Can High-Inequality Developing Countries Escape Absolute Poverty?
World Bank Policy Research Working Paper No. 1775
At any positive rate of growth, the higher the initial inequality, the lower the rate at which income-poverty falls. It is possible for inequality to be high enough to lead to rising poverty, despite good underlying growth prospects.
Do the poor face the same prospects for escaping poverty in high-inequality developing countries as in low-inequality countries? Is it possible for inequality to be so great as to stifle prospects of reducing absolute poverty, even when other initial conditions and policies are favorable to growth?
Household survey data for developing countries suggest that initial distribution does affect how much the poor share in rising average incomes. Higher initial inequality tends to reduce growth's impact on absolute poverty. By the same token, higher inequality diminishes the adverse impact on the poor of general economic contraction.
Combining this evidence with that from recent investigations of inequality's effect on growth, Ravallion finds that, if inequality is high enough, countries that would have very good growth prospects at low levels of inequality may see little or no overall growth and little progress in reducing poverty - or even a worsening on both counts. (By the same token, factoring in the growth effects magnifies the estimated handicap the poor face in contracting low-inequality countries.)
The data Ravallion uses suggest that such cases do occur. The precision with which key parameters have been estimated makes it difficult to say with confidence how common such cases are, but they appear to be in the minority. What appear to be the best available estimates suggest that about one-fifth of the spells between surveys he analyzed were cases in which poverty was rising, yet positive growth in the mean (and hence falling poverty) is predicted at zero inequality. Inequality can be high enough to result in rising poverty despite good underlying growth prospects.
This paper - a product of the Poverty and Human Resources Division, Policy Research Department - is part of a larger effort in the department to understand why some economies do better than others in reducing poverty.
Number of Pages in PDF File: 12
Date posted: November 20, 2004
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