Dynamics of Growth, Poverty, and Inequality in Pakistan

The relationship between growth, inequality, and poverty has been a moot point. On the one hand growth is considered central or the best course to reduce poverty (e.g. World Development Report 1990) with the preconditions that access to education, health, and social services are available to all by means of other policies. On the other hand, there is a realisation that growth, inequality, and poverty relations are non-linear, complex, and path dependent in their dynamics. An important point made in this context by Kuznets (1955) was the empirical finding of an inverted U (arch) shape relationship between growth and inequality which suggested that the inequality would increase with growth in the beginning, but will decline at higher levels of growth as the benefits of growth trickle down to lower income strata. This argument has been debated since then in the literature with empirical support gathered for and against this hypothesis. Recent theoretical literature on the issue tries to find the micro-foundations of the dynamical relations between these three variables (see for example, proceedings of the 5th ABCDE Annual (World) Bank Conference on Development Economics). Institutional factors do not change in a few years while they matter in the reduction of poverty as well as in sustaining it at low levels. Hence these relationships are likely to be non-linearity and path dependent, i.e., history matters in the determination of the impact of growth on poverty, of growth on inequality, of inequality on poverty etc. Therefore an understanding of these relationships require knowledge of both the short-run as well as the long-run elasticities of poverty. The method developed by Kakwani (1993) and Kanbur (1987), make use of single survey and provides information on the short-term elasticities but remain silent about longer term relationships between poverty, growth, and inequality.