By Akhter Ahmed, Country Representative, IFPRI-Bangladesh
The latest findings from the 2022 Household Income and Expenditure Survey (HIES), published by the Bangladesh Bureau of Statistics (BBS) in December 2023, reveal remarkable reductions in poverty. The official headcount rate for moderate poverty (the proportion of people living below the upper poverty line) decreased by 23.0 per cent, from 24.3 per cent in 2016 to 18.7 per cent in 2022, while the headcount rate for extreme poverty (the proportion of people living below the lower poverty line) dropped by 56.6 per cent, from 12.9 per cent in 2016 to 5.6 per cent in 2022.
Bangladesh has witnessed substantial economic growth over the past decade, with an average annual gross domestic product (GDP) growth of 6.6 per cent between 2016 and 2022. Notably, the country experienced a 3.4 per cent increase in GDP in 2020, making Bangladesh one of the few economies to have grown during the COVID-19 pandemic.
This paper evaluated the impact of Bangladesh's remarkable economic growth on poverty reduction by analysing the growth elasticity of poverty reduction. This metric assesses the percentage reduction in poverty rates associated with a 1per cent change in average national income. The author calculated the annualised percentage change in both poverty rates and real income, from which growth elasticities of poverty are derived. Per capita GDP in real terms, adjusted for inflation, served as the indicator for income. The author used HIES data for analysing poverty and inequality and statistical yearbooks published by BBS for per capita GDP. The study spans three distinct periods - 2016-2022, 2010-2016, and 2005-2010 - providing a comprehensive analysis of the evolving relationship between economic growth and poverty reduction. Furthermore, the author also examined the impact of agricultural growth on poverty reduction.
GROWTH ELASTICITY OF POVERTY REDUCTION
Estimates of growth elasticity of poverty in developing countries typically range from -1 to -4, with an average around -2. This implies that a 10per cent increase in per capita income is associated with a 20per cent decrease in poverty, underscoring the importance of economic growth in reducing poverty, particularly in developing countries.
However, the growth elasticity of moderate poverty in Bangladesh is notably lower and has been on a declining trend since 2005. Specifically, my calculation provides a growth elasticity of moderate poverty at -0.80 during 2016-2022. This implies that a 10 per cent increase in per capita real income resulted in an 8per cent reduction in moderate poverty. The growth-poverty elasticities were -0.84 in 2010-2016 and -0.96 in 2005-2010, suggesting that the efficacy of economic growth in reducing moderate poverty is relatively low and has gradually diminished over the past 17 years in Bangladesh.
The growth elasticity of poverty is often linked with income distribution, typically assessed by the Gini coefficient, which can take any value between 0 and 1. A value of 0 signifies a perfectly equal distribution of income within a population and 1represents perfect inequality, when one person in a population receives all the income and other people earn nothing. A more unequal income distribution tends to yield a smaller reduction in poverty for a given increase in per capita income.
HIES data reveal a growing inequality in Bangladesh, evident in the national-level income Gini coefficient rising from 0.458 in 2010 to 0.482 in 2016 and further to 0.499 in 2022. The trend of increasing income inequality is also apparent from my estimates of the Palma ratio from HIES data, which measures the ratio of incomes between the wealthiest 10per cent and the poorest 40per cent of the population. In 2022, the richest 10per cent of the population enjoyed 40.9per cent of total national income, whereas the poorest 40per cent held 12.9per cent of total income in Bangladesh. The Palma ratio increased from 2.9 in 2016 to 3.2 in 2022. The increasing trend of inequality may explain the relatively limited effectiveness of economic growth in mitigating moderate poverty in Bangladesh.
In contrast, the growth elasticity of extreme poverty was -2.44per cent during 2016-2022, meaning that a 10per cent increase in per capita real income was associated with a substantial 24.4per cent reduction in extreme poverty. This means that economic growth has been particularly effective in alleviating extreme poverty during this period. The elasticity of extreme poverty was -1.0per cent in 2010-2016 and -1.4per cent in 2005-2010.
A significant contributing factor to the relatively pro-extreme poor economic growth from 2016 to 2022 is the marked increase in funds allocated to the social safety net (SSN) system in recent years. In fiscal year 2015-16 (FY2016), the government earmarked US$4.9 billion for the system, accounting for 12.7 per cent of the total budget and 2.2 per cent of GDP. Subsequently, the budget allocation for the system surged to US$11.7 billion in FY2022, constituting 17.8 per cent of the total budget and 3.1per cent of GDP.
However, the SSN system grapples with significant issues and challenges. Many programmes have limited coverage and inadequate funding. Targeting errors, where assistance may end up going to those who don't need it while leaving out others who do, is crucial across most programmes. Notably, the government employee pension programme, which primarily benefits the non-poor, absorbed 24.8 per cent of the total SSN budget in FY2022. In FY2023, there were 115 SSN programmes, with the top 10 programmes (excluding government employee pensions) accounting for 66 per cent of the total SSN budget. This indicates that, resources for most programmes, and consequently, benefits for participants, are spread thin. To enhance the effectiveness of the SSN system in poverty reduction, there is a need to improve targeting performance, increase transfer (benefit) sizes, and scale up successful programs while phasing out inefficient ones.
ASSESSING THE ROLE OF AGRICULTURE IN POVERTY REDUCTION
Agricultural growth has historically played a pivotal role in reducing poverty in developing countries. GDP growth originating in agriculture triggers significant income growth among the poorest. The impact of agriculture extends beyond its direct poverty reduction effect and encompasses strong growth linkages effects on the entire economy. Agriculture's indirect contributions stem from backward linkages to the non-farm sector through the industrial production of inputs such as fertilisers, irrigation equipment, pesticides, and feed. Forward linkages involve packaging, transportation, industrial processing, storage, and marketing of agricultural commodities. These activities result in substantial growth in the non-farm sector, leading to increased employment and income. However, the advantage of agricultural growth over non-agricultural growth in reducing poverty tends to diminish as countries become wealthier.
As of 2022, 68 per cent of Bangladesh's population resides in rural areas, relying primarily on agriculture for their livelihoods. Despite a decline in its GDP share from 22.7 per cent in 2000 to 11.6 per cent in 2022, the agricultural sector remains the largest employer, engaging approximately 45 per cent of the total labour force.
To evaluate the contribution of agriculture to poverty reduction, I estimated growth elasticities of poverty for both agricultural and non-agricultural GDP. Agricultural GDP is comprised of crops and horticulture, animal farming, fishing, and forestry. Non-agricultural GDP includes industry (manufacturing industries, electricity and gas, water supply, construction) and services (trade, transportation, financial services, education, health, public administration and defence, and other service activities). I used data from the Bangladesh Bureau of Statistics (BBS) for 2016-2022 on per capita agricultural and non-agricultural real GDP for both sectors.
The estimated agricultural growth elasticity of poverty is -2.26, signifying that a 10 per cent increase in per capita real agricultural GDP led to a 22.6 per cent reduction in poverty during 2016-2022. In contrast, the non-agricultural growth elasticity of poverty is -0.72, indicating that a 10per cent increase in per capita real non-agricultural GDP was associated with a 7.2 per cent reduction in poverty. This implies that agricultural sector growth is 3.1 times more effective at reducing poverty than an equivalent amount of growth generated in non-agricultural sectors of the economy.
RECOMMENDATIONS FOR ENHANCING AGRICULTURAL GROWTH FOR POVERTY REDUCTION IN BANGLADESH
The above findings underscore the crucial role of agriculture-led growth in poverty reduction in Bangladesh. The results have important policy implications for formulating strategies for poverty reduction, recognizing the unique contributions and linkages that agriculture establishes within the economy.
Enhancing agricultural growth requires both yield-increasing technological change and a shift to higher-value crops and non-crop agriculture including livestock and fisheries. Both public and private investments in agricultural technology are imperative to maximize the poverty-reducing impact of the agricultural sector.
With arable land diminishing, technological innovations are essential to address production challenges arising from worsening soil fertility, increasing vulnerability of crop varieties to pests and diseases, and the impacts of climate change-an increase in the incidence of natural disasters, sea intrusion, and salinity. Furthermore, it is important to bridge the gap between average farmers' yields and research station achievements. Efforts are needed to understand why the gap is often large between the yield potentials of existing technologies and those in use by farmers.
Specific strategies for enhancing agricultural growth include intensifying rice production through increased yields rather than expanding the gross area under rice cultivation. This will allow diversification into higher-value crops including maize, pulses, oilseed crops, vegetables, and fruits. To accomplish this goal, farmers will require timely and sufficient provisions of agricultural inputs, such as fertilizers, improved seeds, irrigation, farm machinery, and diesel fuel.
Given that smallholder farmers constitute the majority in Bangladesh, increasing their incomes aligns with the broader goal of poverty reduction. Because smallholder farmers have relatively less access to land, their production of high-value crops like horticulture is pivotal for increased incomes. Adequate access to institutional credit and effective agricultural extension services are vital for them.
Access to finance is crucial for farmers to invest in productive resources, improve agricultural productivity, and mitigate the impacts of shocks. Currently, access to finance is constrained, particularly for smallholder farmers. Relaxing the constraint necessitates innovative financing models such as post-harvest loan repayment schemes to overcome collateral-related challenges.
Emerging agricultural technologies offer significant promise for augmenting agricultural productivity but can be realised only if the technologies are disseminated to farmers through effective extension systems. Agricultural extension services are crucial for empowering farmers with the necessary skills and techniques to improve their agricultural practices. However, smallholder farmers often lack access to such support. Modernising extension services through information and communication technologies such as mobile phone-based services and video-based training can provide tailored and timely agricultural information to farmers.
In conclusion, a comprehensive approach that promotes yield-increasing technological change and a shift to higher-value agricultural production is essential for enhanced agricultural growth and, consequently, faster poverty reduction in Bangladesh.
Akhter U Ahmed, Ph.D. is Country Representative of the International Food Policy Research Institute (IFPRI) in Bangladesh.
This op-ed was originally published by The Financial Express on February 12, 2024.