Tuesday, December 7, 2021

Growth patterns unlikely to improve income inequality

Simulations by the World Bank show that if Botswana continues growing the way it is, its income distribution is unlikely to improve in any fundamental way and may even further increase disparities that already exist.

In one simulation exercise, disparities in poverty between urban and rural areas are expected to decline further, and the gap between cities and rural areas will be 11.5 percentage points in 2018, down from 16.4 percentage points in 2009/10.

“Despite the regional convergence on poverty, income inequality among regions will grow, worsening the income distribution. The main driver of the expected increase in income inequality is the growing disparity in earnings between other sectors (mainly services) and agriculture and livestock. This also explains why the Gini index increases most in urban villages, where incomes from both non-agriculture and agriculture are important,” the Bank says.

Job creation remains a key development challenge in Southern African countries, particularly in Botswana. Usually, job creation without additional growth would at least lower inequality. However, the Bank’s simulation suggests that this is not necessarily the case: a larger employment elasticity of growth implies higher employment and smaller increases in value added per workers.

Generating more jobs itself on a given growth path will not fundamentally alter the income distribution because as the Bank explains, when more employment is generated, the income distribution worsens considerably in one simulation.

“While inequality within urban areas falls, inequality within urban villages and rural areas increases drastically. Two factors are at work. First, per worker incomes grow slower in sectors like agriculture, manufacturing, and services, which employ more workers than sectors with faster income growth, such as mining and the public sector. Second, it matters who gets the jobs. Furthermore, our simulations illustrate the importance of productivity growth when more employment is generated,” the Bank says.

Poverty in cities and towns is expected to decrease from 8.2 percent in 2009/10 to 4.7 percent in 2018 and 2 percent in 2030. Projections for urban villages suggest a reduction from 20.0 percent in 2009/10 to 15.6 percent in 2013 and 12 percent in 2018. In rural areas, poverty is projected to fall as well, but will likely remain higher than other locations. Rural areas’ poverty rates are projected to fall from an estimated 24.6 percent in 2009/10 to 16.2 percent in 2018 and 8.5 percent in 2030. The latest figures from the Bank show that with a Gini co-efficient of 60.5, Botswana is the third most unequal country in the world after South Africa and Seychelles. Southern Africa has the highest geographic concentration on income inequality in the world.

“Current growth patterns are not likely to improve Botswana’s unequal distribution of income; in fact, they may even further increase the disparities. Additional simulations show that the pace of poverty can be significantly accelerated if more employment is generated, primary and tertiary education is expanded, and targeted social transfers are intensified. It is estimated that such policies could halve projected poverty in 2018 and might completely eradicate poverty by 2030,” says the Bank which has been keen to stress that the simulations should not be interpreted as an attempt to make precise quantitative predictions but rather should be seen as an instrument to better understand key structural features of Botswana’s economy and income distribution that matter for effective policies to reduce poverty and inequality.

Applying demographic forecasts from the UN World Population Prospects to the working-age population, the Bank’s scenarios rely on assumptions of demographic change and a better-educated workforce.

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