Interrelationship between growth, inequality, and poverty: the Asian experience

Interrelationship between growth, inequality, and poverty: the Asian experience

Examining inequality, growth and poverty in 17 Asian countries

This paper examines the relationships between economic growth, income distribution, and poverty for 17 Asian countries for the period 1981–2001. The author uses an inequality–growth trade-off index (IGTI) to analyse the trade-off between inequality and growth. A poverty equivalent growth rate is also employed to study the distributional impact of growth. Although these two analytical tools are applied to cross-country data sets for the 17 Asian countries, data quality is often a major concern. Rather than using cross-country data, the author recommends the use of micro unit record household surveys. While cross-country analysis is useful and has generated many insights, it tends to neglect country heterogeneity in the growth–inequality–poverty relationship and is empirically unable to generate robust determinants of pro-poor growth that are valid across the developing world. Policy recommendations emerging from cross-country analysis should therefore not be prescribed for individual countries without analysis at a specific country level.

Some policy implications that emerge from the study include:

  • pro-poor policies and reducing inequality would benefit the ultra-poor much more than the poor living close to the poverty line
  • the IGTI increases monotonically with the level of income. This indicates greater effectiveness of pro-poor policies in countries with higher incomes than in countries with lower incomes. Equivalently, growth-enhancing policies would be more effective for countries where mean income is low and the trade-off index is very small, say less than 1
  • when the level of inequality is higher, the trade-off index will be greater. Where high inequality persists, inequality-reducing pro-poor policies would be more effective.

The author concludes that the pro-poor growth debate and policy agenda should consider non-income dimensions that are material and remain significant for human well-being in addition to the importance of redistributing the economic benefits of growth.