Can high-inequality developing countries escape absolute poverty?
Do the poor face the same prospects for escaping poverty in high-inequality developing countries as in low-inequality countries? Is it possible for inequality to be so great as to stifle prospects of reducing absolute poverty, even when other initial conditions and policies are favorable to growth? Household survey data for developing countries suggest that initial distribution does affect how much the poor share in rising average incomes. Higher initial inequality tends to reduce growth's impact on absolute poverty. By the same token, higher inequality diminishes the adverse impact on the poor of general economic contraction. Combining this evidence with that from recent investigations of inequality's effect on growth, the author finds that, if inequality is high enough, countries that would have very good growth prospects at low levels of inequality may see little or no overall growth and little progress in reducing poverty - or even a worsening on both counts. The data the author uses suggest that such cases do occur. The precision with which key parameters have been estimated makes it difficult to say with confidence how common such cases are, but they appear to be in the minority. What appear to be the best available estimates suggest that about one-fifth of the spells between surveys he analyzed were cases in which poverty was rising, yet positive growth in the mean (and hence falling poverty) is predicted at zero inequality. Inequality can be high enough to result in rising poverty despite good underlying growth prospects.
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