Poverty-reducing lessons from success stories

Bangladesh is among the most successful poverty-reducers. But why? And who are the other success stories? It is important to draw lessons from the experience of selected best performers of poverty reduction across the developing world because it gives policymakers a new perspective. This article identifies some common ingredients of success, notwithstanding their diverse circumstances. The stages of development also merit diagnostic and policy considerations.

This article provides an in-depth review of countries that successfully reduced poverty and undernutrition during the 2010s. It locates their success stories by looking at their long-term patterns of economic development and social progress. Bringing down the high level of adult and child undernutrition is imperative.

Success is the outcome of several factors that speak to poverty and undernutrition reduction. Poverty is generally minimised in countries that have had less growth volatility and reduced inequality. There are 17 successful poverty reducing countries in this analysis. Out of all successful poverty reducers, inequality decreased in 12 countries and rose in 5 countries in the 2010s.

A common ingredient of successful poverty reducers is the accumulation of educational and health capital. Successful cases have both resource-rich and scarce economies, but the difference between the unsuccessful ones is in the way they used natural rents to finance human development and inclusive job-creating economic growth. These economies are also good at installing a greater coverage of social protection. All these features are found to be absent among unsuccessful countries. With this backdrop, the question arises: what are the lessons of policymakers for countries like Bangladesh?

Concepts underlying the narratives

The poverty reduction narratives are based on a conceptual approach. This article draws insights from the three strands: (a) growth-distribution for ‘proximate determinants’; (b) growth-human development-social protection for ‘policy determinants’; and (c) institutional drivers for ‘deeper determinants.’

The first strand is the interaction between growth and distribution in reducing absolute poverty. Growth, poverty and inequality are the ‘proximate determinants’ of poverty reduction. Absolute poverty reduction can be achieved by combining growth and distribution policies. The second strand is the ‘policy determinants’ to explain the variation in poverty reduction. Here the composition of growth, employment and social security makes all the difference in poverty reduction performance. The third strand is the ‘deeper determinants’ in which institutions play a central role. Here both economic growth and progress against poverty are influencing factors. 

This three-strand approach has been adopted to unpack the success stories of the 17 best performing countries. The evolution of certain indicators of the three determinants over a fairly long period, from the 1990s to the present day, are traced here. It helps us to identify certain patterns, while in turn understanding the strengths and weaknesses. It is particularly important for Bangladesh, which is entering a new phase of development-graduation under the UN and World Bank enlistment.

Identifying the successful performers

There is no easy way to identify the best performers in well-being measures. Is it the pace of poverty reduction, or the level of current poverty, or a mix of both? The approach which should form the demarcating criteria remains a wide-open question. Either way, while taking any approach it is important to consider the nature of poverty – its core multidimensionality.

Countries that have performed well in both reducing poverty and malnourishment can be shortlisted among the most successful countries. After applying this criterion, Bangladesh is among the list of 17 successful countries that emerged in the past two decades. Others are China, Malaysia, Indonesia, Philippines, and Vietnam, India, Sri Lanka, Dominican Republic, El Salvador, Honduras, Ethiopia, Tunisia, Kyrgyz Republic, Greece and Kosovo.

These countries either displayed a higher pace of annual poverty reduction or have maintained very low poverty during the period. The national poverty lines of respective countries have been factored into the analysis. In general, the national poverty lines differ for each country, and they tend to rise with the level of country’s income.^[1]

As indicators, the proportion of undernourished population and the prevalence of child stunting were taking into account. In the case of successful poverty reducers, the calorie-deprived population can be considerable, ranging from 3% to 20% of the population. China and Malaysia have a very low share undernourished population i.e. they are the better performers. Bangladesh, however, has high undernourishment along with countries like India and the Philippines with over 10% of the population undernourished.

The nutritional situation becomes darker when it comes to child stunting rate. Countries that are fast reducers of poverty are not necessarily fast reducers in child undernutrition. Here most of the successful poverty reducers, including Bangladesh, fail to pass the test.

Even in late 2010s, the stunting rate among children is unacceptable high: Bangladesh (28%), India (35%), Indonesia (31%), Philippines (30%), Vietnam (24%), and Sri Lanka (17%). This is because child undernutrition is an outcome of different factors and cannot be addressed by income or growth acceleration alone. Even poverty is just one reason for the prevalence of child stunting. Factors such as maternal undernutrition, maternal and child health care services, nutritional knowledge, micronutrient production, dietary diversity and women’s empowerment all play a defining role.

 

What the successful countries show

The conditions of successful performers differed in the beginning of the new millennium. Some were more traditional and agriculture-based, while others were quite advanced in harnessing modern service sector activities and showing signs of industrialism and urbanism.

First, proximate determinants of poverty reduction

Role of growth: We considered both measures of GDP per capita and GNI per capita to judge the growth performance of an economy. Of all 17 countries, growth decelerated 16 countries in the late 2010s compared to early 2010s, except for Bangladesh.

Role of growth volatility: Growth rate of an economy may fluctuate over decades. If the annual growth fluctuates too much, then it effects poverty levels. Bangladesh along with China, Vietnam and Indonesia are the most successful countries which displayed the least growth volatility.

Role of inequality: Countries also differ in terms of inequality dynamics. An inter-country comparison is difficult because of the way consumption and income are measured. The conventional measure of Gini index, which is more widely available, has been used.^[2] Bangladesh fares moderately well in inequality measures.

Some countries experienced disequalising growth – when growth is accompanied by a rising Gini index since 1990. The list includes the following countries: China (Gini index increasing from 32.2 to 38.5); India (from 31.7 to 35.7); Indonesia (from 34.6 to 38.2); Sri Lanka (from 32.5 to 39.4) and Bangladesh (from 27.6 and 32.4). Vietnam has witnessed see-saw trends in inequality; rising in the 2000s, before dropping again to the level prevailing in the early 1990s.

10 out of 17 countries have experienced falling income and consumption inequality. Unfortunately, Bangladesh is not among them. The trends in inequality for a select group of successful poverty reducers convey an important message: poverty trends were shaped both by economic growth and inequality-reducing policies.

Second, policy determinants of poverty reduction 

Moving out of agriculture: Nearly all the successful cases in poverty reduction listed above have experienced a declining share of agriculture in their GDP from 2000-2019. Agriculture’s share in GDP almost halved in China, Sri Lanka, Bangladesh and Vietnam over the past two decades. In contrast, the progress was much slower in India, Indonesia and Philippines, indicating much less vibrancy.

Countries also differ in terms of the nature of structural transformation. The declining share of agriculture in GDP does not mean a corresponding rising share of industry. The share of the industry in GDP has decreased in nearly all the countries except for Bangladesh. In fact, the drop in the share of agriculture led to rise in the share of the service sector. This is odd because one would think manufacturing-driven growth would be a natural choice for countries like Bangladesh.

This poses a challenge in sustaining poverty reduction for those who have the greater propensity to move out of poverty. Service sector-led growth at early stage of development is only open for skilled labour endowed with human capital and business initiative. Whereas unskilled labour workers moving out of agriculture usually seek wage employment at relatively low levels of human capital potentially available in the labour-intensive manufacturing sector.

Therefore, the job market is polarised between the high-end service sector and low-end agricultural sector. There are missing medium skilled jobs required by the export and domestic demand driven manufacturing sector. This ‘missing middle’ problem creates additional concerns of overcrowding of low skill jobs in the lower end of the service sector and a greater informalisation of the labour market.

Importance of service sector employment: Agriculture’s share in total employed labour force has dropped in all economies in the list of successful performers between early 1990s and late 2010s. In some countries, the matched drop was spectacular: in Bangladesh, from 69% to 38%; in China, it declined from 60% to 25%; in India, from 63% to 43%; in Indonesia, from 55% to 28% and in Vietnam, from 71% to 37%. Part of the surplus labour that moved out of agriculture went to the industrial sector, but most went to seek service sector jobs.

This is also true even for ‘manufacturing nations’ such as China, Vietnam and Bangladesh. For instance, Bangladesh, often termed as a rising manufacturing hub, experienced a decline of agricultural employment by 31 percentage points; out of this, only 7.7 percentage points of the equivalent labour force went into industry, while the remaining 23.4 percentage points of labor force went into services. India’s drop of agricultural employment by 20 percentage points was evenly shared by the industrial and service sectors. Even in Vietnam – another export hub of Asia – decline in agricultural employment was equally divided into industrial and service sectors.             

The service sector orientation in the pattern of employment has important implications for understanding the observed poverty dynamic in the best performing countries. Moving out of agriculture was a tool of intergenerational poverty reduction – a process sustained mainly by the expansion of service sector employment and less so by the expansion of manufacturing employment.

Labour income: In all the countries included in the list of successful performers, labour income seems to be a key driver. Rising wages and salaried employment led to many of the successful cases. Between 2001 and 2019, the share wage and salaried workers in total employment has increased dramatically in China from 39% to 55%, from 36% to 48% in Indonesia and from 21% to 46% in Vietnam. Bangladesh also experienced a considerable increase from 33% to 41%, while not as dramatic as others, but still way ahead of Sri Lanka and India. The rise of wage employment was a major poverty reduction factor in Bangladesh.

In some of the successful economies, the share of salaried employment has risen, resulting in higher wage earnings. In India, the rise led to rapid annual GDP growth averaging 8.4% between 2003-4 and 2011-12. More positively, the share of youth in regular work rose. The Bangladesh evidence also tells the same story. Between 2003 and 2013, the share of self-employment has declined from 45% to 40%. This translated into the share of regular wage workers increasing from 14% to 23%. More importantly, the share of casual workers (day labourers) dropped from 20% to 15%.^[3] Robust manufacturing and export growth in the 2010s has stimulated this transition.

Urban as transformer: The urban factor is important for five reasons: (a) proximity to urban areas accelerates the chances of moving out of agriculture; (b) proximity to urban areas enhances the productivity of rural non-farm activities; (c) agglomeration economies of the urban economy provide the space for creating poverty-reducing jobs through modernisation and industrialisation and leads to higher economic density and attractive destinations for poor migrants; (d) small town development can often provide opportunities for off-farm jobs through daily commutes, while not severing the links with rural areas, thereby offering a more sustainable model of urbanization and finally, (e) rural-urban migration in rapidly urbanising contexts can transform traditional agrarian relations leading to agricultural mechanisation, land tenancy with better terms and conditions for the tenant farmers and contractual rural labour markets with high implicit wage income.

All the successful performers have consistently become more urbanised. China has been rapidly urbanising its economy in the last three decades. Bangladesh has quickly urbanised too (the share rising from 20% to 38%), as did Vietnam (the share increasing from 20% to 37%). The share of urban population is expected to increase with even faster pace in the next decade with the growth of exports, special economic zones, modern connectivity and transport infrastructure. Poverty reduction process cannot be understood without reference to urbanisation, industrialisation and export growth.

Role of human capital: Human development has three aspects – education, health and nutrition. The stock of human capital of a developing country is represented by its literacy rate. Substantial progress has been achieved in the last three decades in almost all the economies. In Bangladesh and India adult literacy still hovers around 75%, which may be compared to over 90-95% in the most successful poverty reducers. In short, the latter countries are fast approaching the target of near 100% adult literacy, an indication of hidden social transformation in these countries.

The quality of education leaves much to be desired and not just in Bangladesh

Some countries have a framework of systematic quality monitoring at the national level. Many do not. In Bangladesh, CAMPE, an educational NGO, conducts periodic surveys on the quality of primary education. However, the quality of education leaves much to be desired and not just in Bangladesh. The Programme for International Student Assessment (PISA) is an international assessment that measures 15-year-old students’ reading, mathematics and science literacy every three years. This system has been administered since 2000 in many countries on a voluntary basis.

A cursory look at the list of participating countries in the PISA gradation system reveals the quality of education in a particular country. Only 11 out of 17 countries have participated in the PISA system, and many of them participate on an irregular basis. Bangladesh is not a participant.

The point is, human capital – measured by adult literacy and the quality of basic education – in many successful poverty-reducing economies, including Bangladesh, remains a challenge. Economic growth and poverty reduction does not automatically solve the problems of educational human capital.

Health can have intergenerational poverty effects. Preventing health shocks and reducing morbidity through effective investments can have immediate effects on the lives of the poor. It protects them from income losses due to illness. Early health interventions can also reduce the likelihood of disabilities and untreated illnesses, which otherwise may have longer-term consequences.

The first indicator considered here is the number of hospital beds per 1000 people. In this indicator, a few countries stand out: China, Sri Lanka and Vietnam. All these countries have raised the hospital-bed ratio noticeably between 2001 and 2017. Here, the South Asian countries do not fare well.

However, Sri Lanka is an exception in South Asia. In contrast to Sri Lanka, India experienced a declining hospital bed-population ratio from 1991 until the end of 2010s, i.e. during the entire period of the country’s outward oriented economic reform. This again stands in contrast with China, Sri Lanka and Vietnam, who also underwent similar liberalised economic reform.

Bangladesh’s experience comes out as winner compared with the Indian experience. Back in 1990, Bangladesh had roughly half the number of hospital beds per 1000 population compared to India. By 2017, it had twice the number of hospital beds per 1000 population. The performance of Bangladesh has been vindicated by a range of gender-sensitive indicators as well.

Role of women empowerment: Successful poverty reducers have favourable indicators on greater ‘status of women,’ higher ‘female agency’ and greater ‘female empowerment.’ Three noteworthy measures may capture the status of women in a society: fertility trends (an indicator of reproductive burden of women); female secondary enrolment rate (an indicator of women’s human capital and capability) and the female labour force participation rate (an indicator of women’s economic empowerment).

The total fertility rate (TFR) is the number of children that are likely to be born to a woman during her reproductive age.^[4] Only few successful poverty reducers have attained the replacement level of fertility of 2.1 during the last two decades. The successful countries in this regard are Bangladesh, China, Malaysia, Vietnam and Sri Lanka. No wonder these countries display higher rates in the education and labour force participation of women.

The pace of female secondary enrolment rate expansion is common in the successful list. However, it varies. The contrast between Bangladesh and Ethiopia is a case in point. Both the countries started from a similar level of female secondary enrolment in 1990 at around 12-14%. But they have diverged since then – Bangladesh and Ethiopia at 78% and 34% respectively. Other than Bangladesh, China and India are also fast expanders of female secondary enrolment.

Capability, however, needs to be translated into income opportunities. It is crucial for a country to create job opportunities for women which translates into their economic empowerment. Most of the countries, with Bangladesh as a lead, have raised the female labour force participation rate between 1990 and 2020. The glaring exceptions are China, India and Sri Lanka where it fell. The reasons for the fall vary such as the implications of China’s one-child policy.

In the case of Bangladesh, it had a growth of export-led manufacturing during this period. It absorbed over 4 million young people into the work force – about 60% of which are women. Importantly, it gave the right signal to aspiring female workers. These are the main reasons for the sustained increase in the female participation rate in Bangladesh – from 25% in 1990 to 36% in 2019. The direct effect of microfinance growth should also be factored in as it helped to create demand for female self-employment. Moreover, the indirect effects of foreign remittance, mostly by male emigration, has created demand for female-managed agriculture. Increased female economic empowerment led to increased female schooling as well.

Role of income transfer and social protection: Income transfers often act as a buffer against income shocks. The importance of income transfer is visible in countries with unskilled members of the population and initial levels of poverty. Bangladesh, with the highest population density in the sampled countries, had high levels of unskilled labour at the start of growth process. It also took early advantage of international migration from the labour scarce countries of the Middle East and Southeast Asia. The share of foreign remittance from overseas workers of Bangladesh rose from 2.5% in 1990 to 9.4% in 2010. But it declined to a respectable 6.7% in 2020.

The remittance channel became an important macroeconomic tool for building foreign exchange reserves in poverty reducing countries like Bangladesh, Sri Lanka and Philippines. The general point, nearly half of the countries in the successful list have a relatively high share of remittances in GDP. This has acted as a growth driver in these economies as well as a poverty reducer by stimulating consumption and investment in the farm and non-farm sectors. In countries such as Bangladesh, the Indian state of Kerala, El Salvador and Honduras the flow of remittances increased dramatically in 2020 compared to the pre-pandemic level. This dramatically increased consumption and mitigated the negative growth consequences of covid-19.

Access to income transfers, however, is limited for the extreme poor. This is where social security transfers from public coffers kick in. Some form of social protection – be it cash transfers or traditional employment guarantee schemes – becomes important in that context. Countries that have performed well in reducing extreme poverty and undernourishment have spent more in social protection for the poorest. There is a general upward trend of social safety coverage in the group of successful economies.

In natural resource rich countries like Malaysia, coverage of social safety net programmes was already very high (at 70% of population) from the mid-2000s. For South Asian economies, the safety net coverage was low in the 2000s but rose rapidly in the 2010s. Therefore, the coverage in Bangladesh was only 12% in 2005 but increased to 40% in 2016. It has expanded further since then, reinforced by the compulsions to protect the ‘new poor’ due to the covid-19.

This brings us to another aspect of social protection policy in the successful poverty-reducing countries: its coverage and impact. For most of these countries, the social protection net is inadequate to support the well-being of the poorest. This is because benefits from these programmes typically do not exceed 4-5% of the income of the beneficiary households.

There is also gap between the intended and the actual reach of the poor beneficiaries. Inclusion and exclusion errors are often large and persistent across regimes. An analysis in 2020 based on the Multiple Indicator Cluster Surveys (MICS) survey in Bangladesh shows that about 50% of the beneficiaries of social protection programmes – including widow and old-age allowance, stipend schemes and relief/work programmes – belong to the non-poor category. Only 25% belong to the category of extreme poor. Taking these leakages into account, the real impact of social protection would be even less.

A way out from this problem is to promote universal coverage, and the concept of a Universal Basic Income (UBI) is one example. However, implementation of UBI requires an overhaul of the existing system. It will impede a considerable fiscal burden. A tax financed UBI policy will be severely challenging for a tax collection regime in developing economies like Bangladesh.

Third, deeper determinants of poverty reduction

Deeper determinants like geography, history and institutions matter for extracting lessons from the successful poverty reducers. Factors such as path dependence and hysteresis play a central role in preparing these countries for structural transformation manifested in outward orientation, industrialisation and modernisation. In short, the deeper determinants enrich the understanding of the role placed by policy determinants.

Geography influences factors like proximity to coastal areas, which is important for maritime trade and openness. It also determines natural resource endowments. Hence, geography can make a country dependent on natural rents. It also shapes the population density of a country: mountains, deserts and forests have fewer people than in coastal belts. Remote and population sparse areas typically fall short in connectivity terms. Poverty is also typically higher in adverse geographies.

River erosion areas in the northwest and coastal areas in the south of Bangladesh have greater levels of poverty than in plain land. China’s northwest has higher poverty than in the coastal belt. Does this mean poorer people live in disadvantaged environments? The question cannot be settled by geographical factors alone. In Bangladesh, the hill people of the Chittagong Hill Tracts have a very high ‘human poverty’ index even though the region is one of the top GDP-ranked due to its abundance of natural resources.

History and institutions also tell these countries’ social performance. Some societies are predisposed towards female empowerment, while others are adaptive to new technologies. Some societies are oriented to distributive justice, while others are comfortable with a top-down approach. All these factors contribute to policy choices.

History can tell us about the causes of the long-term divergences in poverty rates within a nation. Historical events can make a substantial difference to economic outcomes both within and between the countries. The consecutive shocks of the 1970 cyclone (resulting in 0.5 million deaths) and the 1974 famine in Bangladesh (resulting in 1.5 million deaths) persuaded the country’s policymakers to show credible commitments to the trinity of food production, population control and female education. This in turn led to an acceleration of social development in the subsequent decades.

As noted, Bangladesh’s social development in gender-sensitive education and health indicators was faster than in India and considerably faster than in Pakistan. Greater female education means that the female work force in Bangladesh was better educated than in Pakistan, its former colonial ruler. This explains why Bangladesh was able to take advantage of the global readymade garment export market earlier (in the early 1980s) and why Pakistan lost out despite having a strong textile base.

The role of social movements acutely reflects social policies in certain countries. The 1971 Liberation War that led to an independent Bangladesh witnessed an increase in political movements from the 1950s and 1960s about upholding secular values. As a result, post-independence Bangladesh saw less constricted norms of purdah and a favorable policy stance towards promoting female education and workforce participation. The Liberation War also brought to the forefront some of the most dedicated middle-class professionals into the NGO sector, which played an important role in poverty reduction. These NGOs initiated programmes that spurred microfinance, non-formal education, child nutrition, maternal healthcare, homestead gardening and immunisation.

Professionalisation of the NGO sector is an asset for Bangladesh, to be drawn upon in times of crisis. Such a professional NGO sector imbued with the patriotic spirit of the Liberation War is still missing in the other parts of South Asia.

10 policy implications

From a policymaker’s perspective, the following points on poverty-reduction are imperative.

1. Growth acceleration is not a necessary attribute of countries with the most successful record of poverty reduction.
2. The stability of growth – as measured by growth volatility – is important for poverty reduction. Most successful poverty reduction countries, including Bangladesh and China, displayed the least growth volatility. India and Malaysia are surprising exceptions.
3. Inequality plays into poverty-reducing dynamics. Some countries, such as Bangladesh and China, experienced disequalising growth over a three-decade period between the early 1990s and late 2010s. Inequality dynamics therefore are policy amenable.
4. Successful poverty reducers made structural transformation, moving out of agriculture and into non-agricultural jobs. Bangladesh, China and Vietnam are shining examples here.
5. Labour income is a key driver. The rising share of wage and salaried employment is a contributing factor. Bangladesh is on the right track, showing an increase from 33% to 41% in three decades.
6. Human development is essential for poverty reduction. Adult literacy is a prime measure of the educational human capital stock, and the majority of the countries have crossed the 90% literacy rate by 2018. The countries lagging behind include Bangladesh and India.
7. Successful countries in reducing child undernutrition are also the ones fostering women’s empowerment. Bangladesh is exemplary here.
8. Education needs to be translated into income opportunities. Most successful countries raised female labour force participation rate between 1990 and 2020. Bangladesh saw a boom in export-led manufacturing sector during this period, absorbing over 4 million young people into the workforce—about 60% of which are women.
9. Income transfer policies plays an important part in poverty reduction – in some countries noticeably more than others. In Bangladesh the and Indian state of Kerala, the flow of remittances in 2020 fueled domestic consumption, mitigating the negative growth consequences of covid-19.
10. Private income transfers are absent among the extreme poor where public income transfer via social protection becomes important. For Bangladesh, social security coverage rose fast in the 2010s.

End remarks

In this article, the international poverty-reduction experience is reviewed through the lens of three sets of determinants: proximate determinants (growth, inequality and growth volatility); policy determinants (structural transformation, human development and income transfers) and deeper determinants (geography, history, and institutions). All three determinants influence the reduction of poverty and undernutrition. In addition, the factors that are conducive to reducing poverty are clearly absent among the worst performing countries.

In addition to the commonly discussed proximate and policy determinants, the deeper determinants of geography, history and institutions have also played a role, especially for Bangladesh. Many of the policy choices are derived from these factors that are at work. Obvious examples like the depth of land reform, the nature of land tenure, quality of civil society and attitude towards women all play a crucial role. Understanding the interplay between deeper determinants and policy determinants is also a puzzle worth resolving.

For Bangladesh, structural shift out of an agricultural economy was a fundamental determinant of its poverty reduction performance. Since 1990, during this transition, the manufacturing sector consistently grew. This makes the country unique among other South Asian players like India and Pakistan where the manufacturing sector didn’t have this uninterrupted long-run expansion. This expanding manufacturing element has not only improved female workforce participation, but also served as a bedrock of the country’s poverty-reducing success story in recent history.

 

[1] National poverty lines tend to fall around USD 3.20 poverty lines for most of the countries. They need to be revised periodically (once in a decade) to reflect new economic realities. For some countries such as Malaysia and Bangladesh, the national poverty lines have not been revised since the early 1990s. 

[2] The underlying trends in Gini need to be subjected to robustness checks by comparing with other measures such as the Palma ratio and the Theil index, but they are mostly available for developed countries.

[3] During the 2000s, the share of ‘unpaid workers’ was stable at 18-20%, but this has changed dramatically in the 2010s. The share of unpaid workers has dropped, and the weight of salaried employment has gone up considerably.

[4] The TFR is a measure of the fertility of a woman who passes through her reproductive life subject to all the age-specific fertility rates for ages 15–49 that were recorded for a given population each year. According to the UN, a total fertility rate (TFR) of about 2.1 children per woman is called replacement-level fertility, meaning it can sustain the existing population levels.

 

Photo ©️ Mahmud Hossain Opu