Question

What is distribution neutral economic growth? Does distribution neutral economic growth reduce poverty? Why might people disagree about that?

Answer 1

Economic growth has been vital for reducing extreme poverty and improving the lives of many poor people around the world. This is an indisputable fact.


Using a country’s individual income distribution, which tells us how many people are living in extreme poverty we find that positive growth which is distribution-neutral shifts the income distribution to the right, without changing its shape .The share of people that emerge from poverty due to this distributional-neutral shift is depicted in yellow, which is the area between the two distributions and to the right of the poverty line. The number of people who are lifted out of poverty depends on the position of the poverty line across the distribution of income.

Take any distribution of income across individuals (or a distribution of consumption or expenditure) and specify three summary statistics: the average (or mean), a measure of spread, and a measure which aggregates information on incomes below a specified poverty line. The rate of change of the first is of course what is commonly known as the rate of economic growth. The second can be captured through a range of inequality indices. The most commonly used summary measure of the third is the fraction of individuals below the poverty line, or the head count ratio, although there are a suite of indices which weight depth of poverty to different degrees.

It should be clear intuitively that an increase in the average holding inequality constant will reduce poverty. This is the case of ‘distribution neutral growth’, which is a benchmark in many poverty projection exercises, and leads to the often cited ‘growth elasticity of poverty reduction’: put simply, the responsiveness of poverty to growth. On the other hand, increasing inequality while holding the mean constant will usually increase poverty. Thus, if a rising mean is accompanied by rising inequality, the poverty reduction impact from growth will be attenuated.

But if growth is accompanied by reduced inequality, the impact of growth on poverty reduction will be heightened. These effects constitute the first channel through which inequality mediates the impact of growth on poverty.

Even when inequality does not change with growth, its overall level can affect the relationship between growth and poverty reduction. It is well established that distribution-neutral growth starting at a higher level of inequality will reduce poverty by less. In other words, the responsiveness of poverty reduction to growth is lower when initial inequality is higher. This is the second channel through which inequality connects growth and poverty reduction, even if inequality stays constant with growth.

There is a third inequality channel through which growth and poverty reduction are connected, and which follows from those mentioned above. In fact it is a channel through which the impact of growth on poverty reduction can be overestimated. Standard national statistical sources usually do not, and cannot, produce information on intra-household inequality. In effect, it is assumed that there is no inequality within households and that inequality between individuals is purely the result of inequality in household per capita income or consumption. But there is considerable corroborative evidence that resources within the household are themselves distributed unequally, for example between men and women. Thus standard income and expenditure distributions understate inequality. And for this reason they overstate the responsiveness of poverty reduction to growth, with the overstatement being greater the larger is the degree of intra-household inequality.