Minggu, 28 Maret 2010

Does Inequality Matter for Poverty Reduction?


This paper examines the importance of (in) equality in reducing poverty from two different viewpoints. World Bank in its annual report argues that inequality does not really matter for alleviating poverty as long as some specific requirements are met. On the contrary, Robert Wade and Simon Maxwell emphasizes that inequality will complicate policies and efforts to combat poverty. In other words, inequality should be simultaneously minimized to achieve the best performance of poverty reduction program and policies. Based on those two arguments, I will take my side to conclude this paper.

World Bank: Inequality Does Not Matter For Poverty Reduction

In the World Development Report 2000/2001: Attacking Poverty (hereinafter is referred as to WDR) particularly chapter 3, World Bank discusses three variables: growth, inequality, and poverty. Those three variables are interrelated each other. Firstly, WDR believes that ‘as countries become richer, on average the incidence of income poverty falls’. It also means that in general, the wealthier a country, the lower the incidence of poverty. For this reason, economic growth is a powerful force for poverty reduction (p. 45). Secondly, WDR is forceful in stating that there is no systematic relationship between growth and income inequality, and, therefore, the impact of growth on reducing poverty varies across countries (p. 52). Thirdly, and the most importantly, WDR claims that not every increase in income inequality should be seen as a negative outcome (p. 52). As economies develop, income inequality can rise because the labor force shifts from agriculture to more productive activities such as industry and service sectors. The above relationship can be deeply elaborated more as follows:

1. The Importance of Economic Growth on Poverty Reduction

According to WDR, since high economic growth will conceivably lead a country to be richer, it constitutes one of key ways to reduce poverty. However, two basic questions need to be clarified. First, what causes economic growth and second, why countries with similar rates of economic growth can have very different rates of poverty reduction?

For the first question, WDR deems that growth depends on education and life expectancy, particularly at lower incomes. There is some evidence that female literacy and girls’ education are good for overall economic growth. In addition, rapid population growth is negatively associated with per capita GDP growth and that the changing age structure of the population can affect growth. Apart of these, some economic policies such as openness to international trade, sound monetary and fiscal policies, a moderately sized government and aid policies are also strongly conducive to economic growth. Other exogenous factors such as ethnic fragmentation, geography, environmental degradation, and initial incomes, matter as well for poverty reduction.

Meanwhile, for answering the second question WDR identifies a complex set of interaction among policies, institutions, history and geography as the determinant factor in producing patterns of growth, changes in distribution of income and opportunities, and rates of poverty in a country. To support this idea, WDR shows data on education and health indicators, which are much better in rich countries. In short, WDR avows that as income rise, health and education indicators as well as people consumption will automatically improved.

To conclude, WDR highlights the importance of economic growth for improving the income of poor people and for moving people out of poverty. Conversely, low or negative growth can have a devastating impact on poor people (p. 47).

2. Insignificant Relation of Growth and Income Inequality

WDR admits that for the same growth rate in per capita consumption, there can be large variation or differences in poverty reduction. Income distribution is the answer for these differences. It implies that for a given rate of growth, the extent of poverty reduction depends on how the distribution of income changes with growth and on initial inequalities in income, assets, and access to opportunity that allow poor people to share in growth. More concretely, if economic growth is accompanied by an increase in the share of income earned by the poorest, incomes of poor people will rise faster than average incomes. In Uganda, for example, growth with rising equality delivered strong poverty reduction, while in Bangladesh rising inequality tempered the poverty reduction from growth.

Although equal distribution of income is seen as important, WDR affirms that there is no systematic relationship across countries between growth and income inequality such as Gini coefficient. It is implied that the difference of income inequality is caused by the combination of policies and institutions in a certain country rather than by economic growth itself.

Another explanation for the lack of association between growth and inequality is that countries with similar overall growth rates could experience very different changes in income distribution because of differences in the regional and sectoral composition of growth. If poor people cannot migrate to regions where socioeconomic opportunities are expanding, growth can lead to rising inequality. Similarly, if growth is concentrated in sectors from which poor people are more likely to derive their income, growth will be associated with declining income inequality.

3. Income Inequality is not always a Negative Outcome

WDR undoubtedly considers that the increasing trend of income inequality should not be seen as negative as long as the following four preconditions are satisfied.
  • The income at the bottom rise or at least do not fall.
  • The development process expands opportunities for all.
  • The observed trends are not the result of dysfunctional forces such as discrimination.
  • The number of poor people falls.

Empirically, WDR argues that as economies develop, income inequality can rise because the labor force shifts from agriculture to more productive activities. For instance, if wages are lower in agriculture than in industry and services and the labor forces shift towards those two sectors, then inequality will increase despite an overall decline in poverty. To strengthen its idea, even WDR refers to early thinking on the effects of inequality on growth, which suggests that greater inequality might be good for growth. This view implies a tradeoff: more growth could be bought for the price of more inequality, with ambiguous effects on poor people. However, in a more recent thinking, WDR considers that lower inequality can increase efficiency and economic growth through a variety of channels, and, therefore, it can support to poverty reduction.

Maxwell and Robert Wade: Inequality Matters for Poverty Reduction

Contrary to the World Bank opinion, Simon Maxwell and Robert Wade tend to say that both redistribution and (in) equality matter for poverty alleviation. Maxwell specifically criticizes WDR by stating that WDR misses two important arguments on the question of why redistribution matters. The first is about social inclusion, and the second is about rights (p. 335).

Quoting Wilkinson, Maxwell shows that in developed countries differences in death rates are more successfully explained by differences in inequality than by differences in material conditions. It means that although factors such as damp housing and air pollution have direct effects on health, much more important are the health effects of people’s subjective experience of their position in society, whether it makes them feel successful, optimistic, confident, or failures, socially excluded, depressed, economically insecure and desperate. It is called ‘psycho-social’ consequence of inequality and draws clear conclusion about the need for redistribution. The second thing is regarding people’s rights. Although it is true that equality is not a right in the sense that individuals have rights as defined in national and international laws, but a degree of equality is implied by commitments to civil and political liberties and to adequate standard of living.

Similarly, Wade proposes a fact that the global distribution of income is becoming ever more unequal, and this should be a matter of greater concern than it is. In such situation, Wade questions the effectiveness of globalization and market integration into world economy. In fact, it never produced equal world’s income distribution and it has failed to work to the benefit of all (p. 73). This argument contests WDR’s statement that openness to international trade is sound policy to foster economic growth.

Referring to some previous studies, Wade shows that world inequality increased from a Gini coefficient of 62.5 in 1988 to 66.0 in 1993. This is a faster rate of increase of inequality than that experienced within the US and Britain during the 1980s. On average, Gini coefficient increased by about 6% during that period. Furthermore, the share of world income going to the poorest 10% of the world’s population fell by over a quarter, whereas the share of the richest 10% rose by 8%. All data above indicate that the world became much more unequal (p. 75). At the same time, there is another kind of polarization between a zone of peace where economy grows faster, and a zone of turmoil where people find their access to basic necessities are restricted.

Unfortunately, this issue has received little attention within the fields of development studies, international relations and international economics, even from World Bank and IMF. Most prominently, Wade criticizes World Bank and IMF for their judgment that inequality is not seen as negative. They neglect, Wade argues, not only matters of world’s income distribution but also world inflation, world exchange rates, and world interest rates; and, in the case of World Bank, the global environmental issues of the oceans, the atmosphere, and nuclear waste. Wade comes to conclusion that to call these world organizations is misleading. They may be world bodies, but they think in state-centric rather than global ways.

Finally, Wade points out that growing inequality is analogous to global warming. Its effects are diffuse and long-term. Therefore, inequality and poverty cannot be fixed just by providing the poor with welfare and opportunities; it should be done through the changing of larger structures of income and asset distribution. That is why, Wade recommends us to mobilize our governments, the multilateral organizations, and international NGOs to establish as an overarching a more equal world income distribution, and not just fewer people in poverty.

My Respond: Inequality and Poverty are Two Sides of the Same Coin

Personally, I prefer to support Wade’s and Simon’s views. I believe that inequality is the “twin sister” of poverty, so that it must matter for poverty reduction. The relationship between inequality and poverty, for me, is substantially close. On the one hand, I suppose that in a country where inequality is commonplace, poverty cannot be resolved significantly. On the other hand, it might be true that there is an unequal but not poor society, as WDR mentioned. However, it is rather difficult to refuse a claim that there is no poverty without inequality.

Indonesian case could be a good example to illustrate such relationship. Inequality problem in Indonesia is not only about imbalanced distribution of income between the poor and the rich people. It also deals with regional disparity between rural and urban areas, between Java and outer islands, and between western and eastern part of Indonesia. As a result, poverty is mainly concentrated in rural areas, outer islands, and eastern Indonesia. This situation clearly shows that inequality cannot be seen as a positive outcome. In addition, although Indonesia has experienced high economic growth from 1960s until mid of 1990s, poverty remains one of the most crucial dilemmas in national development processes. It is because high growth was never accompanied by even distribution of income among peoples. In other words, growth without reducing inequality demonstrates a failure of economic functions in a region / country. Again, it signifies that inequality matters for poverty alleviation.

Regarding WDR, I am uncertain and suppose that, to some extent, it is quite ambiguous report. We can address some critical points that are open to debate as follows:

1. WDR mentions that growth depends on education and life expectancy, particularly at lower incomes. There is some evidence that female literacy and girls’ education are good for overall economic growth. This outlook is not wrong, but how can a country improve its people’s living standard such as education level and life expectancy without outstanding economic performance. In real situation, it is more accurate that “economic growth is needed to accelerate education, health and other development sectors” rather than the other way round. In other words, high level of literacy and life expectancy is the result of economic growth, not the precondition for growth.

2. WDR tends to simplify the relationship between growth, inequality and poverty. For example, WDR states that growth is a powerful force for poverty reduction. It seems to me that for World Bank, growth is one of intervening objectives to solve poverty problem. That is why growth is seen as the most important and effective way to reduce poverty. In the implementation step, however, government policy plays more crucial role. It is quite common that many developing countries execute many biases in their policy on poverty alleviation. One of the most prominent biases is urban bias as elaborated by Michael Lipton (1977). In this sense, government’s programs and projects on poverty are mostly executed in urban areas so that rural poverty has unsuccessfully been reduced. In such a case, high growth will unable to move people out of poverty.

3. The other simplification is that inequality is merely considered in economic terms, that is, uneven income distribution among rich and poor peoples. In reality, however, such social inequality as access to basic education and health services, is much more severe than economic issues. For sure, low income will restrict poor people to be able to appropriately access both social infrastructures and services. But gap in accessing public utilities is not only caused by difference of income, it is also prompted by other factors such as government’s capacity to build and provide public facilities and services.

Finally, I would say that poverty alleviation policies should be implemented not only in economic or income aspect (non-human strategy), but also in a matter of human development. It requires empowerment, particularly for the poor. The reason why HRD need to be realized is that however well are the poverty alleviation programs without improving people’s capacity, it will be worthless. Therefore, both human-based and non-human-based strategy should be performed simultaneously in order to achieve the best outcomes, that is, reducing people live under poverty line.

I believe that comprehensive strategies will produce stronger effect on reducing poverty as well as diminishing the degree of inequality in a given society or country. It does not necessary mean that economic activities and performances are not important, but poor peoples should be given proper places and roles to determine their faith, future, and life. Otherwise, poor people will always dependent on aids, government, donor countries, and any other social and voluntary groups.


Lipton, Michael, 1977, Why Poor People Stay Poor: Urban Bias in World Development, Cambridge, Massachusetts: Harvard University Press.
Maxwell, Simon, 2001, “Innovative and Important, Yes, but also Instrumental and Incomplete: The Treatment of Redistribution in the New ‘New Poverty Agenda’” in Journal of International Development No. 13, p. 331-341
The Economist, 2001, Of Rich and Poor, April 28th.
Wade, Robert, 2001, “Global Inequality: Winners and Losers”, in The Economist, April 28th.
World Bank, 2000, World Development Report 2000/2001: Attacking Poverty, Washington DC: World Bank, available at http://www.worldbank.org/poverty/wdrpoverty/report/index.htm

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