The beswhope is to build in the evaluation methodology- including the
survey instrument - right from the start, prior to intervention. This is rarely done.
Effective public action needs good data and measurment. There are signs of an emerging
consensuson poverty measurement,which might fruitfully guide future efforts at evaluation. Recent

71
theory and practice has moved away from the ear!ier obsessionwith a single number - the count of how
many people do not reach some arbitrary poverty line - or even a single measure of poverty, no matter
how many axioms it satisfies. Instead, the aim is to form consistentcomparisonsof poverty, such as
betweendifferent places or dates, or under alternativepolicies. Recent literature has identifieda number
of principles to guide such comparisons. The more challengingquestionsin poverty measurementnow
lie right at the heart of the problemof normativeeconomicsin general:how do we measurethe "standard
of living"? The welfarist approach - by which only information on individual utilities should be
considered- infers preferencesfrom behaviorand makesethicallyacceptableinter-personalcomparisons
of utility functions which reproduce those preferences. But the chances of convincinglyretrieving
individualpreferencesfrom observed behaviorremain slim, recognizingthat there are many non-market
determinantsof welfareeven in the most market-orientedeconomy. The need for valuejudgementsabout
individualutilities, and the search for convincingand applicablenon-welfaristapproaches, will continue.
Recognizingthesepervasiveuncertainties,what do we knowaboutthe world's poor, to help guide
policy? The proportion of people deemed poor, by local poverty lines, decreased in most LDCs (for
which we have data) between the mid-1960s an-dthe mid-1980s. However, there has been negligible
progress in the aggregatesince then, and by any reasonable standard, numbers of poor have almost
certainlybeen increasingsince the mid-1980s. Around 1i,, a little over one billion people were living
on less than one dollar per day.
More striking than this observation is the marked regional imbalance in the current rate of
progress in povety reduction. Poverty is probablyworseningin Africa (thoughdata inadequacieswarn
against confidence),and Latin America. But in Asia the poor are appear to be seeing some real gains,
and can reasonablyexpect them to continue, albeit with ups and downs in some countries.
At micro level, some reasonably robust generalizationsabout the poor are emerging from
houshold-surveydata. By most measures, poor householdstend to be larger, due mainly to more
children. The children are less likely to reach average life expectancy,but it is the higher replacement
fertility of the poor - which is perfectly rational - that makes up the difference. The workingmembers
of poor householdsthus have more mouthsto feed, but they also face higher risks of unemployment,and
of ilness preventing work. Women are worse off, though this need not be evident in the incidenceof
current consumptionpoverty, but rather in terms of the demandson their time, and their opportunities
to escapepoverty.
The poorest dependmainly on their labor; there is typicallylittle else that they can derive income
from. They typicaly face varied, and uncertain, employmentprospects from one time of the year to
another. Other risks pervade their lives, such as the threat of illness. They do many things to help

72
 insure themselves(includinghavingmany children), and to help insure each other, though often at a cost
to longer-termprospects for escapingpoverty.
In many respects relevant to policy, the poor are quite heterogeneous. The depth of current
poverty varies, as do the endowmentswhich might help in escaping poverty. Net trading positions
(consumptionminus production)in key markets - notably for food - also vary amongthe poor, so some
gain while others lose from a given change in relative prices. In much of South and South-EastAsia,
for example,higher prices of the domesticallyproducedfood staple will generallybenefit those near the
poverty line, but many of the poorest will lose at least in the short term.
Typically,the highestincidenceand severityof povertyare found in rural areas, especiallyif ill-
watered. For manyof the rural poor, their only immediateroute out of povertyis by migrationto towns,
to face a higher expected income, though often a more uncertain one. This may or may not reduce
aggregatepoverty. We can be more confidentthat growth in agriculturaloutput - fuelled by investment
in human and physicalinfrastructure- is pro-poor, though not becausethe poor own much land.
The policies pursued by most LDCs up to the mid-1980s- and by many still - have been biased
against the rural sector in various ways. The same is true - though different policies are involved- of
the other major sectoral concentration of poor, namely the urban informal sector. There are clear
prospects for reducingpoverty by removing these biases. Lookingahead (far ahead in some cases), it
is less clear how much further gain to the poor can be expectedfrom introducinga bias in the opposite
direction. Neutralityshould be the immediateaim.
However, providedthat the sectoralcompositionof growth is not biased againstthe poor - though
political-economyconsiderationssuggest that this proviso should not be taken lightly - the overall rate
of economicgrowth matters enormouslyto their well-being,more so than some past discussionsof anti-
poverty policy have recognized. Earlier concerns that growth in a dualistic developing country must
increase inequalityhave declined, both as a result of a deeper understandingof the contingentnature of
such effects, and due to the belief that, for the poor, absolutelevels of living matter more than relative
positions. Elasticitiesof poverty measureswith respect to distributionally-neutralgrowth in aggregate
consumptionof two or more are now commonin LDCs, though there is considerablevariationaccording
to initial conditions,includingwealth inequalities. While the potentialfor reducingconsumptionpoverty
through a growth process which is not biased against the poor is now undeniable, adverse initial
conditionscan mean that this potential is only realizedpainfully slowly.
Two importantroles for public action can be identified. One involvesfostering the conditions
for pro-poor growth, particularly in providingwide access to the necessaryphysical and human assets,
includingpublic infrastructure. The other entailshelpingthose who cannotparticipatefully in the benefits

73
of such growth, or who do so with continuedexposureto unacceptablerisks. Here there is an important
role for interventions aiming by various means to improve the distribution of the benefits of public
expenditureson social services and safety nets in LDCs. Those means range from the selectionof key
categoriesof public spending, such as primary educationand basic health care, to more finely targeted
transfers (including nutrition and health interventions)based on poverty indicators, or on some self-
targetingmechanism. Though disappointingoutcomesabound, many countrieshave demonstratedwhat
is possible with timely and well-onceived interventions.

74
Notes
1. The remarkis noteworthybecauseit originatesnotfrom a warrioragainstpovertybut from an
economicliberal, writing for an institutiondestinedto become a think-tankfor Mrs Thatcher's
government.
2. "Anyone,beforethe middleof the eighteenthcentury,who expecteda progressiveimprovement
in materialwelfare...wouldhave been thoughteccentric.There was little variationin the lot of the
unskilled[European]laborerin the two thousandyears...to the Franceof LouisXIV" [Keynes(1923:
vii)].

3. On the 1803and later editions,see Himmelfarb[(1984:114-7)].On the 1824article- which

prefiguresthe "substitutingqualityfor quantity"approachin Beckerand Lewis(1974)- see Lipton
(1990).
4. Yetthe Englishpoor lost part of this safetynet, as the rules were appliedmoreharshly. The
valueof Statesupportin old age, about90%of working-class averageincomesaround 1837-8,fell to
below30% by 1890-1900[Thomson(1984:453)].However,from 1911nationalinsurancepensions
restoredthe proportionto around40%, and "by 1913outdoorpauperismamongthe elderlyhad fallen
to 5%of its 1906level" [PolakandWilliamson(1991:135)1.Publicrelief wasonlypart of the reason;
the growthof friendlysocietieswas massive[Hanson(1972:118-27)1.
5. This is in markedcontrastto Mandeville'sdenial- so shockingto his contemporaries
- that, in
a stationaryeconomy,charityschoolscouldraise the income(or the well-being)of workers,ratherthan
merelydelayingtheirearnings,in an epochwhentherewasno technicalprogressto complement the extra
literacyor numeracyof, or addto the wage-billfor, laboras a whole. SeeHome(1978).
6. In politicalscience, "modernizationtheory" suggeststhat, as developingcountriesprogress
economically,they approachthe formsof politicalorganizationof developedWesterncountries. In
is theviewthatwaysof domestic,economicandsocialorganization
anthropology,"culturalevolutionism"
followan evolutionarysequencefromlowerto higherforms.
7. Thoughnotthe onlyweapon;IndianandotherLDCgovernmentsdid subsidizeandprotect(via
restrictionson big firms)craft, village,and cottageindustry.
8. On theseexperiencessee Fei et al. (1979),Kuo (1983)and Wade(1991).
9. For example,India's rate of growthin nationalincomewas 1-1.5percentper personyearly
between1950and 1973.
10. See, for instance,Datt and Ravallion(1992c)on the generallysluggishreductionin poverty
measuresin IndiasinceIndependence.
11. SeeBirgegaard(1987),Lipton(1987a). Mostof the spendingof governmentssuchas India's,
and of agenciessuch as the World Bank, that was labelled "rural development"went mainly to
smallholderagriculture,not to "integrated"projects. The argumentsagainstsuch projectsin Asia,
however,have been greatlyexaggerated,especiallyfor second-generation, less top-downprojectsthat
investedin technologyandinstitution-building
beforecostlyinfrastructures
[ibid.; LimcaocoandHulme
(1990)].

75
 12. The faultmay lie with inappropriate planningmethods,notwithintegratedareadevelopmentas
such. Recentareaprojectssuchas Solidaridadin Mexico,whichofferfiscalincentivesinsteadof dictates
fromarea authorities,appearto workbetter.
13. Manyof theseestimateswerealmostcertainlybiasedupwards. The mainproblemis that few
of the estimatesof the earningsgainsfromextra schoolingcontrolledfor differencesin ability,family
environment,andschoolquality. Ontheseandrelatedissuesseethe surveysby Schultz(1988),Behrman
(1990),and alsothe chaptersby JimenezandStrauss/Thomas in this volume.
14. See, in particular,Sen (1979, 1985, 1987). For an attemptto clarifythe issues, and their
implicationsfor developmentpolicy,see Anandand Ravallion(1992).
15. Gulati(1977)showedthat in Trivandrum(Kerala),India,motherssoldfoodstampsto purchase
betterhealthcare - eventhoughin KeralaStatefree basichealthwaswidelyavaDlable.A BN approach
appearsto claimthat plannersknowbetterthan peasantshow to allocateincome.
16. ThusMorris'sPQLI givesequalweights(1/3)to threerates - infantmortality,life expectancy
at age 1, adult literacy, and the reciprocalof infant mortality- and nothingelse. Of course, the
price-weightsin GNP comparisonscan also be criticizedas arbitrary. But they are, up to a point,
justifiedby a theoryaccordingto whichrelativepricesmeasurerelativevaluesto users(marginalutilities)
andrelativeopportunitiesforegonein production(marginalcosts). No suchrevealedpreferencesunderlie
the weightsin PQLIsand the like.
17. See Jolly and Cornia(1988),Pinstrup-Andersen
(1989),Maaslandand van der Gaag (1992),
Lenaghan(1992),andKakwaniet al. (1993).
18. And alsowithindicatorsof socialandpoliticalrights[Dasgupta(1992)].
19. However,when educationalspendingand povertyincidenceare held constart at the mean,
averageGNPper personstill remainscorrelatedwithliteracyrate [Anandand Ravallion(1992)].
20. It is not clearunderwhatcircumstances privatepovertyreductionandpublichealthactivitiesare
substitutes,as opposedto complements, in the productionof health. Substitutability
is suggestedby the
fact that healthoutcomesare muchbetter in Kerala,withwidespreadpublichealthprovision,than in
manyIndianStateswith far lowerlevelsof poverty. Complementarity is suggestedby a large studyin
the Narangwalareaof the IndianPunjab;therea givenoutlayhadmuchmoreimpacton childhealthif
dividedbetween(private)foodsupplementation and(public)healthprovisionthan if usedexclusivelyfor
either [Tayloret al. (1978)1.
21. Outliersalso includecountrieswith muchworse than expectedoutcomeson BN indicators,
notably"rich"oil-producingnations.
22. Agarwala's(1983)workstimulatedmuchenthusiasmat the time, but the robustnessof someof
the conclusionsis auestionable[Aghazadeh and Evans(1985),Taylorand Arida (1988)]. WorldBank
(1988)showsthat countriesreceivingconditionaladjustmentloans- especiallyif repeatedover several
years- outperformedcomparatorson most indicators,but withratherimportantexceptions:low-income
countries,heavilyindebtedcountries,and Sub-SaharanAfrical WorldBank(199lc, ch.4) arguesthat
trade restrictionsreducerates of returnto Bankprojects,thoughTaylor(1993)pointsto the possibility
of spuriouscorrelation. Morerigorousempiricalworkis needed.

76
23. See Colcloughand Manor (1991), Wade (1991), and the papers in the symposiumon this topic
in the Summer 1990issue of the Journal of EconomicPerspectivesincludingBardhan (1990).

24. It is beyond our scope to go into any detail on data sources here. Household surveys are the
single most importantsource of data for making poverty assessments; indeed, they are the only data
source which can tell us directlyaboutthe distributionof livingstandards in a society, such as how many
householdsdo not attain some consumptionlevel. However, a lot of care must go into setting up and
interpretingsuch data; see Ravallion(1992d)for a survey of the issues that the analyst should be aware
of, and a full set of references. Discussionsof the generic issues of survey methodology- such as
sampling, questionnairedesign, survey operations, and the treatment of self-consumedproducts and
consumerdurables - can be found in U.N. (1982, 1989), and Delaine et al (1992).

25. For example, in Morocco, animal husbandry is intensive in child labor. While a poor farm
household will enjoy higher total consumptionfrom higher meat prices, the behavioralresponsesmay
involve longer-term losses to poor children, taken out of school to tend livestock [de Janvry et al.
(1991)].

26. These issues are not specificto poverty measurement;there are a number of good expositions,
includingDeaton and Muellbauer(1980) and Deaton (1980). Also see Deaton, in this volume.

27. This assumesthat the parametersof the empiricaldemandmodel satisfythe theoreticalconditions

of utilitymaximization[see, for example,Deaton and Muellbauer(1980)]. The utility functionis derived
from the estimateddemandmodel either as an explicitfunctionalform [as in, for example,Rosen (1978)
and King (1983)]or by more flexiblen'n-erical methods [Vartia (1983)].

28. For further discussion see Pollak and Wales (1979), Deaton and Muellbauer (1986), Fisher
(1987), Pollak (1991) and Browning(1992).

29. The latter are often very importantto poor people's welfare, yet they are typically not valued in
budget surveys. Access to commonproperty resources appears to have been decliningin India [Jodha
(1986)];hence market-basedvaluationsof consumptiontend to underestimatethe level, but over-estimate
the rate of growth, in poor people's living standards.

30. Examples include Anand and Harris (1991), Glewwe and van der Gaag (1990), Haddad and
Kanbur (1990), Lanjouw and Stern (1991), and Chaudhuriand Ravallion(1993).

31. The following draws in part on Ravallion (1992d), which elaborates on these issues. Other
surveys(though more from a de% 1'ped countryperspective)include Hagenaarsand de Vos (1988), and
Hagenaarsand van Praag (1985).

32. The basic needs approach to defining poverty lines goes back to Rowntree's (1901) study of
York, England [Atkinson(1975, Chapter 10)].

33. After forty years and endlesssterile controversy,the Dunn team's work on pregnantand lactating
women [Nestie(1987-1990)],and a few good papers on specific work tasks under laboratoryconditions,
comprise almost all the LDC exceptions.

77
34. A Laspeyres index is common, pne issue is ,where amongst the poor one should anchor the
index. Some have preferred to use a bundle of goods appropriate to someone at the poverty line
(implying minimizationof the head-count index of poverty; see section 3.3), while others have sought
a bundle of goods more typical of the middle poor or poorest (minimizingthe error in higher-order
poverty measures). While homotheticityis implausiblein general, there is some evidencethat it is more
common amongstthe poor, in which case this choice will matter little. See Ravallion(1992d).

35. For example, Ravallion and Bidani (1992) show that rank reversals in Indonesia's regional
poverty profile are quite common when comparingdifferent methodsof setting poverty lines.

36. This may be revealed by 'thresholds' in behavior, such as at incomelevels where the income-
elasticityof the age- and sex- specificparticipationrate is not significantlydifferent from zero, where the
food-sharedoes not fall as income rises, or where the income elasticity of demand for food is unity.

37. On the argumentsfor and againstthis property see Blackorbyand Donaldson(1980).

38. Sen (1976, 1981)offers an otherwiseattractivemeasureof the severity of poverty which is not,
however, sub-groupconsistent;this is also true of the measuresthat have proposed as generalizationsof
Sen's measure [Thon (1979), Anand (1983), and Kakwani (1980b)].

39. In particular, PG can be interpreted as ratio of the minimum cost of eliminatingpoverty with
perfect targeting to the maximumcost with no targeting [Ravallion(1992d)].

40. This is actuallya fair characterizationof how a reductionin the prices of domesticallyproduced
food-stapleswould affect the distribution of welfare in some Asian countries; an example is given in
Ravallionand van de Walle (1991a).

41. Ravallion and Chao (1989) show how the optimal allocation can be calculated. This can be
instructivein quantifyingthe potentialgains from targeted transfers aimed at reducingpoverty, such as
betweenregions [as in Ravallion(1992b)1or land-ho'dingclasses [Ravallion(1989a)]; sections5.3 and
6.2 will give examples. Also see Thorbecke and Berrian (1992).

42. This is readily proved by differentiatingthrough (1) w.r.t. z and using the fact that for the FGT
measuresp(y,z) is homogeneousof degree zero in z and y.

43. This follows from the fact that, for any given Lorenz curve, the value of F(z) is homogeneous
of degree zero in z and the mean; see Kakwani (1980a).

44. See Kanbur (1987a), Kakwani (1990a), Kakwani and Subbarao (1990), Jain and Tendulkar
(1990), Datt and Ravallion(1992a).

45. We shall give an elementaryexpositionof the approach. For a fuller introductionsee Ravallion
(1992d). On the use of dominanceconditionsin rankingdistributionsin terms of measuresof inequality
see Atkinson (1970); on rankings in terms of poverty see Atkinson (1987), and Foster and Shorrocks
(1988). Our expositionwill be confined to single dimensionsof welfare, though the approach can be
generalized to multiple dimensions (though, naturally, unambiguouspoverty orderings become more
illusive); on the multi-dimensionalapproach see Atkinsonand Bourguignon(1982, 1987).

46. More precisely, attention is restrictedto poverty measures which are additive, of the form in
equation(1), or any measurewhich can be writtenas a monotonictransformationof an additivemeasure.

78
All the FGT measure5discussedin section 3.3 qualify. Atkinson(1987, 1989, Chapter 2) characterizes
the set of admissiblepoverty measuresand gives other examplesfrom the literature.

47. This can also be tested (equivalently)using the generalizedLorenz curve, obtainedby scalingup
the ordinary Lorenz curve by the mean. If the generalizedLorenz curve (ordinary Lorenz curve scaled
up by the mean) of distributionA is everywhere above that of B then the area U:AerA's cumulative
frequency distribution must be everywhere lower than B's. On the generalized Lorenz curve see
Shorrocks(1983).

48. The theory is formally identical to the problem of measuring undernutrition when nutrient
requirementsvary in some unknownway; see Kakwani(1989) and Ravallion(1992a).

49. See World Bank (1990) and Ravallionet al. (1991); the latter paper describes the assumptions
and data used. The estimate is based on distributionsof persons ranked by household consunmption or
incomeper person, as derived from householdsurveysfor the mid-1980s covering 76% of the population
of developing countries, and on econometric extrapolationsbased on national accounts and social
indicatorsfor the remainder. Currencyconversionsuse the Summersand Heston (1988)exchangerates
adjustedfor differencesin purchasingpow6.

50. See World Bank (1990, Chapter 3). Using comparableestimationmethods,an earlier study at the
World Bank estimatedthat 389%of the populationof 36 low income countriesin 1975 did not reach the
consumptionper capita of the 46th percentile of the Indiandistribution [Ahluwaliaet al. (1979)]. This
implies a poverty line close to the lower one used by World Bank (1990' and Ravall;on et al (1991).
Note that the earlier study did not includeChina.

51. Almostall poverty measuresused in practice are homogeneousof degree zero in the povertyline
and mean; this is impliedby the property of 'scale independence",meaningthat if all consumptionsand
the poverty line increaseby the same proportionthan poverty will remain the same.

52. This is an analyticallyconvenientassumption(Kakwani,1990a),but it also accordsvery well with

the observedpattern of shifts over timo in the worldLorenz curves reportedby Berry et al., (1989). See
Ravallionet al (1991) for details. Kakwani(199Oa)gives formulaefor the elasticitiesof various poverty
measuresw.r.t. the Gini indexunder this assumptionabouthow the Lorenz curve shifts.

53. Thus low poverty lines indicate higher poverty in SSA, while at sufficientlyhigher lines the
ranking reverses; for fiurtherdetails see Chen et al. (1993).

54. Though data inadequaciesresult in quite a wMdeconfidenceinterval around estimatesof poverty

in Africa; see Ravallionet al. (1991)for estimatesof the 95% confidenceintervalsaround point estimates
of poverty levels by region in 1985.

55. Whilethe methodologyof bivariatepovertyprofilesremainspopular,there are alternatives,based

on multi-variate models of the distribution of the poverty indicator which allow straightforward
dominancetests; see Ravallion(1992a).

56. However, in a sample in 20 urban centers in India in 1984 - while the 819 poor households
averaged 5.9 members, the 1190non-poorhouseholds4.7 - the streng negativesize-incomerelationship
ceased to hold among the non-poor [National Institute of Urban Affalrs (1989)l. Similarly, in rural
Bangladesh,larger family size lowered monthly meals per person, and of kgs. of food staple, mom
subtantally for poorer villages (and for females and children) [Mahmudand McIntosh(1980)1.

79
57. Thesedata may overstatethe impactof maternaleducation,becausethey do not controlfor
ability,familybackground,etc [Behrman(1990)].
58. Mortalityis less of a problem. Eachbirth, geteris2aribus,itself cuts a household'saverage
income, confoundingthe causalsequencein any claimednegativecross-sectionalassociationof it to
fertility. But each death, being typicallythat of a non-workinghouseholdmember,tends to raise
householdmean income;the effectthereforemeansthat any negativeassociationbetweenincomeand
mortalityis mm likelyto involvea causalsequencefrompovertyto higherrisk of death.
59. Exceptionscan arise when higher incomeis not associatedwith rising opportunitycosts of
mother'stime [Schultz(1981)1.
60. First, to achievea givencompletedfamilysize, thepoorrequiremorebirths,dueto higherchild
mortality. Second,the poorare likelierto needsupportfrom childrenin old age than are the rich, yet
those childrenwill fa( lower income,higher time-ratesof unemployment(sec. 4.3.2.), and fewer
incentivesto remitin order to inherit. Third,the poorfaceworseprospectsof education(whichwould
allowthemto 'substitutequalityfor quantity'in children[Beckerand Lewis(1974)1,andespeciallyof
femaleeducation(whichraisesthe opportunity-cost of motherhood).
61. The latterargument,however,dependson markettransmissionof higherexptecteddemandfor
naturalresources(dueto higherpopulation)to suppliers'sactionsto economizein, and/orto discover,
such resources. Wherereal long interest-ratesare both exogenousand high (or risingsharply),this
transmissionmechanismdoesnot workweli [Lipton(1992a)1.
62. Thishas beenfoundfor Am subsetsof girls under5 in NorthIndia[Levinson(1974),Bardhan
(1982),Dasgupta(1987)]andin Bangladesh
[Chen(1981),MuhuviandPreston(1991)].
63. The increase,withdeepeningpoverty,vanishesamongthe verypoorest5-10%of householdsin
most samples[Lipton1983a:43-5].
64. In Peru, the excessfemaleburdenwas even moreseverefor single-headedhouseholds,where
femaleheads even had to work 39% more "market' hoursthan male heads; even in multiple-earner
households,marketplus domesticworkoccupiedfemaleheadsfor 76 hoursper monthmorethan male
heads[Rosenhouse19891.
65. See H. Standing(1985),AnkerandHein (1985),GuhanandBharathan(1984)on silk-weaving
workin SouthIndia;von E-aun, PuetzandWebb(1989)on irrigatedrice-farmingin the Gambia;Telles
(1993)on urbanlabormarketsin Brazil.
66. For sociological' planationssee AlamandMartin(1984),and Schiegel(1976).
67. See, for example,Visaria(1977),Lipton(1983a)andvan de WalleandRavailion(1992).
68. Sincechild/adultratiosrise sharplywithfallinglivingstandards,thisprobablyexplainswhythe
associatedincreaseof femaleASPRsis so modest.
69. For theoriesand evidenceon unemployment in LDCssee Rosenzweig's(1988)survey. Recent
contributionsincludethe workon tacit collusionon the supplyside in rural labor markets[tDrfzeand
Mukherjee(1989),Osmani(1991)],and the generalequilibriumtheory of unemployment under the
efficiencywage hypothesis[Dasguptaand Ray (1986, Dasgupta(1992)]. The latter explainshigher

80
unemploymentamongstthose with fewestassetsas the competitiveequilibriumof a labor market in which
the cost of labor per efficiencyhour is high for those with few assets, who are thus priced out of the
market.

70. Though rural poverty clearly fell in Indonesia, Egypt, and Kenya in 1950-75or so, real farm
wage-ratesshowedno clear uptrend [Lipton(1983: 86-7)]. Real wage rates showedlittle gain - and by
some accountsfell - during the 1980sin Java, whilepovertymeasuresfell markedly [Ravallionand Huppi
(1991), World Bank (1991b)1.

71. Schoolingis associatedwith higherproductivityevenfor farm laborers[Chaudhri(1979),Jamison

and Lau (1982), Otsuka et al. (1992)], and can help people to escape from low real wage-rates i
unskilled agricultureby shifting or diversifyingsector, or place, of work. In Malaysia, Thailand and
Korea, this process eventually"turned round" the rising trend of farm labor supply; femaleeducationalso
helps this process in the long run by inducinglower fertility.

72. For a stark exampleof how the poor can lose from statutoryminimum wage rates imposedon
public works employmentsee Ravallionet al (1993).

73. Iu a sample of Philippine farm households, Bouis (1991) finds that the incidence of certain
micronutrientdeficiencies(iron, calcium, thiamin)tends to be greatest amongstthe poor.

74. See Schiff and Valdes (1990); on Ivory Coast evidence, such capacity depends on loat
endowmentsof quite precisely specifiablehealth inputs [Thomaset al. (1992: 32)].

75. See Payne and Lipton (1993); for more enthusiasmaboutRMR-adaptation,see Sukhatme(1981);
for less, see Dasgupta and Ray (1990).

76. Despite the controversies about calorie-incomeelasticitieswe have not seen, and would not
readily believe, data showinghigh incidencesof severe undernutritionwell abo an ultra-povertyline.

77. See Schofield(1974),Bardhanand Rudra (1981), Platteau(1988), Ravallionand Dearden(1989),

Rosenzweigand Stark (1989), Walker and Ryan (1990), Townsend (1991), Ravallionand Chaudhuri
(1992),Fafchamps(1992), Coate and Ravallion(1993),Saha (1993), and Besley's chapter in this volume.

78. See, for example,Andersonand Hazell (1989), Chamberset al.(1981), Sahn, (1989), Ravallion
(1988), World Bank (1990, chapter 2), Walker and Ryan (1990), and Morduch (1990, 1991).

79. 4.7% in Cameroon, 7.1% in Peru, 0.3% in Bangladesh,3.0% in India, 4.8% in Sri Lanka and
2.2% in Thailand. They were slightlymore significantin Turkey (9.7%), Syria (14.7%) and Paraguay
(16.0%). Only in two of the ten countries with substantialpopulations and available data (Ecuador,
Nepal) did over 30% of people live in "intermediate" settlements. See UN (1983:896-907) and
'1988:711-718).
80. Exceptionsdo exist. In parts of Kerala (India)and SW Sri Lanka, rural areas are not much less
denselyseled than are small towns.

81. National definitions of "rural" and "urban" do not refer to comparable (or sometimesto any)
population sizes of setdements. In Africa, five of the available (1980s) national data sets give no
definition;ten give political definitions (e.g. "municipalities");for five, the main criterion is " > 5000";
for one, " > 3000"; andifor three, ' > 2000". In Asia, the respectivenumbers are 4 (includingChina),
 15, 2 (includingIndia),zero and 1. In SouthAmerica,theyare 1, 6, 0, 0 and 2, plusone countryeach
using ">2500" and "> 100dwellings".In Asiaa furthertwo countriesuse "> 10,000",andone each
">9000" and (Japan)">50,000". SeeUN (1988:205-6).
82. For example,an RUPIRof 3 meansthat a randomlyselectedpersonlivingin rural areasisthree
timesmorelikelyto be poorthan one livingin urbanareas.
83. The Bankestimateis 1.1. However,the 1.3figuremakesuse of a subsequentreworkingof the
Indian data, which developedalternative(income-group- and State-specific)rural and urban price
deflators. This newseriesgivessomewhathigherestimatesof rural povertyincidence,andof RUPIRs:
respectively59 per centand 1.27for 1970-71,51 per centand 1.28for 1983,and 49 per centand 1.29
for 1987-8[Minhaset al. (1991:1670)].
84. Large excessrural mortalityexistsin Indiafor both sexesat all ages; for under-fives,the gap
appearsto have widenedsince 1961[Mitra (1978:223), Ruzicka(1982:tables 5-6)]. Rural infant
mortalitytypicallyexceedsurban[WorldBank(1990:31)1.
85. However,even the urban poor, especiallyfemale casual workers, depend significantlyon
agriculturaland alliedemploymentandincome.
86. Suchas banningstreet vending,or low-costtransportfrom the streets,or favoredtreatmentto
large firmsin accessto institutionalcredit.
87. Spearman'srank correlationcoefficientis not significanteven at 10 per cent; but, of the five
States(outof 15) withhighesturbanpovertyincidence,threeare amongthe half-dozenwiththe lowest
proportionsof urbanpopulationlivingin slums.

88. Noticethat the function P is homogeneous of degreezero in the povertyline and the mean.
Povertymeasureswiththis propertyare 'invariantto scale*.In someof the literature,thesearereferred
to as "relativepovertymeasures",as distinctfrom"absolutepovertymeasures",whichare invariantto
addingthe same absoluteamountto all incomesand the povertyline; see Blackorbyand Donaldson
(1980)and Foster and Shorrocks(1991). A:mostall povertymeasurescurrendyused in practiceare
"relativepovertymeasures"in the abovesense.

89. TheLorenzcurvecanbe writtenas L(pz) - F-r(t,)dWi/ whereF-I isthe inverseof the CDF
0
i.e., a proportionp of the populationhave a standardof livingless than F-(p,n) [Gastwirth(1971)].
90. This assumesthat z is constant,thoughthis can be readilyrelaxedto the assumptionthatz has
an elasticitywith respectto i whichis less than unity; from the cross-sectionalrelationshipbetween
nationalpovertylines andmeanincomethat assumptionis plausiblefor developingcountries[Ravallion
et al. (1991)1.
91. Thesecommentsalsoapplyto the Senindex,and otherswitha kinkat the povertyline.
92. Also see Adelmanand Morris (1973),Robinson(1976),Ahluwalia(1976),Ahluwaliaet al.
(1979),and AdelmanandRobinson(1988).

82
 93. Anandand Kanbur(1985)prove this for FGT measures,though it readily generalizesto all other
sub-group consistentpoverty measures. Kakwani (1988)proves a similar result for generalizedLorenz
curves (and, hence, all monotonicpoverty measures), though it will also hold for the poverty incidence
curves (section 3.3). Anand and Kanbur (1993) contains the essential analytic results, though the
implicationsfor poverty are not drawn out.

94. This is in contrast to Fields's (1980) conclusion that migration into the urban sector will
unambiguouslyreduce aggregatepoverty; the difference lies in Fields's assumptionthat no one is poor
in the urban sector.

95. Am importantconcern is the possibilitythat measurementerrors in the poverty measure will be

correlated with those in the survey mean; if, for example, survey measurementerror leads one to
overestimate the rate of growth in the real mean then it will lead to an overestimationof the rate of
reduction in poverty incidence. Chen et al. (1993) used an instrumentalvariables estimator, with
instrumentsderived from independentdata sources, such as the National Accounts.

96. In a cross-sectionof countries(both developedand developing)Persson and Tabellini(1991) find

that the higher the incomeshare of the middle class (the third quintile)around the 1960s,the higher the
real rate of growth in GDP per capita 1960-85.

97. On India alonesee: Ahluwalia(1978, 1985),Saith (1981),Rahakrishnaet al (1983),van de Walle

(1985), Mellor and Desai (1985), Dev (1988), Gaiha (1989), and Bell and Rich (1990).

98. A classic instance of immiziing growth being the fate of smallholdersin Chilalo, Ethiopia,
followingintensificationin the early 1970s [Cohen(1975)].

99. The new institutionaleconomicsemphasizesthe choicesmadeby farmers in adoptinginnovations,

those choices being seen as dependent on (inter alia) evolvingrelative factor scarcities. On the agro-
technicalprogress from this perspectivesee Hayamiand Ruttan (1985),Richards(1985),Binswangerand
Ruttan (1977), and Binswangerand Rosanzweig(1986).

100. In 1987-8,the best estimatesof rural poverty incidencein major Indian Stateswere much lower
in the Punjab (21.0 per cent) and Haryana (23.2 per cent) than in any of the other, more agriculturally
sluggish and less productive, States [Minhas et al. (1991: 1676)]. Research gaps include statistical
analysis, and causalmodelling,of the regional links betweenFGT measuresof (1) rural povertyand food
(not farm) output, (2) urban poverty, or total poverty, and farm (or food) output.

101. Similar experimentsfor Indonesia, where the regional disparities in the incidenceand severity
of poverty across islands are larger, have suggestedgreater gains from this type of targeting- and also
that those gains are far from beingrealizedby existing inter-regionaltransferpolicies [Ravallion(1992b),
Bidani and Ravallion (1992)1. But even then regional targeting is no panacea; the impact on nation21
poverty of unrestrictedincome redistributionsacross Indonesia's provinceswouldbe equivaientto a four
percent increase in national mean consumption. We shouid look for other indicatorsto enable finer
targetingwithin regions or sectors.

102. Many developingcountriesare heavilydependenton a few primary commodidesfor both foreign

exchange and as a source of revenue for public spending.The prices of these commoditiesproved to be
highly volatilein the 1970sand 1980s.Increasesin the prices of these goodsoften led to public spending
sprees, which led to large budget deficits whenprimary commodityprices fell.

83
103. For an expositionrelevant to the present discussion see Edwards and van Wijnbergen (1989).
For analysesof the distributionalimpactsof adjustmentwithinthis frameworksee Knight (1976), Addison
and Demery (1985), and Kanbur (1987b). This type of model also underlies the analysison this issue
using computableGE models, such as in the recent OECD project [Bourguignon,de Melo and Suwa
(1991)].

104. On the Stolper-Samuelsontheorem see (for example)Dixit and Norman (1980).

105. See, for example, the simulationsof the effects of structural adjustmenton the rural sector of
Morocco by Bourguignon,Morrissonand Suwa (1991).

106. For example,whilepersonsat the povertyline in Java, Indonesia,tend to be net suppliersof rice,
the poorest tend to be oet consumers, and there is also a great deal of variability in net trading position
at any income level [Ravallionand van de Walle (1990)1.

107. For reviews of countryexperienceswith the use of public expenditurereforms to dampen adverse
effects of adjustmenton the poor see Ribe et al (1990), and World Bank (1990, Chapter 7).

108. See, for example,the discussionon adjustmentin India in Ravallionand Subbarao (1992).

109. On the supply response in agricultureand how it is affected by infrastructuresee Binswanger's

(1989) survey. Also see de Janvry et al. (1991).

110. Householdsurvey instrumentsfundedthis way have includeda numberof the surveysdone under
the World Bank's Living StandardsMeasurementStudy; see Glewwe(1990).

111. We shall continueto focus on consumptionpoverty. Impactsof adjustmenton a range of social

indicatorsare examinedby van der Gaag et al. (1991) and Maaslandand van der Gaag (1992). These
studies find little evidencethat the evolutionof social indicatorswas any different betweenadjustingand
non-adjustingcountries.

112. As in Ravallion's (1990b)study for Bangladesh. For further discussionof this type of approach
in an adjustmentcontext see Kanbur (1987b). Also see Azam et al. (1989).

113. See section 4.6 on the urban informal sector. Discussions of the main instruments of direct
interventionto reduce urban poverty include Mayo et al. (1986) and Mayo and Gross (1988) on 'sites-
and-services"and slum up-gradingprojects; World Bank (1992c)on the potential costs and benefits to
the urban poor of urban infrastructureand some other urban policy interventions;and Ravallion(1989b)
on urban planningregulations.

114. For a recent review of the issues in evaluating targeted interventionsin the U.S. see Manski
(1990). For more general discussionsof project evaluation see Dreze and Stern (1987) and Squire
(1989).

115. This is analogous to the role of the "loss function" in balancing type 1 and type 2 errors in
statistics.

116. See Kanbur et ai (1992) for an analysis of the optimal benefit withdrawal rates for targeted
poverty reductionschemes which effect labor supply.

84
117. RavaUionand Sen (1992) examine the impact of land-based re-distributions when they are
accompaniedby pro-poor productivityeffects; they find that plausible allowances for such effects will
add to the poverty impact, though the effect is not large.

118. There is a large literature; contributionsinclude Dandekar (1983), Basu (1981), Acharya and
Panwalkar(1988),Echeverri-Gent(1988), Dreze (1990a), Dreze and Sen (1989), and von Braun, Teklu
and Webb (1992). For a recent survey of the theory and evidencesee Ravallion(199la).

119. For example, 70% of the employmentprovidedby Bangladesh'sFood-for-WorkProgram in the

early 1980swent to the poorest 25% of rural households,ranked by annualincomeper person [Ravallion
(1991)1.

120. A panel study in six semi-arid Indian villages over 1975-83showed that '..only about 12% of
householdswere [poor in none ofl the nine years [while]44% were poor for six or more years, and 19%
were poor in every year [and] 50% were poor in a typicalyear. The transient componentis large [yet]
there is a substantialpersistentcore of chronic poverty" [World Bank (1990: 35)].

121. Credit, thoughnot an input itself, facilitatesproduction.Thepoverty impactof raw-materialinput

choices (on gross output) is not explicitiy reviewed. Subsidiesto fertilizers, irrigation, etc. normally
accrue mainly to better-off farmers, thoughthe poor may gain indirectly. Technologychoices, changing
inputuses in ways that may reducepoverty, appear in Table 2 under col. (a), rows (4-6); and institutional
choices, mainly in col. (e) (credit).

122. Local lnowledge - aboutthe structureof both poverty and technology- is essentialbeforepolicy-
makers inhteveneto induce, or to accelerate,gains in the productivityof labor. Do laborers own most
of the capital and land that "employs"them? If not, is the price-elasticityof total farm supply low, and
the elasticAtyof substitutionbetween labor and other factors high? If so, "gains" in labor-productivity
(e.g. better weedicides)can mean large net losses for the rural poor.

123. Of course, outputgains achievedwith all inputs held constantcannot in general be attributedto
"factor-specificproductivityincreases". However, in practice, such rises can generallybe traced mainly
to changesin the type, or mode of utilization,of one or another factor.

124. There remains the possibilitythat, by expandingthe proportionof land growing crops that loom
large in poor people's consumption(viz. food staples)or employment,an interventionor incentivemight
help the poor, via cheaper food or more employmentincome.

125. Silting tenants who escapeeviction, of course, gain from rent controls, etc. But potentialtenants
lose, as land-to-rentis resumedfor commercialfarmingon own account. It is notablethat tenancy almost
always renders the distributionof operated farmlandmore equal, i.e. more pro-poor, than that of owned
farmland; and it is not, as a rule, a barrier to innovation [Bardhan and Rudra (1980), Lipton with
Longhurst (1989), Singh (1990)].

126. It is controversialto what extent, if at all, this is really happening[Bie (1989)].

127. The same is true of the view that "excessive" indebtednessarises from the "extravagance"of
myopic peasantswhen exposed to new opportnities for credit; see Ravallion(1990c).

128. See Theil and Finke (1985), Schieberand Poullier (1989), and Gertler and van der Gaag (1990).

85
129. WorldBank(1990, 1991a)has beenprominentamongstrecentexponentsof this view. t

130. Outcomesfor thepoor will dependon policydesignwithinanygivencategoryof social-service

spending,as wellas the allocationacrossbroadcategories.Howwellcanthepoorbe identified(to allow
pricediscrimination or someformof indicatortargeting,suchas by locatingnew
basedon means-testing,
facilitiesin poor areas)? Whatare the costsandbenefitsof suchtargeting?But thesepolicyproblems
are generic,andhave alreadybeen dealtwithearlierin this section.
131. Theseare oftentermed'benefit incidence'studies. 'his is somewhatmisleading,sinceone is
not really quantifyingbrnefits(in the sense of welfaregains), but rather utilizaoion.Utilizationof
multipleservicesis then being aggregatedaccordingto the sarvice-specific rates of subsidy(public
spendingless cost-recovery).So theseare betterthoughtof as 'subsidyincidence"studies. For further
discussionsof thesestudies,andtheirlimitations,see Comes(1992),andSeldenandWasylenko(1992)
132. ExamplesincludeMeerman(1979)for Malaysia,and Selowsky(1979)for Colombia,Foxley
(1979)for Chile, Meesook(1984)andvan de Walle(1992)both for Indonesia,Bahl et al (1986)for
SouthKorea,WorldBank (1989)for Bangladesh,Hammeret al (1992)for Malaysia,and Seldenand
Wasylenko(1992)for Peru. Alsosee the Jimenezchapter.

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Tttle Author Date for paper

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aboutPolicyandGrowthfromCross- SaraZervos 38526
CountryAnalysis

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Systemsand
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WPS1119TheNorthAmerican FreeTrade RaedSafadi March1993 J. Jacobson

Yeats
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for CopingwithPrice
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WPS1121 MeasurngCapitalFlight:A Case HaraldEggerstedt March1993 H.Abbey

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Environmentin Mexico 37699

of Slovenian MilanCvikl
WPS1126 TheCostsandBenefits April1993 S. Moussa
Independence EvanKraft 39019
MilanVodopivec

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AffectEastAsia Taylor
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WPS1128 TheInternational OceanTransport HansJorgenPeters April1993 J. Lucas-

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WPS1129 HowPolicyChangesAffectedCocoa Jonathan

R. Coleman April1993 G. Ilogon
Sectorsin Sub-Saharan
African TakamasaAklyama 33732
Countries PanosN.Varangis

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Ma,tinRavallion 33902