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The Role of Income Inequality for Poverty Reduction

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  • Katy Bergstrom

Abstract

This paper approximates the identity that links growth in mean incomes and changes in the distribution of relative incomes to reductions in absolute poverty and examines the role of income inequality for poverty reduction. Under the assumption that income is log-normally distributed, we show that we can approximate this identity well. We find that the inequality elasticity of poverty reduction is larger, on average, compared to the growth elasticity of poverty reduction and that the growth elasticity declines steeply with a country’s initial level of inequality. However, we find that prior changes in poverty were, in large part, explained by changes in mean incomes. This is a consequence of changes in income inequality being an order of magnitude smaller than changes in mean incomes. Overall, our results highlight the important role income inequality can play in reducing poverty despite prior poverty changes being, in large part, a consequence of economic growth.

Suggested Citation

  • Katy Bergstrom, 2022. "The Role of Income Inequality for Poverty Reduction," The World Bank Economic Review, World Bank, vol. 36(3), pages 583-604.
    • Handle: RePEc:oup:wbecrv:v:36:y:2022:i:3:p:583-604.
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    File URL: http://hdl.handle.net/10.1093/wber/lhab026
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    Cited by:

    1. Brychka, Bohdan & Vyslobodska, Halyna & Voitovych, Nadiia, 2023. "Poverty in Ukraine: evolution of interpreting and analysis of impact factors," Agricultural and Resource Economics: International Scientific E-Journal, Agricultural and Resource Economics: International Scientific E-Journal, vol. 9(2), June.
    2. Gregor Mager & Anja Faße, 2024. "The contribution of smallholders' livelihood activities on income inequality and poverty: Case study from rural Tanzania," Journal of International Development, John Wiley & Sons, Ltd., vol. 36(1), pages 644-676, January.

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