Income distribution affects the conversion of growth into poverty reduction

The importance of economic growth for poverty reduction is widely acknowledged. But there is an ongoing debate about the way inequality affects poverty reduction. For example, how does income distribution impact on the responsiveness of poverty to economic growth and changes to inequality?

Research from Utrecht University, in the Netherlands, and University of East Anglia, in the UK, explores the relationship between poverty, inequality and growth in poor countries. It looks at how the rate of poverty reduction for any given rate of growth – or change to inequality – is affected by income distribution.

The researchers examine data from 1980 to 1998 for the six main developing regions: East Asia, Eastern Europe and Central Asia, Latin America, Middle East and North Africa, South Asia and Sub-Saharan Africa. These regions showed very different trends in economic growth, poverty and inequality during the 1980s and 1990s.

Recent influential studies have promoted the idea that economic growth can deliver poverty reduction. The evidence put forward is that during periods of growth, the incomes of poor people tend to rise at the same rate as those of the rest of society.

The researchers acknowledge the importance of growth for poverty reduction, but argue that growth alone is not enough: the way income is distributed among the population is also important. It is harder for more unequal societies to convert growth into poverty reduction. And increases in inequality can push people into poverty, as the research shows has been the case in Eastern Europe and Central Asia.

The researchers identify four factors that can influence poverty levels: changes to the average level of national income (economic growth or contraction); changes to income inequality; and how much poverty can be expected to respond to changes to income or changes to inequality (the income elasticity, and inequality elasticity, of poverty respectively).

Key findings of the research include:

• The responsiveness of poverty to changes to income or inequality varies widely across regions and depends mainly on differences in the initial distribution of income.
• Poverty was twice as responsive to changes to income in Eastern Europe and Central Asia as it was in Sub-Saharan Africa (mid 1990s).
• Poverty in Latin America was just as responsive to economic growth as it was in East Asia (mid 1990s).
• Poverty in South Asia was unresponsive to changes to inequality.

Differing growth rates are the main reason for the different rates of poverty reduction observed in the various regions. But changes to inequality, and income elasticity and inequality elasticity were also important. In Eastern Europe and Central Asia their combined effect was much larger than the impact of growth alone.

The researchers conclude that:

• Economic growth alone will not be enough to reduce poverty.
• Higher inequality does not necessarily predict that a region will be slow to convert growth into poverty reduction – as the findings on Latin America and East Asia show.
• Further research is needed to identify the economic conditions and policy interventions that could contribute to pro-poor growth in developing countries.

Source(s):
‘Not by Growth Alone: The Role of the Distribution of Income in Regional Diversity in Poverty Reduction’, European Economic Review, 51 (4), pages 805 to 829, by Adriaan Kalwij and Arjan Verschoor, 2007

id21 Research Highlight: 2 October 2007

Further Information:
Arjan Verschoor
School of Development Studies
University of East Anglia
Norwich NR4 7TJ
UK

Tel: +44 (0) 1603 592806
Fax: +44 (0) 1603 451999
Contact the contributor: a.verschoor@uea.ac.uk

University of East Anglia, UK

Adriaan Kalwij
Utrecht School of Economics
Utrecht University
Janskerkhof 12 3512 BL Utrecht,
The Netherlands

Tel: +31 30 253 7936
Fax: +31 30 253 7373
Contact the contributor: a.kalwij@econ.uu.nl

Utrecht University, The Netherlands