1. “The Poverty-Growth-Inequality Triangle” Carolina E. Fernandez PUAF 699I Prof. Branco Milanovic February 26, 2007 By François Bourgignon

2. Organization 1) What are the factors that should be considered for a development strategy and Why? 2) Relationship between Growth and distribution 3) Relationship between Distribution and growth The findings of this paper are contrasted with the main literature. The findings of this paper are contrasted with the main literature.

3. Main Argument The reduction of absolute poverty is a meaningful goal of development The reduction of absolute poverty is a meaningful goal of development Development strategy will depend on INTERACTIONS between growth and distributional changes Development strategy will depend on INTERACTIONS between growth and distributional changes It requires strong, country-specific combinations It requires strong, country-specific combinations Growth is not sufficient condition for poverty reduction Inequality matters for poverty alleviation

4. The Arithmetic Identity This equation is not the same for every country (elasticity) This equation is not the same for every country (elasticity) Poverty reduction in a given time and country is fully determined by the rate of growth of the mean income and the change in the distribution of incomes. Poverty reduction in a given time and country is fully determined by the rate of growth of the mean income and the change in the distribution of incomes.

5. The Poverty-Growth-Inequality triangle Absolute poverty and poverty reduction Aggregate income level and growth Distribution and distributional changes Development strategy

6. Change in Poverty= Growth Function + distribution + change in distribution

7. Both, Initial Levels and changes in Inequality Matter

8. Some Conclusions Growth is good for the poor but distribution matters (might offset the effects of growth) Growth is good for the poor but distribution matters (might offset the effects of growth) Growth and inequality should be considered simultaneously Growth and inequality should be considered simultaneously Country-specificity matters: equal growth causes different rates of poverty reduction Country-specificity matters: equal growth causes different rates of poverty reduction Poverty reduction depends on initial conditions. Elasticity of growth and distribution on poverty depend + on development level and – on inequality levels Poverty reduction depends on initial conditions. Elasticity of growth and distribution on poverty depend + on development level and – on inequality levels

9. Main Literature agrees Growth is fundamental for poverty reduction Growth is fundamental for poverty reduction Growth accompanied by progressive distributional change is better than growth alone. Growth accompanied by progressive distributional change is better than growth alone. High initial inequality is a brake on poverty reduction. High initial inequality is a brake on poverty reduction. Poverty itself is also likely to be a barrier for poverty reduction Poverty itself is also likely to be a barrier for poverty reduction

10. Two-way Relationship Between Growth and Distribution Are there any patterns? Are there any patterns? Does the initial level of inequality affect growth in a systematic way? Does the initial level of inequality affect growth in a systematic way? Are redistribution policies likely to accelerate or slow growth? Are redistribution policies likely to accelerate or slow growth?

11. Effects of Growth on Distribution Economic growth may modify distribution: changes in endowments, relative prices, factor rewards and resources. (examples?) Most famous link: Kuznets: Not always true! Most famous link: Kuznets: Not always true! Inequality Income per capita Growth affects institutions which may also affect the distribution Most studies find growth is distribution-neutral (dollar and Kraay, Ravallion, Easterly)

12. Effects of Distribution on growth Inequality plays a central role in determining the rate and patterns of growth Inequality plays a central role in determining the rate and patterns of growth Literature divided as to the direction of the link. Literature divided as to the direction of the link. Less inequality is better Less inequality is better a) Taxation a) Taxation b) Social conflict c) HK accumulation d) Credit market imperfections More inequality is better More inequality is better a) propensity to save b) Investment indivisibilities c) Now reward, less effort

13. Final conclusions Redistribution of wealth and not income may have positive effects on growth. Is this feasible? Redistribution of wealth and not income may have positive effects on growth. Is this feasible? To the extent that pure income redistribution contributes to the accumulation of wealth by the poor, it might be positive for growth. To the extent that pure income redistribution contributes to the accumulation of wealth by the poor, it might be positive for growth.Literature: Growth does not seem to affect inequality Growth does not seem to affect inequality No conclusive evidence on the impact of inequality on growth No conclusive evidence on the impact of inequality on growth Some evidence that asset inequality (more than income inequality) can undermine growth and the effectiveness of pro-poor policies. Some evidence that asset inequality (more than income inequality) can undermine growth and the effectiveness of pro-poor policies.