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Key Text Why Inequality Matters for Poverty

Author: F Naschold
Date: 2002
Size: 6 pages (96kB)

Summary

How is inequality linked to poverty? How important is it relative to economic growth? Inequality re-entered the mainstream development policy agenda following the World Development Report of 2001. This paper from the Overseas Development Institute draws on recent research to understand the dynamics of triangular relationship between inequality, poverty and growth. It asserts that inequality both matters in its own right, and is key to reducing poverty.

Inequality, poverty and growth interact with one another through a set of two-way links. These include direct and indirect effects. For instance, inequality can directly influence poverty as inequality directly affects growth and growth in turn influences poverty. Understanding these links can lead to stronger development policies on poverty reduction.

Neither the rate of economic growth nor the stage of economic development have an inverse impact on inequality. Instead, it is the kind of economic growth that does.
More equal distribution of income and assets can foster growth, whereas high inequality can retard it. Reducing inequalities can thus be doubly beneficial for the poor.
Growth is less effective in reducing poverty in least developed and high-inequality countries. There is also evidence that growth has a larger effect in rural areas, while distribution is more important in urban areas.
The relative effects of growth and distribution also vary depending on whether absolute or relative measures of poverty are used. For example, growth effects tend to dominate changes in absolute poverty.
No commonly used measure of poverty is entirely absolute – the difference lies in the extent to which they incorporate relative measures.

Distribution is central to fighting poverty, and poverty reduction, especially for the poorest, can be greatly enhanced through distributional policies. Some policy-relevant findings include:

Distribution policies should be pursued where they remove the redundant and dysfunctional inequalities and in countries where the inequality effect on poverty is greater than the growth effect.
Development policies should make the choice of poverty measure very clear (absolute or relative) since the choice makes an implicit judgment about how much the poor should benefit from the growth.
There is a need for further country-based work on the nature, extent and determinants of various dimensions of inequality, and their effects on different dimensions of poverty.
Growth and better distribution should be complementary, rather than competing, objectives in the fight against poverty.

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Source: Naschold, F., 2002, 'Why Inequality Matters for Poverty', Inequality Briefing, Briefing Paper no. 2, Overseas Development Institute, London
Author: Felix Naschold , fn23@cornell.edu
Overseas Development Institute (ODI), http://www.odi.org.uk/