Growth is regarded
as key to poverty reduction. Poverty is widely defined term, and most
definitions take its multidimensional aspects into consideration. According to the
World Bank (2000), poverty is a lack of power to command resources. The poverty
reduction has become a central goal for development. It can be achieved by
economic growth and/or by the distribution of income. Issues related to the
benefits of growth accrued to the poor have become a priority of development
policy in the 1990s. An emerging consensus is that growth alone is a rather
blunt tool for poverty reduction. In conjunction with emphasis on poverty
reduction, policies as to the redistribution of income and assets have become
increasingly more important. A policy agenda that addresses both distributional
concerns and poverty reduction could lead to enhancing both economic growth and
equity. This study presents several analytical
results on poverty elasticity, measuring the extent to which economic growth
reduces poverty. It offers several propositions to demonstrate that the initial
levels of economic development and income inequality can have significant
impacts on poverty reduction. It also demonstrates that the poverty tradeoff
between growth and inequality can be explained in terms of initial levels of
development and inequality.
Key words: Economic growth,
poverty reduction, inequality, Tradeoff.
Poverty reduction is considered one of the
most essential development goals for developing and developed countries both
(United Nations, 2000). However, the poverty outcomes have varied extensively
across countries depending on the particular success of their development
strategies. Research that compares the experiences of a wide
range of developing countries finds consistently strong evidence that rapid and
sustained growth is the single most important way to reduce poverty. A typical
estimate from these cross-country studies is that a 10 per cent increase in a
country’s average income will reduce the poverty rate by between 20 and 30 per cent
(Adams, R, 2002) .
Initial levels of income inequality are
important in determining how powerful effect of growth has in reducing poverty.
For example, it has been estimated that a one per cent increase in income
levels could result in a 4.3 per cent decline in poverty in countries with very
low inequality or as little as 0.6 per cent decline in poverty in highly disparate
countries (Ravallion 2007).
Such calculations need to be interpreted
with care, given the multitude of variables involved. Even if inequality
increases alongside growth, it is not necessarily the case that poor people
will fail to benefit – only that they will benefit less from growth than other
households. But contrary to widespread belief, growth does not necessarily lead
to increased inequality. While some theoretical research suggests a causal
relationship between growth and inequality (and vice versa), the consensus of the latest empirical research is that
there is no consistent relationship between inequality and changes in income.
The experiences of developing countries
in the 1980s and 1990s suggest that there is a roughly equal chance of growth
being accompanied by increasing or decreasing inequality (Ravallion 2001). In
many developing countries, rates of inequality are similar to or lower than in
developed countries. A series of studies using cross-country data all suggest
that growth has neither a positive nor a negative effect on inequality (Chen
and Ravallion 1997).
This is not to say that increased growth
has not led to increasing inequality in some countries. Both China and India
have seen widening inequality as their growth rates picked up over the 1990s. Both
Bangladesh and Uganda would have seen higher rates of poverty reduction, had
growth not widened the distribution of income between 1992 and 2002. For
example, one study suggests that the proportion of people living in poverty in
Uganda at the end of this period would have been 30% instead of 38%, had the
poor benefited proportionally from growth (Besley
and Cord 2007).