By Vinod Thomas and Marvin Taylor-Dormond
Many countries experienced unprecedented economic growth and a significant reduction of poverty over the past decades. With an average yearly growth rate of 10 percent, China was able to cut poverty by nearly three quarters since 1990. In Latin America and the Caribbean poverty fell by a quarter between 1995 and 2005. Globally, a one percentage point growth in income has been associated with a decline in poverty of about 2.4 percentage points.
But even with relatively high economic growth, poverty reduction has been highly variable across countries, and benefits of growth have not always reached the poor and the vulnerable. The sheer numbers are also staggering: in the middle of the last decade an estimated 1.4 billion people worldwide still lived in extreme poverty. So the agenda to sustain growth and to ensure that its nature is favorable to poverty reduction remains paramount.
In this context, the private sector is especially important for supporting growth that can sharply reduce poverty. Worldwide poverty rates would not have gone down dramatically without a dynamic private sector. But the impact of private investment on growth and the impact of growth on poverty are not automatic. Leveraging the private sector has the potential for high rewards, but important risks must be managed too.
First, income distribution matters greatly for how much poverty reduction responds to economic growth. Private sector participation ought to be favorable to bringing about a better distribution of income, especially where the initial situation is highly skewed.
Second, the pattern of growth that the private sector promotes is crucial. The poverty impact is greater when growth is focused on areas where poor people are concentrated and on sectors where they obtain their livelihoods. New pathways for businesses need to directly engage the poor as workers, suppliers, distributors, and consumers in financially sustainable ways.
Third, when markets fail or are inefficient, private sector responses to market signals can exacerbate inequalities, leaving the poor worse off. For example, distortions in the access to assets and finance can further deepen the distributional differences. In such situations, the International Finance Corporation, the World Bank Group’s private sector arm, can help address the market failures.
The IFC has been directing its efforts to fight poverty through an emphasis on inclusive business and significant contributions to International Development Association — the World Bank’s fund supporting the poorest countries. The vast majority of IFC investment projects contributed positively to economic growth, and most addressed poverty indirectly, but incorporating distributional issues into project design has been a challenge. Evaluative evidence indicates that poverty focus need not come at the expense of financial success, and that a broad range of IFC interventions can enhance both the pace of growth and its benefits for the poor.
Several actions by IFC could enhance its poverty impact and serve as an example for private sector-led poverty reduction. A priority would be to foster a shared understanding of having a clear poverty focus in corporate strategies. IFC can also use the World Bank Group’s vast knowledge and resources about the best ways to reach the poor to implement innovative approaches to poverty reduction. The linkages among growth, distribution, and benefits for the poor can be made more explicit in project design. It would also pay to improve the metrics for tracking these outcomes.
A focus on growth and a better distribution of its benefits will be necessary to ensure that growth can indeed be sustained and that it makes a sizable difference to poverty reduction. The private sector can be a key player in ensuring that growth is sustained and that its benefits reach the poor.
Vinod Thomas is the Director-General, Evaluation, World Bank Group and Marvin Taylor-Dormond is the Director of Private Sector Evaluation of IEG.