Poverty Alleviation Matters More Than GDP

InfrastructureADB

By John Richardson

RICH people, relatively speaking, don’t buy that many chemicals and polymers – hence, poverty reduction matters from a dollars and cents as well as a moral perspective.

Thus, a report released this week by the Asian Development Bank, Support for Inclusive Growth, makes for very disturbing reading.

David Pilling from the FT, in this excellent summary and commentary on the report, writes that:

  • While inequality has narrowed in much of South and Central America, in Asia it has been going the other way, according to Vinod Thomas, director-general of the Asian Development Bank. Asian inequality as measured by the Gini index rose about 1% each year throughout the 1990s and 2000s.
  • In the 1990s, GDP in the Asia-Pacific region grew at an annual rate of 9%, slowing to 8.2% in the 2000s. But average living standards did not keep pace. In the 1990s, household consumption grew far more slowly than GDP – at just 5.7%. As a result, consumption as a percentage of GDP fell across a large part of the region. Ordinary people missed out on much of the wealth their nation was theoretically creating.
  • Fast growth has dramatically cut the number of “absolute poor”, defined as living on $1.25 or less a day in 2005 purchasing power parity terms. The number of people in this desperate category fell from 1.23bn in the 1990s to 790m in the 2000s. In China alone, the number of absolute poor fell from 520m, or 43%, in the 1990s, to 230m, or 17%, in the 2000s.
  • However, the record on reducing rates of “moderate poverty”, defined as below $2 a day, is less impressive. Numbers in this category fell considerably more slowly. Much of the growth, in other words, went to those who were already better off, allowing them to pull further away from the pack.
  • Nor do countries in Asia appear to have done enough with the growth they have generated. In about half Asia’s countries, including China, India, Indonesia and the Philippines, spending on education is less than 4% of GDP, compared with an average of 5.2% in advanced countries. The ADB also found that health outcomes had generally lagged behind economic performance.

The slide above, from the ADB report, illustrates how some countries have a long way to go in providing some of the basic necessities essential for poverty alleviation: access to safe water, electricity and sanitation.

And the International Monetary Fund, in its twice-yearly Global Financial Stability Reports, warns that five years of ultra-low interest rates have led to a 40% growth in household debt in Brazil, China, Singapore, Thailand and Turkey since 2008. Much of this “wealth creation”, especially in China, has further added to income inequality, we think.

What does this mean for the chemicals industry? It means that:

  • Headline GDP growth rates are a blunt tool for measuring demand growth in the developing world, given that most of the rise in the total value of goods and services has gone to a small percentage of people. What matters more is tracking income growth – and, also, crucially, the extent to which that income growth is equitable. The greater a country’s success in poverty alleviation, the greater the growth in demand for chemicals and polymers. Thus, chemicals companies cannot just take forecasts of GDP growth and assume that chemicals demand will be a straightforward multiple over these forecasts.  They need to also invest the resources into detailed studies of the effectiveness of poverty alleviation policies – and into regional variations in income growth.
  • Political risk has increased because of income inequality. A very good example is Thailand and the support for Thaksin Shinawatra, the self-exiled former prime minister, which is being driven by feelings of social inequality resulting from income inequality. A Pew Poll found that 82% of Indians think that inequality is a major problem. Chemicals companies, therefore, also need to carry out thorough political risk assessments.
  • Central bank largesse has made the problem worse, as it has discouraged governments from making the structural changes necessary to create more sustainable growth. The impact of withdrawal of that stimulus, particularly in China, is something else that must  be evaluated by chemicals companies. It would be very complacent to assume that this withdrawal will be achieved in an entirely orderly and non-disruptive fashion.

, , , , , ,