Economic growth that is good for the poor is known as ‘pro-poor growth’. But what exactly does the term mean? This briefing note from the Department for International Development (DFID) examines the relationship between growth and poverty. Given DFID’s aim of eliminating absolute poverty, it argues that the most appropriate measure of pro-poor growth is the average growth rate of the incomes of the poor.
The Millennium Development Goals (MDGs) will only be achieved if developing countries experience rapid and sustained growth. Poverty reduction strategies would benefit from clearer analysis of the links between growth and poverty alleviation. As a basis for this, it is important to establish what is meant by ‘pro-poor growth’. There are two main approaches: the absolute definition considers only the incomes of the poor, and the relative definition compares changes in the incomes of the poor with those who are not poor. If the objective is to reduce absolute poverty, then the former definition is preferable. Higher rates of growth usually result in more rapid poverty reduction. However this relationship varies between countries, mainly due to differences in what happens to income inequality.
According to the relative definition, growth is only pro-poor if the incomes of poor people grow faster than those of the overall population. However, DFID is committed to the MDG of halving absolute poverty income by 2015, and thus prefers to judge whether growth is pro-poor by how fast on average the incomes of the poor rise. Using the absolute definition, pro-poor growth is measured by:
- First identifying ‘the poor’ according to a specific poverty line, such as the international $1-a-day line or a national poverty line. Those whose incomes lie below the line are ‘the poor’.
- Collecting inflation-adjusted data on the distribution of income at the beginning and end of the period to be measured, usually from household surveys.
- Calculating the income growth over the period for each of the initially poor households. The average of these growth rates is the rate of pro-poor growth.
- If the rate of growth accelerates, then all standard measures of income poverty fall faster, including the extent and depth of poverty.
DFID’s priority is absolute poverty reduction, therefore why talk about ‘pro-poor growth’ at all? It is argued that the concept of ‘pro-poor growth’ is useful because it links economic growth with changes in the well-being of the poor. The ‘pro-poor growth’ banner:
- Helps build coalitions between developing-country governments, the private sector and donors.
- Makes clear that policy-makers do not have to choose between pro-growth and pro-poor policies. Most policies that increase growth reduce poverty, and many policies that alleviate poverty also boost growth.
- Underlines the importance of enabling poor people to participate in, as well as benefit from, the growth process.
- Highlights how high inequality slows growth, emphasising the need to reduce it. Policy-makers should aim for the most pro-poor combination of overall growth and inequality reduction for their country.
