Do the poor benefit from economic growth? Do they benefit to the same extent at different stages of development or lose out disproportionately during economic crises? Does policy-induced growth benefit the poor?

Defining ‘poor’ as the poorest fifth of the population, research by David Dollar anat the World Bank suggests that the income of the poor rises one-for-one with overall growth and that pro-growth policies can further increase the income of the poor. As overall incomes increase so do the incomes of the poor.

What makes growth especially pro-poor or pro-rich? Using data comparisons, for example between poor and rich countries or between crises and periods of normal growth, the research questions a number of popular ideas surrounding the poverty-growth relationship: growth is not necessarily biased against poor-income households and economic crises do not cause poor incomes to fall proportionally more than higher incomes; nor is it the case that growth benefits the poor less now than in past decades.

How do institutions and policies influence the extent to which growth benefits the poor? Standard policies such as fiscal discipline and economic stability will benefit the poor as much as they benefit the whole economy. Stable inflation and reduced government consumption in particular will raise overall incomes and will have an overall positive effect on income distribution. Public social spending, democracy, and primary school enrolment rates, commonly thought to influence the extent to which the poor share in economic growth, do not significantly increase the income of poor.

Key research findings include:

• The poverty-growth relationship does not vary between normal growth periods and economic crises.
• The impact of growth on poverty has not declined in recent decades.
• Standard pro-growth macroeconomic policies benefit the poor as much as they do the rest of the economy.
• Macroeconomic policies raise average incomes with no significant adverse effect on the distribution of income.
• Growth of income of the poor is not influenced by formal democratic institutions or by public social spending.
• Policies associated with globalisation, such as greater participation in international trade increase the income of the poor.
• The effect of growth on the income of the poor is generally the same in rich and poor countries.

Little is known about what systematically causes change in the distribution of income and further research is needed. It is clear that growth can improve the lives of the poor but for this to happen, growth-enhancing policies are essential, such as:

• good rule of law
• fiscal discipline
• openness to international trade
• private property rights
• economic stability.

Source(s):
‘Growth is good for the poor’, World Bank Policy Research Department Working Paper #2587 by David Dollar and Aart Kraay March 2001 Full document.

Funded by: World Bank

id21 Research Highlight: 26 September 2001

Further Information:
David Dollar / Aart Kraay
Development Research Group
1818 H Street N.W.
Washington
DC 20433
USA

Contact the contributor: ddollar@worldbank.org

Contact the contributor: akraay@worldbank.org

Development Research Group, World Bank

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