Macroeconomic stability is a necessary condition for domestic and foreign investment, and hence economic growth. Furthermore, instability through high inflation, for example, hurts the poor the most because the majority of them hold their assets in cash and are less able to protect their income from the increases in the general price levels. Yes, there have been reservations on the positive impact of growth on poverty, following the argument about the trade-off between growth and equity. However, empirical evidence shows the trade-off is not strongly significant. One way to minimize the trade-off is by having well-balanced sectoral development focusing on sectors dominated by the poor. For example, in many countries, the majority of the poor are in rural areas, hence emphasizing growth of the agricultural sector would be a pro-poor strategy, at least in the short run. However, the poorest of the poor still have not benefited as much as the rest of the population (Ghiva et al., 2002 and Demery et al., 1996). In the long run, a more diversified growth policy towards the manufacturing sector should be pursued.

Trade has been the major engine of growth in East Asia. What is unique about trade in this region is that it is driven by intra-industry trade, and trade in components and parts. Centred on China, regional trade is supported by low costs and low trade barriers between countries. In East Asia the proportion of the population living on less than US$ 1 a day declined from 457 million in the 1990s to 150 million in 2005. In other words, the region has already attained the MDG1 target. Even though this aggregate number is dominated by the dramatic decline in poverty in China, from 361 million in 1990 to 117 million in 2005, progress has been rapid in most countries (Gill et al., 2007).

The following are some figures from selected Asian and Pacific countries. China had phenomenal GDP growth of 7.8 per cent in 1998 increasing to 10.7 per cent in 2006. Gross domestic investment also grew from 37.7 per cent (of GDP) in 1998 to 43.6 per cent in 2006. Inflation was very low at minus 0.8 per cent in 1998 and 1.5 per cent in 2006. Similarly exports grew from 0.5 to 27.2 per cent during the same period. This macroeconomic performance coincided with a phenomenal decline in poverty from 33.0 to 16.7 per cent during the same period, with a Gini index of 0.45 in 2001.

In contrast to China, Sri Lanka with GDP growth of 4.7 per cent in 1998 to 7.0 per cent in 2006, (presumably because of a high inflation rate - 9.4 per cent in 1998 and 13.0 per cent in 2006 - and relatively low exports) poverty increased from 3.8 per cent in 1990 to 5.6 per cent in 2002. For other countries in the region, data indicated that whenever macroeconomic performance is favourable, there is also significant improvement in poverty reduction and the Gini index.

An analysis of macro-policy and poverty would not be complete without addressing the East Asian economic crisis of the late 1990s. As a result of a less-prudently managed, pegged exchange rate pushing the economy into recession, the Thai baht became overvalued against the dollar. Coupled with capital flight by destabilizing speculation activities of foreign investors, Thailand was forced to abandon the pegged exchange rate in 1997 and replace it with a much lower one. Many firms were forced into bankruptcy because they had to make much higher interest payments. Hence, as we know it, the economy went into a deep recession. These waves of speculative attacks also spread to other East Asian countries such as Republic of Korea, Indonesia and Malaysia. The impact on poverty was staggering. In Indonesia for example, poverty was more than doubled during the economic crisis.

To conclude, indeed macroeconomic development has a fundamental impact on poverty reduction and it is an essential platform for developing policies for bringing people out of poverty.

Written by Togar A. Napitupulu, Senior Economist, UNESCAP-CAPSA, Bogor, Indonesia.

(References available upon request)