The Nexus of Economic Growth, Employment and Poverty Reduction: An empirical analysis by Rizwanul Islam

The link between growth, employment, and poverty depends on various factors, and it is pertinent that policy makers take into account implications of variables such as allocation of resource between farming and manufacturing sectors. 

The treatise under scanner The Nexus of Economic Growth, Employment and Poverty Reduction: An Empirical Analysis by Rizwanul Islam examines how economic growth, employment, and poverty reduction are interrelated with data of few countries which were facing acute poverty and their experiences of poverty reduction with rise in economic growth. The study is based on experiences of Bangladesh, Bolivia, Ethopia, Uganda, India, and Indonesia. According to the treatise, there is no doubt that higher economic growth is the first condition to fight poverty. But, the pattern of economic growth affects the magnitude of employment opportunities generated and thus poverty reduction is influenced further by it. In general, it has been found that shift in employment to manufacturing sector from farm sector contributes favorably in reducing poverty. Also, increase in labor force participation helps reduce poverty. However, the study did not find any invariant relationship between growth and poverty reduction, and same rate of overall growth often resulted in varying impact on poverty. It is rather the pattern of employment and labor markets that determines their actual impact on the poverty reduction.

It is observed that while a structural shift from agriculture is important in poverty reduction, what happens within the sector is also important, as for the time being, majority still depends on it. So policies supporting agricultural laborers in different forms contribute favorably in poverty reduction. Even when the long-term aim is to reduce expenditure on farm sector; in the short-term, given the concentration of people, farm sector cannot be ignored. From the supply side, quality of labor and expenditure on improving them through investment on education can have significant positive impact in raising the productivity of labor.

Though it has been long believed that benefits of economic growth would ultimately trickle down to poor, many questions its automation. Kuznets came out with a U shaped relationship between economic growth and reduction in poverty (1955). Kuznets’ view that rise in economic growth would ultimately lead to reduction in poverty is not accepted by many economists. Adelman and Morris (1973) questions automation, and the landmark study by Chenery et al.(1974) places importance on pattern of redistribution along side growth.  

The employment growth that is associated with a given output is called employment elasticity of output growth and may be taken as a surrogate for employment intensity of growth. This elasticity is inverse of productivity of labor (more than 1 means fall in productive capacity of individual labor). So raising employment elasticity per se cannot be the aim. Though the rate of elasticity should be less than 1, optimum level depends on the allocation of output to the workforce. Activities which are labor intensive as well as profitable would lead to employment-intensive growth. The idea is that growth should be accompanied by its ability to generate more employment. But rise in employment numbers should not be at the cost of reduced productivity of individual labor. Thus, rise in productivity of labor as well as the number of labors employed is desired.  

In order to measure employment intensity of growth of the countries under study, employment elasticity in manufacturing sector is considered as a variable as reliable data for unorganized sectors were unavailable. After computing elasticity or employment-intensity of growth, the study supplements how growth has led to structural changes in the economy. A close look is taken on sectors where poor people are employed while tracking trends in productivity. Next, it is examined whether growth opened new avenues for employment with higher productivity. Next, the study equates productivity of the above two with change in real wages of labors. That is the basis for deciding by how much growth has impact on poverty reduction.

Indonesia’s economic growth in the 1970s and 1980s as well as the experiences of Uganda and Vietnam during the 1990s can be called as cases of good growth leading to high employment generation and reduced poverty. On the other hand, moderate growth in Ethopia and Bolivia in the 1990s did not lead to significant rise in employment. However, no invariant relationship between rate of economic growth and poverty reduction is found. Because poverty reduction is influenced by intensity of employment generation from growth as well as ability of the poor to benefit from those employment opportunities, it is conjectured that growth has different impact on poverty reduction in different countries, and even same country with similar growth rate may experience varying impact on poverty during different time periods.