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Poverty, Growth, and Inequality

The Poverty-Growth-Inequality Link

While poverty reduction has become the main goal of development efforts, there is an on-going and sometimes heated debate about the elements that should be at the center of any sensible poverty reducing strategy. By definition, poverty reduction in a given country is a function of the changes in average income and changes in income inequality. But this simple identity raises some obvious questions on what should be the right balance between pro-growth and pro-distribution interventions in a poverty strategy:
  1. Should a poverty strategy have a growth bias or instead mainly concentrate on empowering the poor to benefit from growth?
  2. Is inequality affected as a general rule by growth?
  3. Does lowering inequality promote or hinder economic growth?
  4. And how does the level of initial inequality affect the impact of growth on poverty reduction?

Key reading

Lopez, 2004. "Pro-Poor Growth: A Review of What We Know (and What We Don't)."

These questions are explored below, drawing on a survey of recent literature on the relationship between growth, poverty and inequality (Lopez 2004). First, papers are reviewed that have explored the relative contribution of income growth and distributional changes to changes in poverty. The issue is relevant because even if poverty responds to both factors, gaining knowledge about their relative importance may be helpful when trying to strike the right balance between pro-poor and pro-growth interventions. A second group of papers considered below focuses on the growth-inequality relationship, with some paying attention to the potential impact that the growth process has on inequality and others stressing the potential effect of inequality on growth. These papers have largely focused on whether countries will have to face trade-offs between reducing inequality and improving growth performance, or instead whether there exists a virtuous circle in which growth leads to lower inequality, with lower inequality in turn leading to faster growth.

This section underscores the answers to many of the above questions remained unclear. However, there are a few basic conclusions that can be drawn to shed some light on the questions posted above:

  • Growth is fundamental for poverty reduction, and in principle growth as such does not seem to affect inequality.
  • Growth accompanied by progressive distributional change is better than growth alone.
  • High initial inequality is a brake on poverty reduction.
  • Poverty itself is also likely to be a barrier for poverty reduction; and asset inequality seems to predict lower future growth rates.

Next: Growth and Poverty

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