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The Poverty-Growth-Inequality Triangle

Author: F Bourguignon
Date: 2003
Size: 32 pages (136 KB)

Summary

Should development strategies focus on growth, or poverty, or inequality? How does income distribution affect poverty reduction? How does growth impact on income distribution? This paper by the World Bank analyses the relationships between poverty, growth and inequality. The paper argues that both growth and changes in inequality play a major role in poverty reduction.

Poverty is measured by the absolute poverty headcount index, that is, the proportion of the population below a particular poverty line. Inequality or distribution refers to disparities in relative income across the whole population. Growth is measured by the percentage change in mean welfare level (income or consumption). The paper refers to the relationship between these three variables as the poverty-growth-inequality triangle.

It is generally established that growth is necessary for poverty reduction and that rising inequality increases poverty. Hence, the main issue is the interactions between distribution and growth. The critical question is: are growth and distribution independent of each other, or are they strongly inter-related?

Poverty reduction is determined by both growth and changes in the distribution of income. Distributional changes can cause sizeable changes in poverty, and may even offset the positive effects of growth. Poverty, growth and distribution are linked in other ways:

Income distribution matters as much as growth for poverty reduction.
Country specificity matters. The same growth rate can cause different levels of poverty reduction in countries with different levels of distribution.
The effect of growth on distribution varies according to country conditions. Growth can sometimes increase existing inequalities.
Inequality plays a central role in determining the rate and pattern of growth. Initial inequality is associated with lower growth rates.
There is a negative correlation between wealth inequality and growth. So, progressive redistribution may increase growth. For instance, if there are credit market imperfections, redistributing capital to credit-constrained poor people may increase growth.
In a democracy, if there is too much inequality, it leads to more redistribution.
High inequality can lead to social conflict and political instability, negatively affecting growth.

A development strategy for reducing poverty needs to consider both growth and distribution simultaneously. For example, redistribution can counter the potentially adverse effects of growth on inequality. Redistribution of wealth, rather than income, for instance, through correcting credit market imperfections or lowering the tax rate can increase growth. The implications of redistribution are:

Direct wealth redistribution may not be feasible or without cost. For instance, redistributing property often involves political violence.
Redistributing wealth also involves some income transfers. Income transfers can have positive effects on growth as they may contribute to human capital accumulation. Income transfers also provide social insurance to poor people, and can contribute to pro-poor growth by avoiding dis-savings by poor people.
Smart transfers, or means-tested, conditional income transfers such as Mexico’s Progresa/Oportunidades programmes are effective in improving human capital accumulation.
More research is required on the role of targeted transfers in developing countries and whether efficient redistribution can work in practice.
The feasibility of asset redistribution, such as providing education, depends on the political context. The social benefits of any redistribution of wealth may be opposed by the elites in power.

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Source: Bourguignon, F., 2003, ‘The Poverty-Growth-Inequality Triangle’, Paper prepared for the Conference 'Poverty, Inequality and Growth', hosted by Agence Francaise de Developpement and the European Union, November 2003, Paris and the European Union
Author: François Bourguignon , fbourguignon@worldbank.org