Equity and Growth in Developing Countries: Old and New Perspectives on the Policy Issues

Abstract:     
January 1996

There is no intrinsic tradeoff between long-run aggregate economic growth and overall equity. Policies aimed at helping the poor accumulate productive assets --- especially policies to improve schooling, health, and nutrition --- when adopted in a relatively nondistorted framework, are important instruments for achieving higher growth.

The stylized fact that distribution must get worse with economic growth in poor countries before it can get better turns out not to be a fact at all. Growth's effects on inequality can go either way and are contingent on several other factors.

Bruno, Ravallion, and Squire found no sign in the new cross-country data they assembled that growth has any systematic impact on inequality. Possibly measurement errors confound the true relationship, but they think it more likely that the relationship between growth and distribution is not as simple as some theories have held.

Since distribution does not worsen, growth reduces absolute poverty. Indeed, absolute poverty measures typically respond quite elastically to growth, and the benefits are certainly not confined to those near typical poverty lines.

Of course, one cannot say that growth always benefits the poor or that none of the poor lose from pro-growth policy reform. Only aggregate effects are studied. But for 17 of the 20 countries for which they assemble quite good data (from at least two surveys since the mid-1980s), the mean and the proportion of people living below $1 a day moved in opposite directions.

The gains to poor people from a distribution-neutral growth process will tend to be lower, the higher the extent of initial inequality. A smaller share of total income must imply a smaller absolute gain from a given increment to total income. Compensatory direct interventions can be important, provided they are integrated into a framework of fiscal and monetary discipline.

The evidence does not suggest that growth is always distribution-neutral, and it would be wrong to conclude that changes in distribution are of little consequence. The point is not that distribution is irrelevant or that it never changes, but that its changes are roughly uncorrelated with economic growth.

There is no intrinsic tradeoff between long-run aggregate efficiency and overall equity. Policies aimed at helping the poor accumulate productive assets --- especially policies to improve schooling, health, and nutrition --- when adopted in a relatively nondistorted framework, are important instruments for achieving higher growth.

This paper --- a product of the Office of the Vice President, Development Economics, and the Poverty and Human Resources Division and Office of the Director, Policy Research Department --- was prepared for the IMF Conference on Income Distribution and Sustainable Growth, June 1-2, 1995.

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