The changing understanding of poverty; the latest on growth diagnostics – 2 new papers to read while you’re awaiting the US election result……

December 4, 2008

     By Duncan Green     

I was saddened to see that the wonderfully named Post Autistic Economics Review has presumably succumbed to political correctness in renaming itself the Real-World Economics Review, but the quality is still great and email subscription is still free. The latest issue has a very handy guide by Paul Shaffer of the University of Toronto to the evolving understanding of poverty.

Shaffer identifies three main shifts in thinking about poverty. First, the concept of poverty has been broadened. This is reflected in the move from a physiological model of deprivation to a social one, and subsequently, in the increasing attention given to issues of vulnerability, inequality and human rights.

Second, the causal structure has been broadened to include a range of variables that previously received little attention. This has led to the increasing importance afforded political, social and cultural ‘capital’, as well as who holds coercive power, all of which figure centrally in what Shaffer calls ‘the governance approach to poverty’. The operational consequence is to shift attention from interventions restricted to building human and economic capital to interventions focusing on empowerment, social organisation, legal reform, human rights, etc.

Third, the causal structure has been deepened to focus on flows of individuals into and out of poverty, rather than on changes in the total stock of poverty. This has led to a focus on transitory rather than chronic poverty and on shocks, stresses and individual/community response. The operational consequence is to shift attention from long-term strategies to reduce chronic poverty, to strategies of risk reduction/mitigation, which ‘smooth’ income or consumption. Examples include, insurance and credit schemes, buffer stocks, seasonal public works, etc. At a global scale, this is reflected in increased attention to issues of risk reduction/mitigation in areas as diverse as financial markets, increasing labour mobility and infectious disease; and the impact of volatile trade and aid flows.

Shaffer works through these shifts, offering handy checklists of where development thinking has got to on the links between poverty and issues such as public spending, targeting, microcredit, decentralization and lawlessness, along with a nice sprinkling of case studies.

Meanwhile for those of sterner disposition, have a look at ‘Doing Growth Diagnostics in Practice: A Mindbook’, the new paper from the Harvard team of Ricardo Hausmann, Bailey Klinger and Rodrigo Warner. This takes forward an important and influential stream of work that also involves Dani Rodrik, which is trying to make the economic  equivalent of the shift from medical research to a doctor-patient relationship. Switching metaphorical horses in midstream, growth diagnostics tries to locate and strengthen the one or two weakest links in the chain and focus government efforts on tackling these, rather than the wishlist of dozens of desirable reforms that have often figured in structural adjustment programmes and other agreements. Instead of trying to establish general rules of dubious relevance to real life, the Growth Diagnostics approach is developing a ‘good enough’ approach to help decision makers determine and deal with the top priority ‘binding constraints’ on their economy.

Before setting out its own stall, the paper examines (and highlights the flaws of) three basic approaches to empirical research and country level diagnostics: cross-country growth regressions  (beloved of Paul Collier and others); growth accounting (origin of the mysterious ‘total factor productivity’) and international benchmarks (aka all those league tables from the World Bank, Transparency International and others).

What I like about the growth diagnostics approach (which applies equally well to other kinds of non-economic constraints, like institutional failures) is that it ‘looks for a way to move forward without reneging on the uncertainty about what is the right model of the economy.’ It’s barefoot economics for the real world.


December 4, 2008
Duncan Green