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DIO-Development Intelligence Organization
Training in the management of SDG 10 to reduce inequalities

The DIO has announced their intent to provide training in the appropriate analyses to address SDG 10 (reduction of inequalities). This will include an introduction into the new front in development economics known as the Real Incomes Approach. The Real Incomes Approach, sometimes referred to as Real Incomes Objective, or RIO, provides a specific clarity on the impacts of policies and, indeed, individual project design, on producer and consumer real incomes. It is therefore the most effective basis for analyzing the dynamics of SDG 10. RIO has a set of practical policy instruments to move towards a reduction in disparity while maintaining or increasing real incomes. Conventional development economics has remained a poor sister to conventional macroeconomics and is wholly reliant on the macroeconomic frameworks based on demand management. RIO was developed from the ground up, based on microeconomic principles which do not feature in conventional macroeconomic theory or practice.
The IPL-International Poverty Line

The international poverty line (IPL) is measured in currency units and represents the threshold under which an individual is considered to be living in poverty. It is calculated by taking the poverty threshold from each country—given the value of the goods needed to sustain one adult—and converting it into dollars. The current (2020) IPL is $1.90 per day.

A major limitation of this number is that it is based on macroeconomic statistics and does not really reflect the wellbeing of individuals in terms of purchasing power or real incomes. There is, for example no indication of the relative access to clean water, food, sanitation, power, abodes and conditions of health and access to education, most of which involve costs.

The attempt to adjust this has been to apply "purchasing power parity" which is the "basket of goods" being used to recalculate the IPL based on comparative costs of baskets working through the exchange rates. This international "norm" is usually demonstrated to not be particularly realistic or useful one reasonable data on household income and consumption data in low income segments of populations. As income levels fall, what constitutes a "basket", between income levels, vary significantly as a result of a high sensitivity of the price elasticities of consumption of goods. In many cases, the subsistence plus add hoc livelihood of many rural dwellers with access to use of land can mean low cash income does not indicate anything with respect to hunger. On the other hand, poor urban dwellers can have higher cash incomes and have very deficient diets and poor health.

Debt can be a significant issue for poor "self-employed" rural producers which can represent a significant erosion in income due to interest rates or discounts at time of repayment and macroeconomic framework policies are often associated with inflation.

For example in 2008 the IPL was set at $1.25 and raised in 2015 to $1.90. This represents a nominal rise of 52% or an equivalent annual inflation or fall in purchasing power of the currency of 8.75% p.a.

Since the inflation rate across low income countries varied between 0.5% to 35% and in dollar terms has been below 5%, in terms granular representation of reality "on the ground" the IPL appears to be somewhat arbitrary.

The lack of a coherent determinant macroeconomic economic model to relate interest rates, exchange rates and inflation means that in practical terms the use of the IPL to estimate the proportions of the world's population living in poverty, or the numbers raised from poverty as a result of "economic growth" is, in many cases, misleading and often underestimates the degree of actual poverty.

The objective of DIO is to provide the macroeconomic context and background to RIO for policy makers to understand how the specific policy instruments can be used to ensure that projects addressing SDG 10 can have more impact while enhancing growth in national incomes with reduced disparity of real incomes.

Observations by Nevit Turk, Economics Correspondent, Agence Presse Européenne, Paris.

This training course is intended for policy makers and individuals who manage economic analyses and appraisals of project designs. The need has arisen because the project preparation sections of the majority of existing guidelines for project cycle management issued by leading donors and international funding agencies have not been adjusted to respond to the requirements of Agenda 2030. For example these guidelines still recommend one of the following bases for determining economic rates of return to projects:
  • CBA-Cost Benefit Analysis;
  • CEA-Cost Effectiveness Analysis;
  • IRR-Internal Rates of Return.
Monetarist interpretations of these results often equate these with "economic growth". However, in reviews by the OQSI-Open Quality Standards Initiative, it has been noted that these financial analyses provide no useful information concerning the impact of a particular project design on the incomes of stakeholders in the form of producers, employees or consumers. Indeed, where income disparity is a significant problem, there is an urgent need to create policy frameworks which can help projects attain the SDG 10 objectives of reducing income disparity. Unfortunately, conventional fiscal, monetary, Keynesian and supply side economics1 are all based on the aggregate demand model (ADM)2 and do not lend themselves to supporting microeconomic unit actions designed to reduce income disparity. During the last 30 years or so, conventional macroeconomic policies have increased income disparity. As a result, SDG 10 was reported in the 2019 Sustainable Development Report to be negatively correlated to "economic growth".

A common mistake of the conventional macro-approach is to take a national "minimum income" as a benchmark for progress within the domain of SDG 10 or to apply the International Poverty Line (IPL) (see box to right) as a reference. The OQSI has reported difficulties in applying the IPL in a meaningful sense since in any country the clusters of lower income groups being addressed by projects over specific income levels and circumstances. So, although, at the macroeconomic level, it might be possible to point to a specific nominal income as the threshold between wellbeing and poverty with such a level being considered to be below normal requirements for wellbeing, in practice the gaps and needs vary across a country according to rural and urban based populations. Although a policy can be established to address aspects of income levels and disparities, it is within the area of influence of each project where the actions design and determination of potential impacts need to be estimated.

RIO provides the overall macroeconomic analysis of the relationships between producer, employee and consumer incomes and project actions but it is the RIO policy instruments that can help sustain action impacts on income levels and disparity.

Because RIO only considers real incomes, by including the macroeconomic impacts of population dynamics, inflation and interest rates, the projections of gaps, needs and constraints associated with any particular target group of project stakeholders, can be quantified and the potential contribution of the policy instruments to meeting SDG 10 objectives can also be quantified.

Most existing macroeconomic representations and project financial appraisal techniques cannot achieve. The recently released OQSI CBA1 is the most effective appraisal technique for projects currently in existence. However, the macroeconomic policy support framework needs to apply the RIO policy instruments in order to manage the sped with which real incomes rise and disparity is reduced in order to result in effective SDG 10 outcomes. This is why the DIO has embarked on the preparation of suitable training material and courses.

1 In the early 1980s analysis produced by the Real Incomes Approach demonstrated that so-called, "supply side economics" has no real connection to the supply side (goods and service production sectors) because projects and companies are not provided with supply side means nor incentives to sustain productivity increases. Supply side economics is in reality a demand side fiscal-based policy that applies marginal reductions in tax rates.

2 The aggregate demand model (ADM) is a macroeconomic approach that bases policy decision making on the assumption that money volumes control inflation and economic growth. Recent advances in analyses produced by the Real Incomes Approach have demonstrated that the so-called Quantity Theory of Money (QTM) which is used to explain monetary policy, only applies to the asset markets of land, real estate, precious metals, some commodity holdings, rare art and corporate shares. The prices of consumption goods and services remains unaffected by QTM but "leakages" from inflationary asset markets linked the prices and rentals of land and real estate do affect consumption and services markets. Consumption item and service markets require a different policy model linked to producer productivity and the raising of real incomes while reducing income disparity. The Real Incomes School has provided copious evidence to show the ADM provides no policy instruments to assist the growth in sustainable real incomes, especially in the case of low income countries.

Posted: 20200618
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  Author:   Nevit Turk:         Source:   DIO: