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Equity and growth in developing countries : old and new perspectives on the policy issues

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  • Bruno, Michael
  • Ravallion, Martin
  • Squire, Lyn

Abstract

The"stylized fact"that distribution must get worse with economic growth in poor countries before it can get better turns out not to be a fact at all. Growth's effects on inequality can go either way and are contingent on several other factors. The authors found no sign in the new cross-country data they assembled that growth has any systematic impact on inequality. Possibly measurement errors confound the true relationship, but they think it more likely that the relationship between growth and distribution is not as simple as some theories have held. Since distribution does not worsen, growth reduces absolute poverty. Indeed, absolute poverty measures typically respond quite elastically to growth, and the benefits are certainly not confined to those near typical poverty lines. Of course, one cannot say that growth always benefits the poor or that none of the poor lose from pro-growth policy reform. Only aggregate effects are studied. But for 17 of the 20 countries for which they assemble quite good data (from at least two surveys since the mid-1980s), the mean and the proportion of people living below $1 a day moved in opposite directions. The gains to poor people from a distribution-neutral growth process will tend to be lower, the higher the extent of initial inequality. A smaller share of total income must imply a smaller absolute gain from a given increment to total income. Compensatory direct interventions can be important, provided they are integrated into a framework of fiscal and monetary discipline. The evidence does not suggest that growth is always distribution-neutral, and it would be wrong to conclude that changes in distribution are of little consequence. The point is not that distribution is irrelevant or that it never changes, but that its changes are roughly uncorrelated with economic growth. There is no intrinsic tradeoff between long-run aggregate efficiency and overall equity. Policies aimed at helping the poor accumulate productive assets--especially policies to improve schooling, health, and nutrition--when adopted in a relatively nondistorted framework, are important instruments for achieving higher growth.

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Bibliographic Info

Paper provided by The World Bank in its series Policy Research Working Paper Series with number 1563.

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Date of creation: 31 Jan 1996
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Handle: RePEc:wbk:wbrwps:1563

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Related research

Keywords: Services&Transfers to Poor; Environmental Economics&Policies; Economic Conditions and Volatility; Health Monitoring&Evaluation; Public Health Promotion; Achieving Shared Growth; Inequality; Governance Indicators; Safety Nets and Transfers; Rural Poverty Reduction;

References

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  1. Zvi Eckstein & Itzhak Zilcha, 1991. "The Effects of Compulsory Schooling on Growth, Income Distribution and Welfare," Boston University - Institute for Economic Development, Boston University, Institute for Economic Development 20, Boston University, Institute for Economic Development.
  2. Lipton, Michael & Ravallion, Martin, 1995. "Poverty and policy," Handbook of Development Economics, Elsevier, in: Hollis Chenery & T.N. Srinivasan (ed.), Handbook of Development Economics, edition 1, volume 3, chapter 41, pages 2551-2657 Elsevier.
  3. Anand, Sudhir & Kanbur, S. M. R., 1993. "The Kuznets process and the inequality--development relationship," Journal of Development Economics, Elsevier, vol. 40(1), pages 25-52, February.
  4. Banerjee, Abhijit V & Newman, Andrew F, 1993. "Occupational Choice and the Process of Development," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 101(2), pages 274-98, April.
  5. Bencivenga, Valerie R & Smith, Bruce D, 1991. "Financial Intermediation and Endogenous Growth," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 195-209, April.
  6. Fields, Gary S, 1989. "Changes in Poverty and Inequality in Developing Countries," World Bank Research Observer, World Bank Group, World Bank Group, vol. 4(2), pages 167-85, July.
  7. Papanek, Gustav F. & Kyn, Oldrich, 1986. "The effect on income distribution of development, the growth rate and economic strategy," Journal of Development Economics, Elsevier, vol. 23(1), pages 55-65, September.
  8. Satyajit Chatterjee, 1991. "The effect of transitional dynamics on the distribution of wealth in a neoclassical capital accumulation model," Working Papers 91-22, Federal Reserve Bank of Philadelphia.
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  10. Shaohua Chen & Datt, Gaurav & Ravallion, Martin, 1993. "Is poverty increasing in the developing world?," Policy Research Working Paper Series 1146, The World Bank.
  11. Hoff, Karla & Lyon, Andrew B., 1995. "Non-leaky buckets: Optimal redistributive taxation and agency costs," Journal of Public Economics, Elsevier, vol. 58(3), pages 365-390, November.
  12. Kakwani, Nanak, 1987. "Inequality of income derived from survey data during the inflationary period," Economics Letters, Elsevier, vol. 23(4), pages 387-388.
  13. Hoff, Karla, 1994. "The second theorem of the second best," Journal of Public Economics, Elsevier, vol. 54(2), pages 223-242, June.
  14. Bidani, Benu & Ravallion, Martin, 1995. "Decomposing social indicators using distributional data," Policy Research Working Paper Series 1487, The World Bank.
  15. Ahluwalia, Montek S, 1976. "Income Distribution and Development: Some Stylized Facts," American Economic Review, American Economic Association, vol. 66(2), pages 128-35, May.
  16. Bruno, Michael & Easterly, William, 1995. "Inflation crises and long-run growth," Policy Research Working Paper Series 1517, The World Bank.
  17. Milanovic, Branko, 1995. "Poverty, inequality, and social policy in transition economies," Policy Research Working Paper Series 1530, The World Bank.
  18. Foster, James & Greer, Joel & Thorbecke, Erik, 1984. "A Class of Decomposable Poverty Measures," Econometrica, Econometric Society, Econometric Society, vol. 52(3), pages 761-66, May.
  19. Tsiddon, Daniel, 1992. "A Moral Hazard Trap to Growth," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 33(2), pages 299-321, May.
  20. Ravallion, Martin & Datt, Gaurav, 1996. "How Important to India's Poor Is the Sectoral Composition of Economic Growth?," World Bank Economic Review, World Bank Group, World Bank Group, vol. 10(1), pages 1-25, January.
  21. Braillard, S. Lael & Verdier, Thierry, 1994. "Lobbying and adjustment in declining industries," European Economic Review, Elsevier, vol. 38(3-4), pages 586-595, April.
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