User:Ahmed10

This is Ahmed Ullah, a Ph.d student at the faculty of Business and Government, university of canberra =Introduction= University of Canberra =World Poverty= Research Proposal In Quest of Pro-Poor Public Spending Multiplier: A Case Study of Bangladesh

Submitted To Dr. Muni Perukmal School of Business and Government University of Canberra

Submitted By Ahmed Ullah ID # u3033710

Introduction Poverty is a global phenomenon. No matter where we go, individuals living in absolute poverty will never be far away. Although the number of people living in extreme poverty fell from 1.9 billion in 1981 to about 1.4 billion in 2005, this significant reduction in poverty disguises large regional differences. Millions of people still trapped in poverty and most of them are from Sub-Saharan Africa and South Asia. Governments of these countries, along with the international community, have made poverty alleviation a top priority in their development strategies. The United Nations set the first target of Millennium Development Goals (MDGs) to halve the proportion of people in extreme poverty, between 1990 and 2015 (WorldBank, 2010b). Agenor (2005 p-370) comments that, based on current trends, sub-Saharan Africa and Asia as a whole will not be able to reduce poverty by half between 1990 and 2015. Bringing relief to the poorest part of the world therefore remains one of the central policy issues of the new millennium, he added. Economic theory and different studies (discussed in the next part) suggest that government spending has a seminal effect on growth as well as poverty reduction. The concept of public spending/purchase multiplier in particular, suggest that how much income rises in response to a one dollar increase in government spending. According to the Keynesian cross, the government-spending multiplier is larger than one that means if government increase its spending by one dollar, citizens’ income will raise more than one dollar (Mankiw, 2003 p-262). But if inequality increased along with per capita income growth, it is possible for the world to have witnessed both positive per capita GDP growth and an increasing number of people below the poverty line. So the concept of pro-poor growth is introduced by different academics (like sala-i-martin, agenor) and development institutions (like World Bank, Asian Development Bank etc.) The Poverty Reduction Strategy (ADB 1999, 6) proposes that “growth is pro-poor when it is lobor absorbing and accompanied by policies and programs that mitigate inequalities and facilitates income as well as employment generation for the poor, particularly women and other traditionally excluded groups”. The government of developing nations is spending a huge amount of local as well as foreign currency every year (sourced as loans and grants and from developed country and donor agencies) in the name of development or poverty reduction. But as discussed earlier, this spending does little to the poor from getting out of poverty. So this research project broadly tries to study the nature of public spending and its impact on poverty reduction in developing countries. In particular, the case of Bangladesh will be examined with a objective to find out the pro-poor public spending multiplier (public spending benefited the poor section of the society to a larger extent). The reason for selecting Bangladesh as a sample of developing countries is explained in the methodology part of this proposal. Literature Review Sala-i-martin (2004) claims that economic growth is the single most important factor affecting individual levels of income. He further states that, greater understanding of how to increase the standards of living of individuals in the world and, thereby, lessen world poverty is of high importance. But Sala-i-martin (2004) also cautions that, although the average person on the planet has been getting richer over time, this does not mean that the income of all citizens has increased. In particular, it does not mean that the incomes of the poorest people have grown or that the number of people whose incomes are below a certain poverty line (for example, 1.25 dollars a day) has declined. Gasparini et al., (2007) support this comment as follows “the concern for pro-poor growth is in part the consequence of evidence showing that in some countries the fruits of economic growth were not equally shared by all the population, and, more worrisome, evidence that in some growth episodes the well-being of the poor actually decrease”. Mody and Pattillo (2006) argues that, in principle, poverty reduction occurs through two channels: first, growth raises average incomes and, hence, reduces poverty; second, poverty is reduced even more when the rise in incomes especially benefits the poor. The second channel can be marked as pro-poor. Theoretically the poverty reduction can be achieved either by increasing the average income or through redistribution mechanism via taxation and transfer payment. However, Lopez Groth (2004) thinks that, it is difficult to reduce poverty only by the redistribution policies in the absence of economic growth (or rise of per capita income). Poverty reduction through redistribution is also politically unpopular and administratively difficult. So for every government it is comparatively easier and practical to set some poor specific program aimed at poverty reduction. To make the economic growth pro-poor, principal responsibility borne by government. Because of the characteristics of non-rivalness and non-exclusiveness, ‘Poverty reduction’ can be tagged as a public good and usually private sector is not interested to do anything in this area. Aart kraay (2004) argues that, “ in the medium run, most of the variation in changes in poverty is due to growth, suggesting that policies and institutions that promote broad-based growth should be central to pro-poor growth”. Agenor (2002) explains that the policy changes in tax structure, spending, transfers, or subsidies, increases in prices of publicly provided services or reductions in public sector employment or real wages (fiscal policy)– can have both direct and indirect effect on income distribution. But Rosen (2005 p-165) remarks ‘Although there is a strong consensus among the economists and policy makers all over the world that government should help the poor, there is also enormous controversy over what form such help should take’.

In the ‘Poverty Reduction Strategy for Bangladesh’ Barakat et al., (2009) comments that ‘Quality rate of growth is one that creates demand for the labor supplied by the poor and expands demand for the products and services produced by the poor people. …. government efforts need to focus on increasing the availability education, training facilities and healthcare to all poverty stricken groups. Another way to enhance market access for the poor, specially, those who are unable to participate in the local market is to develop infrastructures such as roads and communication’.

From a theoretical standpoint, the issue of the impact of government activity on economic performance has been a controversial one. There is no uniformly accepted theory that predicts a clear-cut relationship between the size of government (in terms of spending) and economic activity. A voluminous literature has developed over the years in search for empirical linkages between economic performance and a variety of fiscal policy variables, including government spending.

The recent interest in the impact of public investment on economic activity has stimulated by Aschauer's (1989a, b) provocative empirical work revealing a large positive impact of the stock of public capital on private sector total factor productivity. If Aschauer's estimates are accurate, the policy implication is obvious: governments can stimulate productivity by investing in infrastructure. Easterly (1993) finds public investment in transport and communication to be positively related to growth. But, Devarjan (1996) finds the result is speculative and depends, among other things, the sample used. While Bose (2003) finds that total and investment expenditure on education raise growth in developing countries. In one of the seminal contributions to endogenous growth theory, Borro (1990) awarded fiscal policy a central place. Other authors (Romer, 1990, Lucas, 1988, Azariadis, 1990) have stressed the importance of externalities to argue the government has an important role to fulfill in the growth process. In a generic model, Zagler (2003) has shown that the various engines of growth in the endogenous growth literature are closely connected with different categories of the government budget. Mankiw (2003) comments that, when the government changes its spending or the level of taxes, it affects the demand for the economy’s output of goods and services and alters national saving, investment, and the equilibrium interest rate

In sum, a vast literature, has been developed to trace the empirical linkages between government expenditures and economic performance. The studies mentioned above are only a sample from this literature. However, the diverse results obtained in these studies suggest that, at present, the empirical record is mixed and inconclusive. Moreover, these studies do not tell us anything about whether the achieved growth is pro-poor or not. This research project will seek to find out the sectors which are pro-poor, that means, spending which benefited the poor section of the society more than the rich.

Objective of the Research The relationship between economic growth and poverty alleviation is not automatic. To achieve the Millennium Development Goals (MDGs) robust economic growth is essential but not sufficient. The financial allocation of resources among the sectors is the crucial role of the government to achieve simultaneous goal of economic growth and poverty reduction. Public spending in some sectors will generate substantial economic growth while spending to other contributes of poverty reduction. Again, there are some sectors which can affect both economic growth as well as poverty reduction (Barakat et al., 2009). So, the overall objective of the study is to investigate more effective ways of resource allocation for improved economic performance and attaining the Millennium Development Goal (MDGs) of poverty reduction in developing countries. Research Question Is growth really pro-poor in developing countries like Bangladesh? If so then how robust the affect of public spending in physical infrastructure like roads, bridges and social infrastructure like health, education on poverty rate in Bangladesh? Methodology Guba and Lincoln (2004) comment that, the ontological, epistemological and methodological questions must be addressed in order to determine whether research should follow a qualitative or quantitative methodology. They suggest developing and inquiry a research paradigm by asking ontological question of what ‘reality’ is and what can be known about “reality’. They propose ‘Positivism’ in the first place, where a simply reality is assumed governed by natural laws; knowledge is context free and controlled by cause and effect laws (p-112). Guba and Lincoln (2004) continues, an objectivist or positivist ontological position requires an objective form of knowledge, to measure relationships precisely using a quantitative methodology of research (p-117). Under Guba and Lincolon (2004) positivist paradigm of ‘reality’ the researcher can research the object of inquiry without impact and set research procedures are followed to eliminate bias; repetition produces the same result. They argue, the research methodology for positivist paradigm involves empirical analysis to test stated hypothesis. The conditions of the experiment are controlled to prevent bias. But Carter and Little (2007) remark, ‘researchers might object that they are not, or do not wish to be, methodologists or epistemologists. They do research. They generate useful findings. Nothing further is necessary’. Although they also argue, the researcher’s epistemological position and the methodology are shaped by the discipline in which she or he is trained or has read and the formal theories of knowledge the researcher has read. Guba and Lincoln (2004) express their view that scientific research in the field of mathematics, physics and chemistry has been dominated by a need to quantify hypotheses using mathematical formulas in order to predict and control natural phenomena. They added, this quantification is widely believed necessary for the validity and legitimacy of findings. Although economics is marked as a discipline as social science, it is frequently using the mathematical and statistical tool to prove or disprove theories. So it can be believed that the comments from Guba and Linclon (2004) is equally applicable for the discipline of economics too. As economists are regularly interested in relationships between different quantities and traditionally econometrics has focused upon aggregate economic relationships, Verbeek (2008, p 1-2) claims that the most important job of econometrics is to quantify these relationships on the basis  of available data and using statistical techniques, and to  interpret, use or exploit. In particular, Haughton and Khandker (2009) explain, when anyone want to monitor and evaluate the effects of specific policies (like public spending) on poverty, it is necessary to measure how poverty changes over time. They go on with: changes in poverty rates are typically based on comparisons of cross-sectional data. Although panel data has the advantage of paired test ( analysis the same person or household over time), it has also the drawback of attrition bias, as respondents gradually drop out of the panel; they may become less representative over time of the population they are supposed to reflect and they require considerable managerial skills and expense. On the other hand, a single cross-sectional survey can provide a snapshot of poverty at one point of time. It does not allow one to track the evolution of a household’s poverty over time (Haughton and Khandker, 2009). Thus, information on the “dynamics of poverty” is needed to monitoring and evaluating the effect of a specific policy on poverty, for example, public spending on infrastructure (Haughton and Khandker, 2009). They added, ‘The most common way that poverty is tracked is by using the results from two or more household surveys over time. To allow for comparisons over time, the questions need to be comparable in each wave of the survey’. Accordingly to examine the effect of public spending on poverty, the secondary data of two Household Income and Expenditure Survey (HIES) of 1995 and 2005 of Bangladesh Bureau of Statistics (BBS) and public spending data of Bangladesh from the Asian Development Bank (ADB, 2010) statistics website which will provide central government expenditure by function like education, health, infrastructure (transport and communications), and electricity, gas and water can be used. To be free from the estimation bias all time series public spending figure will be adjusted with the then inflation. The reason to select Bangladesh as my research field is that it represents a success story in poverty alleviation among developing countries. Poverty incidence, which was as high as 57 percent at the beginning of the 1990s, had declined to 49 percent in 2000. This trend accelerated subsequently, reducing the poverty headcount rate to 40 percent in 2005. However, nearly half of the population remains poor and per capita GDP (PPP) remains extremely low at $1400 in 2009 (IMF). The inequality is quite high; the lowest quintile of households has only 0.92 per cent of the income, the Gini coefficient being 31 per cent in 2008. So, Bangladesh simultaneously represents a success as well as not a success story in poverty alleviation among developing countries. Second reason for selecting Bangladesh is that as a Bangladeshi citizen as well as civil servant of Bangladesh Government, I have some special access to the government and different development institutions. Moreover I have good knowledge of my own country’s social and political culture, administrative structure, development program implementation process etc. Chen and Ravallion (2008, p-2) think that, in assessing the extent of poverty in a given country one naturally uses a poverty line which is considered appropriate for that country. But before thinking about the poverty line it is necessary to fix the measure of well being. There are two competing variable, one is income and other is consumption/expenditure. According to Deaton & Zaidi (2002), consumption is not closely tied to short-term fluctuations in income, and that consumption is smoother and less variable than income. They added, especially in developing countries, where the rural agriculture sector is large, it is difficult to gather accurate income data. Bangladesh Bureau of Statistics (BBS) uses consumption variable, specifically Cost of Basic Need (CBN) method to derive the poverty line and subsequently the headcount ratio of poverty. With the CBN method, poverty lines represent per capita consumption expenditure at which the members of a household can be expected to meet their basic needs (food and non-food consumption). A household with per capita consumption expenditure falling below a given poverty line will be considered poor. So, with the first set of regression, the relationship of average income of the people and consumption of the poor people (i.e consumption of the people below the poverty line) will be examined. If this regression proves a strong relationship between the independent and dependent variables it can be said that the growth is pro-poor. This is almost the same methodology used by Dollar and Kraay (2002) and  Wodon (1997), but here the variable poverty headcount ratio is used as a dependent variable ( they use the average income of the lowest quintile of the population). If the relationship between the independent and the dependent variable found to be statistically significant it can be concluded that growth is pro-poor. In their study Dollar and Kraay (2002,4) concludes, ‘policies that raise average incomes are likely to be central to successful poverty reduction strategies’. Haughton and Khandker (2009) comments, these might include improvements in education, health, infrastructure, and the like. But Dollar and Kraay (2002, 27) also comment that, ‘existing cross-country evidence….provides disappointingly little guidance as to what mix of growth-oriented policies might especially benefit the poorest in society’. So in the second set of regressions, poverty headcount ratio will be used as a dependent variable and the independent variables are public spending in the four sectors namely: health, education, transport & communication and electricity, gas, and water. But this is not the definitive set of calculations; as the research project goes on it might  exclude some variables, include others or change the model, putting some dummy variable (for example to differentiate the poverty rate between the urban and rural areas or poverty between male and female) etc. The most common criticisms regarding regression analyses involve the choice of econometric method, the problem of unit roots (non-stationarity) usually found in economic series, the problem of omitted variables and, most importantly, the possibility of reverse causation”; the latter refers to the possibility that it may be strong output and productivity growth that lead to higher public investment in infrastructure, rather than the other way around". Overall, in the words of Ford & Poret (1991) "the regression results suggest that the numerical estimates of the effect of infrastructure on productivity are not robust enough to support a policy recommendation of a sharp acceleration of infrastructure investment".

Prospective Outcome of the Research As Bangladesh has the Vision-2021 to a substantial reduction of poverty to 14 per cent from about 36 per cent (in 2008-09), this study will help the Government of Bangladesh to achieve the target by discovering the path of quality economic growth that ultimately help to reduce the rate of poverty at a faster rate. It is expected that the study will also generate useful knowledge on public spending policy/strategy which accelerate the poverty reduction in the developing countries. Important findings also help the development partner like different development nations and World Bank, IMF. ADB etc

Bibilography

AART, K. (2004) "When Is Growth Pro-Poor? Cross-Country Evidence.". IMF Working Paper, 4. ADB, A. D. B.-. (1999) Fighting poverty in Asia and the Pacific: The Poverty Reduction Strategy. ADB, A. D. B. (2010). AGENOR, P.-R. (2002) Maxroeconomic Adjustment and the Poor: Analytical Issues and Cross-Country Evidence

AGENOR, P.-R. (2005) The Macroeconomics of Poverty Reduction. Centre for Growth and Business Cycle, University of Manchester, 73. AZARIADIS, C. A. D., A. (1990) Threshold externalities in economic development. Quarterly Journal of Economics. AZARIADIS, C. A. D. & GASPARINI, L. BARAKAT, A., AHMED, A. K. M.-W. U. & KHAN, S. (2009) Financing Growth and Poverty Reduction: Policy Challenges and Options in Bangladesh. General Economic Division, Planning Commission, Ministry of Planning. BARRO, R. J. & SALA-I-MARTIN, X. (2004) Economic Growth, Cambridge, Massachusetts, The MIT press. BORRO, R. (1990) Government spending in a simple model of endogenous growth. Journal of Political Economy, 98

BOSE, N., HAQUE,M. AND OSBORN, D. (2003) Public expenditure and economic growth: a disaggregated analysis for developing countries. Discussion Paper, 30. CARTER, S. M. & LITTLE, M. (2007) Justifying Knowledge, Justifying Method, Taking Action: Epistemolgies, Methodologies and Methods in Qualitative Research. Qualitative Health Research, 17. CHEN, S. & RAVALLION, M. (2008) The Developing Wourld Is Poorer Than We Thought, But No Less Successful in the Fight aganinst Poverty. Policy Research Working Paper. DEATON, A. & ZAIDI, S. (2002) Guidelines for Constructing Consumption Aggregates for Welfare Analysis. LSMS Working Paper, World Bank. DEVARAJAN, S., SWAROOP, V AND ZOU, H. (1996) The composition of public expenditure and economic growth. Journal of Monetary Economics, 37. DOLLAR, D. & KRAAY, A. (2002) Growth Is Good for the Poor. Jouranal of Economic Growth. EASTERLY, W. A. R., S. (1993) Fiscal policy and economic growth: an empirical investigation. Journal of Monetary Economics. GASPARINI, L., GUTIERREZ, F. & TORNAROLLI, L. (2007) GROWTH AND INCOME POVERTY IN LATIN AMERICA AND THE CARIBBEAN: EVIDENCE FROM HOUSEHOLD SURVEYS. GUBA, E. G. & LINCOLN, Y. S. (1994a) Competing Paradigm in Qualitative Research. GUBA, E. G. & LINCOLN, Y. S. (1994b) Competiting Paradigm in Qualitative Research. GUBA, E. G. & LINCOLN, Y. S. (2004) Competing Paradigms in Qualitative Research. Handbook of Qualitative Research. Thousand Oaks, CA: Sage. HALCOUSSIS, D. (2005) Understanding Econometrics, Mason, Ohio, USA, South-Western, Thomson. HAUGHTON, J. & KHANDKER, S. R. (2009) Handbook on Poverty+Inequality, The World Bank. LOPEZ GROTH, C. (2004) Some derivations in the Alesina & Rodrik(1994) Model. . Department of Economics, University of Copenhagen

LUCAS, R. (1988) On the mechanics of economic development. Journal of Monetary Economics. MANKIW, N. G. (2003) Macroeconomics, New York, Worth Publishers. MODY, A. & PATTILLO, C. (2006) Macroeconomic Policies and Poverty Reduction, New York, Routledge. ROMER, P. (1990) Endogenous technological changes. Journal of Political Economy, 98. ROSEN, H. S. (2005) Public Finance, NewYork, McGraw-Hill. SALA-I-MARTIN (2003) The World Distribution of Income, 1970-2000. The University of Columbia. SALA-I-MARTIN, R. J. B. X. (2004) Economic Growth, Cambridge, Massachusetts, The MIT press. VERBEEK, M. (2008) Modern Econometrics, West Sussex, England, John Wiley & sons Ltd. W.L.NEUMAN (2003) Social Research Methods: Qualitative and Quantitative Approaches. Boston, Pearson Education. WORLDBANK (2010b) http://devdata.worldbank.org/atlas-mdg/. ZAGLER, M. A. S., G. (2003) Fiscal policy and economic growth. Journal of Economic Survey.

=Poverty in Bangladesh= Education Media Current page by Leigh Blackall
 * /Research Methodology/