Does Growth Reduce Poverty? – It Does and it Doesn’t


The good news from the UN’s recently released World Economic Situation and Prospects is that the developing world’s economies grew on average by just under 7% last year. Only 9 countries saw their GDP fall (see our recent post).

So what does this mean for the world’s poor?

God gave economists two hands. On the one hand, poverty should fall. On the other hand, it might not. And growth sometimes increases poverty. This is a three-hand issue.

Let me explain.

On the one hand, the link between growth and poverty is now well-sorted out conceptually. If initial inequality is high, then growth’s effect in reducing poverty is modest. (In their recent BWPI working paper Ajay Chhiber and Gaurav Nayyar work through the effects). It stands to reason that if you own a 1,000 acres of prime land and agricultural prices are booming (which they are in Brazil as sugar-based ethanol production rises) then you will make more from growth than if you have an acre of scrub. The upshot: 7% GDP growth will benefit the poor most in the least unequal societies.

On the other hand, many chronically poor people exist outside the main growth poles (dirt poor, environmentally-stressed regions, cut off from major markets, for instance). Or they are too sick to be productive. Unless they get help (maybe that cousin who now has a job in a boom area) then growth might not do much for them. This is so even in China, where growth is going at 10 per cent a year (see this NYT report).

And on my third hand, some folk are ‘adversely incorporated’ into the market-economy. Their assets get stolen by richer folk — urban land that suddenly becomes valuable for commercial development for instance (in South Asia’s booming cities, but this is also happening in parts of Africa: Addis Ababa is one case). So, their lot gets worse with growth. In the global boom of the late 19th century, whole swathes of African smallholders were dispossessed to create what is today one of the world’s most unequal societies: South Africa. Which is why many South Africans don’t feel they get much from today’s boom — a big issue in the lead up to the 2009 elections. (On South Africa see the CPRC working paper by Andries du Toit and David Neves).

Now, God also gave economists two feet, and 10 toes, so……(to be continued).


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