The debate among governments, economists, and NGOs about how much the world’s poor benefit from economic growth seems unending. Last year The Economist claimed that “Growth really does help the poor: in fact it raises their incomes by about as much as it raises the incomes of everybody else.” Yet, in a letter published soon after by the same magazine, Justin Forsyth of Oxfam claimed that “..current patterns of growth and globalization are widening income disparities and hence acting as a brake on poverty reduction.”
Irreconcilable positions? Not necessarily: for both sides in this debate are, in many respects, talking about different things. One side may be talking about absolute poverty, the other about relative poverty. Moreover, average findings conceal large differences: in some countries the poor can benefit from economic growth, in others they may be too deprived to take advantage of it. In short, some truth resides on both sides. The full picture, however, is more complicated than either point of view.
New data from the 1990s confirms earlier studies that there is little or no evidence that economic growth is associated with increases in income inequality as measured by national household surveys. This finding is important. For if the share of national income going to the poor does not fall with economic growth then of course the poor will gain in absolute terms; growth will be poverty reducing, and contraction will be poverty increasing.
Moreover, the available data confirms that the higher the rate of growth, the higher the average rate of poverty reduction. That is the type of evidence that The Economist was promoting.
Yet it is deceptive to conclude from this that growth raises the incomes of the poor “.. by about as much as it raises the incomes of everybody else.” Given existing inequality, the absolute income gain to the rich will be greater - much greater - than the gains to the poor. For the richest 10% of people in India the income gain from aggregate economic growth tends to be about four times higher than the gain to the poorest 20%; in Brazil it tends to be almost 20 times higher. This is consistent with growth having no overall effect on inequality as conventionally measured.
Focusing on average outcomes also misses the fact that the experiences of poor people during times of economic growth are diverse. The same growth rate can bring anything from a modest drop in poverty to a dramatic decline. One finds plenty of cases of rising inequality during spells of growth. Indeed, the best data available suggests that inequality increases about half the time, and falls the other half.
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Even when inequality does not change with growth, one finds both gainers and losers at all levels of living. In cases where household survey data has tracked the same families over time it is common to find considerable churning under the surface. Many people escape poverty while others fall into poverty, even when the overall poverty rate moves rather little.
An important factor in the heterogenous experiences of developing countries in the 1990s is that starting conditions varied immensely between countries undergoing economic reform. The most important differences appear to be in the physical and human assets of the poor. In economies where poor people tend to be illiterate, sick, hard to reach and/or marginalized socially, they have less chance of sharing in the gains from growth than in an economy in which such debilities are less severe. In other words, in countries where the level of income inequality is high, inequality is reduced less by growth than in countries where inequality is relatively low.
These differences are, in turn, associated with long-standing differences in policy regimes. Suppose you could divide reforming countries into two categories: those whose previous policies benefited the rich, keeping inequality artificially high; and those whose previous policies had the opposite effect, keeping inequality low. Opening the economy and freeing internal markets may well entail sizable redistribution between rich and poor, but in opposite directions in the two groups of countries.
In fact, the average impact of policy reform on inequality is zero. Yet there is abundant distributional change going on under the surface. Policy reforms shift the distribution of income in different directions in different developing countries, as expected, given the diverse starting conditions. As a result, behind the averages, people are often hurting.
So, both sides in this debate have valid points. One side smoothes over the diversity in country experiences; the other often ignores the averages, and focuses instead on cases in which high or rising inequality dulls the gains to the poor from growth.
Yet the evidence is compelling that, on average, the gains to the poor from growth outweigh the losses. It is equally important, however, to understand the variety in outcomes for the poor, so as to understand better what else must be done to assure more growth that directly benefits them. That is where the debate should now turn.
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The debate among governments, economists, and NGOs about how much the world’s poor benefit from economic growth seems unending. Last year The Economist claimed that “Growth really does help the poor: in fact it raises their incomes by about as much as it raises the incomes of everybody else.” Yet, in a letter published soon after by the same magazine, Justin Forsyth of Oxfam claimed that “..current patterns of growth and globalization are widening income disparities and hence acting as a brake on poverty reduction.”
Irreconcilable positions? Not necessarily: for both sides in this debate are, in many respects, talking about different things. One side may be talking about absolute poverty, the other about relative poverty. Moreover, average findings conceal large differences: in some countries the poor can benefit from economic growth, in others they may be too deprived to take advantage of it. In short, some truth resides on both sides. The full picture, however, is more complicated than either point of view.
New data from the 1990s confirms earlier studies that there is little or no evidence that economic growth is associated with increases in income inequality as measured by national household surveys. This finding is important. For if the share of national income going to the poor does not fall with economic growth then of course the poor will gain in absolute terms; growth will be poverty reducing, and contraction will be poverty increasing.
Moreover, the available data confirms that the higher the rate of growth, the higher the average rate of poverty reduction. That is the type of evidence that The Economist was promoting.
Yet it is deceptive to conclude from this that growth raises the incomes of the poor “.. by about as much as it raises the incomes of everybody else.” Given existing inequality, the absolute income gain to the rich will be greater - much greater - than the gains to the poor. For the richest 10% of people in India the income gain from aggregate economic growth tends to be about four times higher than the gain to the poorest 20%; in Brazil it tends to be almost 20 times higher. This is consistent with growth having no overall effect on inequality as conventionally measured.
Focusing on average outcomes also misses the fact that the experiences of poor people during times of economic growth are diverse. The same growth rate can bring anything from a modest drop in poverty to a dramatic decline. One finds plenty of cases of rising inequality during spells of growth. Indeed, the best data available suggests that inequality increases about half the time, and falls the other half.
Secure your copy of PS Quarterly: The Year Ahead 2025
Our annual flagship magazine, PS Quarterly: The Year Ahead 2025, has arrived. To gain digital access to all of the magazine’s content, and receive your print copy, subscribe to PS Digital Plus now.
Subscribe Now
Even when inequality does not change with growth, one finds both gainers and losers at all levels of living. In cases where household survey data has tracked the same families over time it is common to find considerable churning under the surface. Many people escape poverty while others fall into poverty, even when the overall poverty rate moves rather little.
An important factor in the heterogenous experiences of developing countries in the 1990s is that starting conditions varied immensely between countries undergoing economic reform. The most important differences appear to be in the physical and human assets of the poor. In economies where poor people tend to be illiterate, sick, hard to reach and/or marginalized socially, they have less chance of sharing in the gains from growth than in an economy in which such debilities are less severe. In other words, in countries where the level of income inequality is high, inequality is reduced less by growth than in countries where inequality is relatively low.
These differences are, in turn, associated with long-standing differences in policy regimes. Suppose you could divide reforming countries into two categories: those whose previous policies benefited the rich, keeping inequality artificially high; and those whose previous policies had the opposite effect, keeping inequality low. Opening the economy and freeing internal markets may well entail sizable redistribution between rich and poor, but in opposite directions in the two groups of countries.
In fact, the average impact of policy reform on inequality is zero. Yet there is abundant distributional change going on under the surface. Policy reforms shift the distribution of income in different directions in different developing countries, as expected, given the diverse starting conditions. As a result, behind the averages, people are often hurting.
So, both sides in this debate have valid points. One side smoothes over the diversity in country experiences; the other often ignores the averages, and focuses instead on cases in which high or rising inequality dulls the gains to the poor from growth.
Yet the evidence is compelling that, on average, the gains to the poor from growth outweigh the losses. It is equally important, however, to understand the variety in outcomes for the poor, so as to understand better what else must be done to assure more growth that directly benefits them. That is where the debate should now turn.