Redistribution matters: growth for poverty reduction

This article discusses whether poverty reduction in developing countriescan best be achieved through faster economic growth and reduction through redistribution, though the two may be complementary. This paper develops an analytical framework to assess which of strategy would be the most effective, given specific poverty targets, then proceeds to empirical investigation.

This article inspects the impact on poverty in fifty countries of three simulation exercises, corresponding to different distributional outcomes:

• a one percent distribution-neutral increase in per capita GDP
• a one percent increase in per capita GDP, distributed equally across income percentiles
• a one percent redistribution of income from the richest twenty percent to the poorest twenty percent

The effectiveness of the outcomes in reducing poverty is judged by the time period required to achieve a given target. In all simulations a 'head count' measure of poverty is used.

The article finds that:

• the benefits of equal distribution growth are greater the higher is a country's per capita income, and the higher its Gini coefficient The results imply that growth with redistribution would be particularly appropriate for the Latin American countries and those of North Africa and the Middle East. Its poverty-reducing advantage would be less for the sub-Saharan countries (except South Africa), because of their low per capita incomes. It would also be less effective for the former centrally planned countries, despite their middle-income status, because of their relatively low inequality
• as the poverty line rises up a country's income distribution, the efficiency of redistribution ratio becomes less and less sensitive to measures of inequality. However, it is always the case, no matter what a country's per capita income or degree of inequality, that redistribution with growth is more efficient than distribution neutral growth in reducing the intensity of poverty. This is because the relative benefit of equal distribution growth increases as one moves down the income distribution, independently of a country's per capita income or degree of inequality
• for the overwhelming majority of middle-income countries, poverty reduction is most effectively achieved by a redistribution of current income. For these same countries, redistribution with growth would be the second-best option, and distribution-neutral, or status quo growth, a poor third
• low-income countries require a growth strategy, and for most redistribution with growth would be more effective than status quo growth
• growth alone is a rather blunt instrument for poverty reduction, since the consensus of empirical work suggests that it is distribution neutral

The article concludes that:

• greater distributional equality provides a favourable 'initial condition' for rapid and sustainable growth
• redistribution of current income and assets, or redistribution of an economy's growth increment is the most effective forms of poverty reduction for most countries
• the mechanisms to achieve the redistributions are feasible for most countries

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