The world economy has grown well during the 1990s. But how far have the poor benefited from this growth? This paper, from the World Bank, examines the relationship between growth in average incomes of the poor and growth in overall incomes, across the world during the last four decades.
In recent years, there has been intense debate over the extent to which the development of the world economy has improved the lot of the poor. At one end of the spectrum are those who argue that the potential benefits of economic growth for the poor are undermined by sharp increases in inequality. At the other end of the spectrum is the argument that liberal economic policies such as monetary and fiscal stability and open markets raise incomes of the poor and everyone else in society proportionately. This research makes clear that average incomes of the poorest fifth of a country rise or fall at the same rate as average incomes. This relationship holds across regions and income levels, and in normal times as well as during crises. The study also finds that:
- A variety of pro-growth macroeconomic policies, such as low inflation, moderate size of government, sound financial development, respect for the rule of law, and openness to international trade, raise average incomes with little systematic effect on the distribution of income.
- A basic policy package of private property rights, fiscal discipline, macroeconomic stability, and openness to trade on average increases the income of the poor to the same extent that it increases the income of the other households in society.
- There is not a “trickle-down” process or sequencing in which the rich get richer first and eventually benefits trickle down to the poor.
- On the contrary, private property rights, stability, and openness contemporaneously create a good environment for poor households to increase their production and income.
- There is little evidence to suggest that formal democratic institutions or a large degree of government spending on social services systematically affect incomes of the poor.
In short, existing cross-country evidence provides disappointingly little guidance as to what mix of growth-oriented policies might especially benefit the poorest in society. However, it is clear that economic growth and the policies and institutions that support it on average benefit the poorest in society as much as anyone else.
- Growth is not all that is needed to improve the lives of the poor. But standard growth-enhancing policies should be at the center of any effective poverty reduction strategy.
- This does not mean that the potential distributional effects of growth, or the policies that support growth, can or should be ignored.
- The income share of the poorest quintile is not immutable – rather, it is difficult to relate the changes across countries and over time in this income share to average incomes, or to a variety of proxies for policies and institutions that matter for growth and poverty reduction.
- This may be because any effects of these policies on the income share of the poorest quintile are small relative to the substantial measurement error in the imperfect available income distribution data.
- It may also be due to the inability of simple empirical models to capture the complex interactions between inequality and growth suggested by some theoretical models.
