Environment, Economic Growth, and Poverty

1. Environment, Economic Growth, and Poverty March. 2012 Yong-seong KIM Research Fellow Korea Development Institute (KDI)

2. Introduction Environment and economic growth, and poverty Economic growth and poverty Policies for Pro-poor growth Conclusions

3. Introduction Part-I

4. I. Introduction: Pro-poor growth • “Pro-poor growth” as a goal for twenty-first century. • MDG (the Millennium Development Goals) proposed the reduction of poverty through a sustainable growth • Environmental issues as a key ingredient of a sustainable growth in G20 meeting in Toronto (2010) • The concept of “Pro-poor growth” • Rate of income growth of the poor > Rate of GDP growth (A and E) • Rate of income of the poor > 0 (A, B, C, and D)

5. rate of income growth of the poor B C A D 45 0 rate of GDP Growth E I. Introduction: Pro-poor growth The Concept of “Pro-poor growth”

6. Environment, economic growth and poverty Part-II

7. II. Environment, economic growth and poverty • Environmental impacts on economic growth and poverty are controversial. • Environmental awareness can bring welfare gains and new innovative technologies: high growth rate and low poverty rate • Concerns that drastic measures for environmental protections might cause economic distortions and instability: low growth rate and high poverty rate • Focus on the impact of environmental issues on economic growth andpoverty from a macro economic perspective. • Examine the relationship between economic growth and poverty. • Investigate how environmental issues affect economic growth.

8. Environmental pollution 0 Economic development II. Environment, economic growth and poverty • Environment and economic growth: empirical perspective • Inverse U-shaped relationship between environment and economic growth(Environmental Kuznets Curve, EKC) • Results of empirical analyses are mixed and the relationship is ambiguous Environment and economic growth: EKC

9. income inequality 0 Economic development II. Environment, economic growth and poverty • Economic growth and income distribution • Inverse U-shaped relationship between income inequality and economic development(Kuznets Curve) • Results of empirical analyses are mixed and the relationship is ambiguous • Stylized fact is “Economic growth is distribution neutral on average” Economic growth and income distribution: KC

10. II. Environment, economic growth and poverty • Environment and economic growth: theoretical perspective • Conventional approach predicts that measures for environmental protection make an economy to operate below its production possibility frontier, causing a decline in economic growth • A few theoretical model shows the possibility that environmentally oriented economy can not necessarily experience a slowdown in economic growth • Overlapping generation model shows that introduction of environment measures may not necessarily decrease economic growth

11. Economic growth and poverty Part-III

12. III. Economic growth and poverty • Economic growth and poverty: Empirically stylized facts • Economic growth tends to reduce poverty rate in the long-run. • Policy attempts to lower inequality reduce poverty rate in the short-run • Economic growth together with appropriate efforts to reduce income inequality is necessary for poverty reduction and sustainable growth

13. III. Economic growth and poverty: Korean case • Economic growth and poverty: Korean Case • Dramatic reduction in the absolute poverty rate: 82%(1982) → 9.2%(2007) • Rapid economic growth during those periods is a main determinant in the reduction of the poverty rate

14. III. Economic growth and poverty: Korean case Absolute poverty: Korea 1982~2007 Source: National Statistical Office, Family Income and Expenditure Survey, various years

15. III. Economic growth and poverty: Korean case • Decomposition of growth and distributional effect: Korean Case • ‘Pure growth effect’ is dominant in reducing poverty over time in Korea. • Currently, the ‘distributional effect’ operates in a direction to raise poverty rate.

16. III. Economic growth and poverty: Korean case Decomposition of Growth impacts on the poverty rate: Korean Case Source: Yoo (2008)

17. Policies for Pro-poor growth Part-IV

18. IV. Policies for Pro-poor growth • Economic growth and income inequality • Positive relationship between income inequality and growth: For investment to happen, someone need to be rich and redistribution policy generally discourages economic Incentive • Negative relationship between income inequality and growth: In an unequal society, majority favors progressive tax, reducing growth • Policy choice for sustainable economic growth • Unequal distribution is detrimental to economic growth and capital accumulation. • Human capital investment is a useful policy tool for sustainable economic growth

19. IV. Policies for Pro-poor growth Determinants of growth and investment Note: Symbols: , : consistent, sign and generally significant; +, -: consistent sign, sometimes significant; (+), (-): consistent sign but generally not significant, (±): inconsistent sign with significant coefficient; ; inconsistent sign or close to zero, and not significant; : inverse U-shaped, significant. INEQ: Measures of inequality DEM: Measures of political rights and degree of democracy HUMCAP: initial stock of human capital INSTAB: socio-political instability Source: Benabou(1996), NBER Working Paper No. 5658.

20. IV. Policies for Pro-poor growth • Socio-economic policies for sustainable growth: OECD case • Tax policy appears to be ineffective • Unemployment benefits and public health policy improve income distribution without causing negative effects on economic growth Policies, economic growth and income distribution Note: *** = 99%, ** = 95%. Source: Kim(2004).

21. Conclusions Part-V

22. V. Conclusions • Economic growth, poverty reduction and environment • Environmental regulations may not be necessarily growth-reducing. • Growth is not a sufficient condition for poverty reduction due to growth and distributional effects • Policy recommendations for sustainable growth • Tax on capital may not be a good choice, while environmental tax may be. • A government cautiously selects distributive policies : human capital investment, welfare to wotk, and public health may be desirable.