Working Paper 229 - Structural change, economic growth and poverty reduction – Micro-evidence from Uganda

This paper proposes a micro-level decomposition approach of consumption growth and poverty reduction with a focus on the role of sectoral growth and structural transformation. Taking the case of Uganda with available household-level panel data over the 2005-2010 period, we examine the within-sectoral growth and sectoral changes that were associated with a 8 percent point reduction in the poverty headcount ratio and an annual average consumption growth rate of 3 percent. Since those surveys contain a tracking instrument of both households and individuals, it is therefore possible to examine occupational, spatial, institutional, and demographic mobility of the original households and their members over time. Those different dynamics can then be related to micro-level welfare dynamics through panel-based descriptive and regression-based decompositions, aside the more standard cross-sectional approaches such as the Ravallion-Huppi one.Our results highlight some duality between poverty dynamics and consumption growth patterns. It was found that about two thirds of poverty reduction was driven by those households continuing to spend most of their time in agriculture, another third by those diversifying into the rural non-farm economy. In contrast, 65 percent of total consumption growth was driven by nonagricultural households (most of them non-poor to begin with), about evenly split between rural and city households. Another 30% was contributed to by structural transformation.Our results also indicate heterogeneous and gradual but reversible structural transformation over a five-year period with 13% of total population having moved out of agriculture (but two thirds of them having stayed in rural areas) but 8% back with the agricultural sector remaining an important reservoir of lower but significant growth and poverty reduction, 6% having diversified their occupational portfolio, and additional 2% in the non-agricultural sector having moved from rural areas to city. Overall, labor market participation has increased substantially while the share of household labor time allocated to agriculture has followed a fast decreasing pattern. In addition, 60% of micro-level agricultural-non agricultural occupational transformation occurred through non-farm enterprises and self-employed jobs while the remaining 40% did so through wage jobs. There were significantly contrasting dynamics across regions in all of the above patterns, with a specialization of some regions in wage (central) and self-employed jobs (east) in the non-agricultural sector and diversification of economic activities in rural areas for the others.Regression-based decomposition results show that those welfare changes having occurred within and between occupational categories were mainly channeled through an accumulation of productive assets, especially labor and employment, as well as household capital, rather than any specific increases in factor productivity. Intra-sectoral employment growth and reduction in household size, especially among the split-off households, were the most important drivers at the national level, while they also played an important role through structural transformation (in addition to human capital).