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Poverty Reduction in Developing Countries

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 COMMENT
Poverty Reduction in
Developing Countries
No consensus but plenty of solutions
Michael Chibba
Poverty reduction in developing
countries is a core Millennium
Development Goal (MDG). However,
poverty has always been central to the
topic of economic development. For
example, nearly forty years ago,
Dudley Seers stated:
The questions to ask about a country’s
development are…What has been hap-
pening to poverty? What has been hap-
pening to unemployment? What has
been happening to inequality? If all
three of these have become less severe,
then beyond doubt this has been a
period of development for the country
concerned. If one or two of these cen-
tral problems have been growing
worse, especially if all three have, it
would be strange to call the result
‘development’ even if per capita
income has soared. (Seers 1969)
In “How to Tackle Poverty”, Diane
Coyle in a recent issue of this journal
Michael Chibba is Director and Practice
Leader at Canadian International Development
Consultants, Inc. (CIDC) and Founder and
Board Member of the International Centre for
Development Effectiveness and Poverty
Reduction (ICDEPR).
WORLD ECONOMICS • Vol. 9 • No. 1 • January–March 2008
(Coyle 2007) concludes that a mix of
aid, advice, sound institutions (in
terms of transparency, good gover-
nance, and accountability, for
instance), sensible macroeconomic
policies and, perhaps most impor-
tantly, evidence-based policy—not
prior beliefs—is going to possibly
provide the answer to economists on
how best to tackle poverty in develop-
ing countries. In 1972, Derek Healey
reached a somewhat similar conclusion
on the subject of development theory
and policy (with particular reference to
prior beliefs):
There can be little doubt that a thor-
ough survey of opinion on the problem
of economic development would show
that at the end of the 1960s and the
beginning of the 1970s, a new consen-
sus began to emerge. Like all new atti-
tudes, it arose not in a vacuum but in
response to the demonstrable failure of
past beliefs and practices.
The suggested focus on evidence-
based policy is (also) not a new idea.
For example, Muhammad Yunus, the
2006 Nobel laureate, started his micro-
credit operation about three decades
197
Michael Chibba
ago as both economic theory and pre-
vailing practices provided inadequate
solutions to tackle poverty. Gradually,
as the practice of microcredit spread, it
provided compelling evidence that
gave rise to the global microfinance
movement as an important means to
address poverty. The drawbacks of evi-
dence-based policy include the fact
that it is often country-specific or site-
specific (hence, it is not widely appli-
cable); and second, that it takes a long
time for it to be accepted.
Thus, the conclusions that Diane
Coyle offers are in fact “traditional” in
many respects. Today, the interna-
tional development community, as
well as both the theory and practice of
development economics, is still far
from reaching a consensus on how best
to address poverty in developing coun-
tries. A survey of current literature on
the subject provides ample proof of
this (see, for example: Dasgupta 2007,
IFPRI 2007, Ravallion 2007, Berg et al.
2008, Chibba 2008). The major multi-
lateral and bilateral institutions (such
as United Nations agencies, World
Bank Group, Asian Development
Bank, the United Kingdom’s Depart-
ment for International Development)
have their own perspectives on how
best to address poverty. While some of
this divergence is due to the fact that
each institution is guided by its own
mandate and limited resources, and
hence there is a desire to complement
each other’s key areas of focus for the
biggest “bang for the buck”, there is
also significant divergence due to
unique perspectives and viewpoints,
both institutionally and by experts
198 WORLD ECONOMICS • Vol. 9 • No. 1 • January–March 2008
working within each such institution.
The theories, policies and practices to
tackle poverty are today as diverse as
can be.
Yet, possibly due to this very climate
of a prevailing lack of consensus on the
subject, development economics and
the study and practice of poverty
reduction are breeding grounds for cre-
ative and innovative theories and prac-
tices. For example, path-breaking
lessons on poverty reduction, emanat-
ing from inclusive development
efforts, are being drawn from diverse
areas such as political economy (as is
the case in post-apartheid South Africa
and its focus on inclusive development
as well as its use of a consensus-driven
model to promote financial inclusion),
the use of technology (especially,
telecommunications and its beneficial
impact on financial inclusion) and
market-based strategies. For instance,
in The Next 4 Billion, Hammond et al.
(2007) draw attention to market-based
approaches to increase productivity
and incomes of low-income earners
and the poor generally:
Four billion low-income consumers, a
majority of the world’s population, con-
stitute the base of the economic pyra-
mid. New empirical measures of their
aggregate purchasing power and their
behaviour as consumers suggest signif-
icant opportunities for market-based
approaches to better meet their needs,
increase their productivity and
incomes, and empower their entry into
the formal economy…The four billion
people at the base of the economic
pyramid (BOP)—all those with
incomes below $3,000 in local purchas-
ing power—live in relative poverty.
Their incomes in current US dollars are
 Poverty Reduction in Developing Countries
less than $3.35 a day in Brazil, $2.11 in
China, $1.89 in Ghana, and $1.56 in
India. Yet together they have substan-
tial purchasing power: the BOP consti-
tutes a $5 trillion global consumer
market.
As three-quarters of the four billion
are financially excluded or “unbanked”
—those without a bank account and/or
without access to other financial serv-
ices offered by formal institutions—
financial inclusion, within the broader
sphere of inclusive development, is
viewed as the new frontier in interna-
tional development and poverty
reduction (Chibba 2007, 2008).
Theory, field research, development
practices, political economy, and new
business opportunities linked to the
four pillars of financial inclusion—
microfinance, financial literacy, private
sector development (financial and
non-financial) and public sector sup-
port (essentially, an enabling environ-
ment but also a coordinating role by
the central bank in countries such as
India and Trinidad and Tobago)—
along with the related models of finan-
cial inclusion, are cutting new paths to
poverty reduction. And this suggests
that much more than the traditional
policy mix of economic solutions
(including evidence-based policy) is
involved in tackling poverty. Specific
examples include: Mzansi or basic
bank accounts offered by the financial
sector in India and South Africa; the
use of technology-based tools (for
instance, mobile phones and e-banking)
in numerous developing countries
throughout the world; market-
based approaches adopted by large
WORLD ECONOMICS • Vol. 9 • No. 1 • January–March 2008
manufacturers, retailers, supermarket
chains and department stores (for
example, in Mexico, supplier credit
from Cementos Mexicanos and con-
sumer finance from Banco Wal-Mart);
and financial services (such as making
payments to participating merchants,
doing money transfers, and loading
time on mobile phones), based on
innovative solutions and business
alliances, are being extended by tele-
communications firms such as Globe
Telecom in the Philippines. Within
the above context, such services and
products are creating jobs, opening up
new markets, and they are also tack-
ling poverty (see Chibba 2008).
To conclude, evidence-based policy,
sound institutions, and sensible macro-
economic policies are required in
developing countries, but they are
not sufficient to tackle poverty and
promote pro-poor economic growth.
Incremental and complementary solu-
tions to address global and national
poverty reduction goals—in particular,
scaling up of initiatives to accomplish
the MDGs by 2015—require paying
attention to the potential and positive
impact of political economy, technol-
ogy-based solutions, market-based
approaches, private sector develop-
ment and related interventions that are
linked to inclusive development and
financial inclusion. And while there is
no consensus among economists—and
policymakers, businessmen, academ-
ics and practitioners as well—on how
best to address the subject, there are
plenty of creative and path-breaking
approaches that are proving to be
successful.
199
 Michael Chibba
References
Berg, A., Ostry, J. D., and J. Zettelmeyer
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Chibba, Michael (2007). “Monetary Policy,
Governance and Economic Development:
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Economics, 8(3), 111–129.
Chibba, Michael (2008). “Financial
Inclusion: Key pillars, models and
implementation.” Paper submitted for
publication.
Coyle, Diane (2007). “How to Tackle
Poverty: Economists are closing in on the
answers.” World Economics, 8(3), 1–5.
Dasgupta, Partha (2007). Poverty Traps:
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200 WORLD ECONOMICS • Vol. 9 • No. 1 • January–March 2008
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