Economic Growth and Poverty Reduction Strategy

WORLD POVERTY REDUCTION is a central issue in today's growing global economy. However, the best [Page 287]approach to raising income levels of the poor on a sustainable basis is open to debate. Poverty reduction may come about through income growth, redistribution, or both. Changes in poverty are monitored by examining the relationship between growth in a country's per capita income and how the income share of the bottom 20 percent of the income distribution changes (that is, the Lorenz Curve). Advocates of reducing poverty through economic growth and development argue that economic growth—an increase in an economy's ability to produce goods and services resulting in growth of per capita income and a rise in the standard of living—must play a role in achieving sustained poverty reduction in developing countries.

Research shows that economic growth is associated with reductions in poverty, and most economists believe such growth benefits nearly all citizens of a country, even if not equally. The poverty impact of growth can differ substantially among countries. The extent to which these benefits are realized by various groups is reflected as change (or lack of change) in the distribution of income. If economic growth raises the income of everyone in society in equal proportion, then the distribution of income will not change. An increase in mean income in a society, at an unchanged distribution, must necessarily lead to a reduction in poverty.

For growth to occur without a reduction in poverty, income distribution must become more unequal. Growth in household incomes is essential to poverty reduction. However, if growth is skewed in favor of richer households, economic growth may have little impact on poverty reduction. In fact, much of the controversy in pursuing economic growth approaches to poverty reduction involves the relationship between inequality and growth.

Pursuit of economic growth may lead to increasing inequality in the distribution of income. However, sustained growth, even if associated with increasing inequality, can nevertheless bring about poverty reduction, albeit at a lower rate. For a given rate of economic growth, a neutral distributional or pro-poor pattern is preferable in terms of its impact on poverty.

The growth impact on poverty varies according to several factors. The positive relationship between growth and inequality is most pronounced where development takes place within an urban-based setting, that is industrialization, with little or no emphasis on rural development. In developing countries in which agricultural communities account for the majority of those living in poverty, urban industrial growth generates little employment and thus little income gain among the poor. The accrued increase in income based on urban economic growth accrues only to a very small number of households. There also appears to be a relationship between a country's initial distribution of income and the rate of poverty reduction for a given rate of growth. With low initial inequality, economic growth translates into greater poverty reduction, and alternatively with greater initial inequality, economic growth translates into lower rates of poverty reduction. Thus, in countries where inequality is initially high, the poor benefit less from growth. Stated simply, income growth among the poorest groups of people is slower in well-endowed economies.

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