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ELSEVIER

Economics Letters 56 (1997) 51-57

e o n o m i s

l e t t e r s

Can high inequa l ity dev elop ing countries esc ap e absolute poverty?

M a r t in R a v a i l i o n ~

The World Bank Policy Research Department 18 18 H Street NW Washington DC 20433 USA

Received 26 D ecember 1996; accepted 10 M arch 1997

A b s t r a c t

A t a n y p o s i t iv e r a te o f g r o w th t i le higher the initial inequality, t i le lower the rate at w h i c h i n c o m e - p o v e r t y falls, it is

poss ib le for inequal i ty to be sufl ic ient ly high to result in r i s in g p o v e r ty d e s p i te g o o d u n d e r ly in g g r o w th p r o s p e c t s a t l ow

inequal i ty . © 1997 E l sev ie r Sc ience S .A .

Keywords:

P o v e r ty ; G r o w th ; Inequal i ty

JEL classification: D 3 1 ; 1 3 2 ; 0 4 0

1 . I n t r o d u c t i o n

D o t h e p o o r f a c e t h e s a m e p r o s p e c t s o f e s c a p i n g p o v e r t y i n h i g h i n e q u a l i t y d e v e l o p i n g c o u n t r i e s a s

i n l o w i n e q u a l i t y c o u n t r i e s ? I s i t p o s s i b l e t h a t i n e q u a l i t y c o u l d s o m e t i m e s b e s o h i g h a s t o s t i f l e

p r o s p e c t s o f r e d u c i n g a b s o l u t e p o v e r t y , e v e n w h e n o t h e r i n i t i a l c o n d i t i o n s a n d p o l i c i e s a r e f a v o r a b l e

t o g r o w t h ?

T h e r e a r e t w o a r g u m e n t s a s t o w h y i n i t i a l d i s t r i b u t i o n m a t t e r s t o s u b s e q u e n t r a t e s o f p o v e r t y

r e d u c t i o n . T h e f i r s t i s t h a t h i g h e r i n e q u a l i t y m a y e n t a i l a l o w e r s u b s e q u e n t r a t e o f g r o w t h i n a v e r a g e

i n c o m e , a n d h e n c e ( i t i s a r g u e d ) l o w e r r a t e o f p r o g r e s s i n r e d u c i n g a b s o l u t e p o v e r t y . I s h a l l c a l l t h i s

t h e i n d u c e d - g r o w t h a r g u m e n t . T h e r e a re t w o l i n k s in t h i s a r g u m e n t , o n e f r o m i n i ti a l d i s tr i b u t io n t o

g r o w t h , a n d o n e f r o m g r o w t h t o p o v e r t y r e d u c t i o n . O n t h e f i r s t , a n a d v e r s e e f f e c t o f i n e q u a l i t y o n

g r o w t h h a s b e en e x p l a i n e d i n v a r i ou s w a y s , i n c lu d i n g p o l i t i c a l- e c o n o m y m o d e l s in w h i c h m o r e

u n e q u a l d i s tr i b u t io n s f o s t e r d i s to r t io n a r y i n t e r v e n t i o n s w h i c h ( i t i s a s s u m e d ) i m p e d e g r o w t h , a n d

m o d e l s o f r i s k - m a r k e t f a i l u r e i n w h i c h m o r e u n e q u a l d i s t r i b u t i o n e n t a i l s a h i g h e r d e n s i t y o f

c r e d i t -c o n s t r a i n e d p e o p l e w h o a r e u n a b l e t o t a k e u p p r o d u c t i v e i n v e s t m e n t o p t i o n s . ~ T h i s l in k h a s

' T h e f indings interpretat ions and conc lus io ns o f th is paper are those o f the author and should not be a ttr ibuted to the W orld

Ban k i ts Exe cutiv e Direc tors or the coun tr ies they represent .

2See Persson, Tabel l ini (1994), Ales ina, Rodrik (1994), and B~nabou (1996) . For a rev iew of th e th e o r y a n d e v id e n c e a s to

h o w in e q u a l i ty c a n imp e d e g r o w th s e e B r u n o et a l . (1995).

016 5-17 65/9 7/ 17 .00 © 1997 E l sev ie r Sc ience S .A . A l l r ights reserved.

P I I

S 0 1 6 5 - 1 7 6 5 ( 9 7 ) 0 0 1 1 7 - 1

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52 M . R a v a il io n I E c o n o m i cs L e tt e r s 5 , 1 9 9 7 ) 5 1 - 5 7

received a t tent ion in recent l i te ra ture and there is support ive evidence from cross-country

comparisons.3 Argument and ev idence on the second l ink f rom growth to pover ty redu c t ion- -has had

a longer history.4 A num ber of recent s tudies sugges t tha t growth in average incom es typical ly reduces

absolute income poverty .5

There is a second argument l inking ini t ia l d is t r ibut ion to the ra te of poverty reduct ion. This

argument has received less attention. Even if init ial distribution is irrelevant to the rate of growth, i t

may mat ter great ly to how m uch the poor share in tha t grow th. Assume a grow th process in which a l l

levels of income grow at roughly the same ra te . (Amongst developing countr ies , recent changes in

inequal i ty have had vir tual ly zero corre la t ion w ith ra tes of grow th, so this assum ption is defens ible ;

see Ravallion, Chen. 1997 .) High er inequality will then entail that the poo r gain less in absolute terms

from growth; the poor wil l have a lower share of both tota l incom e and i ts increment through gro wth;

thus the ra te of poverty reduct ion (for a wide range of measures) must be lower. At maximum

inequ al i ty--w hen the r iches t person has eve ryth ing-- abso lute poverty wil l be unrespons ive to growth.

By the same token, low er inequali ty will mean that the poo r bear a larger share of the adverse im pact

of aggregate economic contrac tion. Low inequal ity wil l then be a m ixed bless ing for the poor; i t he lps

them share in the benefits of growth, but i t also exposes the m to the costs of contraction. I call this the

grow th-e las t ic i ty argument .~

This paper is mainly concerned with tes t ing the growth-e las t ic i ty argument , though i t wi l l throw

some new l ight on the induced-growth argument , and i t wi l l explore implica t ions of both. The

fol lowing section out l ines the testable hypothes is impl ied by the grow th-e las t ic i ty argum ent and

provides a test . Section 3 then brings the two arguments together to examine how initial distribution

influences progress in reducing poverty. Section 4 concludes.

2 T h e h y p o th es is a n d test

i t is impossible to predict in the abstract how differences between countries in a measure of overall

inequality, such as the Gini index, will influence the growth elasticity of poverty reduction for any

specif ic measure of pov erty , such as the proport ion of the p opula t ion l iving below a poverty l ine . The

outcom e w ill depend on precise ly how dis t r ibution varies between countr ies and o ver t ime, as wel l as

the specific properties of the poverty measure. Consideration of some special cases can be

~On the effect of i~;tial inequality on the rate of growth see Persson, Tabeilini (1994); Alesina, Rodrik (1994); Clarke

(1995), and Dcininger, Squire (1996).

~For recent reviews of this l i terature see Lipton, Ravallion (1995) and Bruno et al . (1995).

*On the e~tcnt to which g rowth reduces absolute po verty see World Bank ( 1990 ); Fields ( 1989); Squ ire ( 1993); Ravallion

(1995) and Ravallion, Chen (1997).

~rhere is a small l i te ra ture on the decomposi t ion of changes in pover ty in to grow th and dis t r ibut iona l e f fec ts

(Kakw ani , 1993; Dar t, Rava ll ion, 1992) . In th is context one can ident ify and measure a grow th e las t ic i ty of s tandard

poverty measures with respect to changes in the mean of the distr ibution on which they are based. However, this l i terature

has not examined the dependence of these elasticit ies on init ial distr ibution.

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M . R a v a ll io n I E co n o m i cs L e tt er s 5 6 1 9 9 7 ) 5 1 - 5 7

53

i l l u m in a t i n g . 7 H o w e v e r , r o b u s t t h e o r e ti c a l g e n e r a l i z a ti o n s w o u l d s e e m w e l l o u t o f r e a c h . W h a t I a m

a f t e r h e r e i s a d a t a - c o n s i s t e n t e m p i r i c a l g e n e r a l i z a t i o n o f t h e r e l a t i o n s h ip .

T h e h y p o th e s i s t o b e te s t e d i s t h a t , a s i n e q u a l i t y i n c r e a s e s , t h e r a t e o f p o v e r ty r e d u c t i o n b e c o m e s

l e s s r e s p o n s iv e t o g r o wth i n a v e r a g e i n c o m e , a n d r e a c h e s z e r o a t s u f f i c i e n t l y h ig h i n e q u a l i t y .

A s s u m i n g t h a t th e e l a s t i c it y o f p o v e r t y r e d u c t i o n t o g r o w t h f a l ls l i n e a r ly a s i n e q u a l i t y i n c r e a se s , a n d

r e a c h e s z e r o w h e n t h e r i c h e s t p e r so n h a s a l l o f th e i n c o m e , t h e r a te o f r e d u c t i o n i n p o v e r t y c a n b e

wr i t t e n :

r = f l ( l - l ) g ( f l > 0 ) ,

( 1 )

w h e r e i s a m e a s u r e o f i n i ti a l i n e q u a l i t y a n d g is t h e r a t e o f g r o wth i n m e a n i n c o m e . T h u s t h e r a t e o f

p o v e r t y r e d u c t io n i s d i r e c t ly p r o p o r ti o n a l to th e " d i s t r i b u t i o n - c o r r e c t e d " r a te o f g r o w t h ( I - i ) g .

T o t e s t t h e h y p o th e s i s a g a in s t a m o r e g e n e r a l ( a d h o c ) n o n l in e a r a l t e r n a t i v e , I e s t im a te d t h e

t b l l o w i n g e n c o m p a s s i n g m o d e l , i n c l u d i n g a n e r r o r t e r m :

2 1

2 2

r = f l ( l -

l )g + % + % g + "y2g 2 + ~ +

~/412 -I-

~ g l 2 + % g + "Y7g + ~,

( 2 )

w h e r e e i s a n i n n o v a t io n e r r o r . E q . ( I ) im p l i e s th e t e s t a b l e r e s t r ic t i o n s o n ( 2 ) t h a t ~ = 0 f o r a l l i.

Ho we v e r , ( 2 ) i s f l e x ib l e e n o u g h to a l l o w a w id e r a n g e o f a l t e r n a t i v e s , i n c lu d in g t h a t i n i t i a l i n e q u a l i t y

i s i rr e l e v a n t , a n d o n ly g r o w th m a t t e r s ( ~ = 0 f o r a ll i ~ I a n d f l = 0 ) . I t a l s o a l l o w s n o n l in e a r i t y i n th e

wa y in e q u a l i t y a f f e c t s t h e g r o wth e l a s t i c i t y .

T o t e s t t h e h y p o th e s i s i n ( 1 ) I w i l l b e u s in g d a t a f o r 4 1 s p e l l s c o n s t r u c t e d f r o m two h o u s e h o ld

s u r v e y s o v e r t im e , f o r 2 3 d e v e lo p in g c o u n t r i e s . 8 T h e two s u r v e y s u s e t h e s a m e we l f a r e i n d i c a to r ( s o

o n e d o e s n o t c o m p a r e a c o n s u m p t i o n - b a s e d m e a s u r e o f i n e q u a l i t y a t o n e d a t e w i t h a n i n c o m e - b a s e d

m e a s u r e a t a n o t h e r ) . A l l d i s t r i b u t i o n s a r e b a s e d o n c o n s u m p t i o n o r i n c o m e p e r p e r s o n , a n d a r e

h o u s e h o ld - s i z e w e ig h t e d ( s o a l l f r a c t i l e s a re o f p e r s o n s n o t h o u s e h o ld s ) . A l l r a t e s o f c h a n g e a r e

c o m p o u n d a n n u a l r a t e s ( a n n u a l i z e d d i f f e r e n c e s i n l o g s g a v e s im i l a r r e s u l t s . ) T h e p o v e r ty m e a s u r e i s

t h e p r o p o r t i o n o f t h e p o p u la t i o n l i v in g b e lo w $ 1 .5 0 /d a y a t 1 9 9 3 in t e r n a t i o n a l p r i c e s ? A l l c u r r e n c y

c o n v e r s i o n s u s e d t h e c o n s u m p t i o n P P P r a t e f i o m P e n n W o r l d T a b l e s 5 . 6 . T h e p o v e r t y m e a s u r e i s

i n t e n d e d t o b e "a b s o lu t e " i n t h a t t h e p o v e r ty l i n e h a s c o n s t a n t r e a l v a lu e b o th a c r o s s c o u n t r i e s ( b a s e d

o n th e P P P e x c h a n g e r a t e s ) a n d o v e r t im e ( b a s e d o n c o u n t r y - s p e c i f i c C P I s ) . ( I t d o e s n o t r e f l e c t , f o r

e x a m p l e , a n y e f f e c t o f ri s in g a v e r a g e l e v e l s o f li v in g o n t h e p e r c e p t io n o f w h a t c o n s t it u t es " p o v e r t y "

7For e xa m ple , K a kwa n i (19 93) de r ive s fo rm ula e fo r t he e la s t ic i ti c :; o f va r ious pove r ty m e a s u re s w i th re s pe c t t o g rowth in the

me a n , ho ld ing the Lore nz c u rve c ons ta n t . He a l s o c ons ide r s one s pe c ia l c a s e in wh ic h the Lore nz c u rve s s h i f t by a c ons t a n t

p ropo r t ion o f t he d i f fe re nc e be twe e n the l i ne o f e qua l i ty a nd the Lore nz c u rve . Supp os e tha t d i s t r ibu t ion doe .~ no t c ha nge

o v e r t im e , b u t d i f fe r s b e t w e e n c o u n t r i e s in th e w a y K a k w a n i a s s u m e s . T h e n , f r o m K a k w a n i ' s f o r m u l a e f o r t h e g r o w t h

e la s t i c i t i e s i t c a n the n be s how n tha t t he (a bs o lu te ) e la s t i c i ty o f c e r t a in pove r ty m e a s u re s ( inc lud ing , fo r e xa mple , t he Fos te r

e t a i ., 1984 , inde x ) w i th re s pe c ~ to the m e a n o f t he d i s t r ibu t ion w i l l he de c re a s ing in the G in i i nde x whe n the pove r ty l i ne i s

l e s s t ha n the me a n o f t he d i s t r ibu t ion .

XFur the r de t a i l s on the da ta c a n be found in R a va l l ion , C he n (1997) , who us e the s e da ta to de s c r ibe how pove r ty a nd

d i s t r ibu t ion ha ve be e n c ha ng ing in the de ve lop ing wor ld , a nd wha t t he e mpi r i c a l r e l a t ions h ip i s a mongs t t he s e va r i a b le s

( though the y do no t e xa mine the i s s ue o f t h i s pa pe r ) .

~ 'Thi s i s e qu iva le n t t o $1 /da y a t 1985 p ri c e s ; t h i s is t he a ve ra ge l e ve l o f pov e r ty l i ne s found in low- inc o me c o un t r i e s : s e e

( W o r l d B a n k ( 1 9 9 0 ) , C h a p t e r 2 ) a n d R a v a l l i o n e t a l . ( 1 9 9 1 ) , f o r f u r t h e r d i s c u s s i o n .

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54

M. Ravallion Economics Letters 56 199 7) 5 1 -5 7

in a g iven coun t ry . ) The inequa l i ty measure i s the Gin i index . The g rowth ra te i s the annua l ized ra te

o f c h a n g e i n t h e s u r v e y m e a n ) ° T h o u g h c a r e h a s g o n e i n t o s e t t in g u p t h i s d a t a s e t f r o m t h e p r i m a r y

s o u r c e s , i t i s u n d e n i a b l y "n o i s y " d a t a ; t h e r e a r e u n d e r l y i n g d i f f e r e n c e s i n s u r v e y m e t h o d o l o g y

b e t w e e n c o u n t r i e s a n d o v e r t i m e t h a t o n e c a n n o t p o s s i b l y e l i m i n a t e ( t h o u g h b y f o c u s i n g o n r a t e s o f

c h a n g e , n o n c o m p a r a b i l it i e s w h i c h t a k e t h e f o r m o f p r o p o r ti o n a t e c o u n t r y - l e v e l f ix e d e f f e c ts w i l l b e

el iminated.) ]~

A j o i n t F - t e s t o n t h e O L S e s t i m a t e o f ( 2 ) c o u l d n o t r e j e c t t h e n u l l h y p o t h e s i s t h a t ~ h =0 f o r a l l i .

Th e restr ic ted form is : ~"

r = 4 .435( I - i g + res idua l (4 .695) , (3 )

R -~

i th an o f 0 .355 . F ig . p lo t s Eq . (3 ) and the da ta . There i s a l a rge unex p la ined va r iance , though a t

l eas t some of th i s i s measurement e r ro r .

However , the re were o the r nu l l hypo theses which cou ld no t be re jec ted as res t r i c ted fo rms ,

i n c lu d i n g ~ - 0 f o r a l l i ¢ - I a n d / 3 = 0 . ~~ U n d e r t h is n u l l, it is o n l y t h e g ro w t h r a t e t h a t m a t te r s . I f o n e

le t s the d i s t r ibu t ion-cor rec ted g rowth ra te and the o rd ina ry g rowth ra te f igh t i t ou t in one regress ion

one ob ta ins :

R m ot poverty reduc tion ( ~MNLr)

I O 0 I

. 6 , , ~ ' v 1

1 2 1 0 . 8 4 1 4 2 0 2 4

O l n i b u t i o ~ o o r m , ~ r a te o t g r o w ~ ( 'Xd ye m)

Fig, I , R ate of I~werty reduction against distr ibution-corrected rate of grow th.

~ "This i s a lm os t ce r t a in ly a be t t e r m easur e f o r th i s pur pose than ( s ay) the p r iva te consum pt ion com ponen t o f the na t iona l

accoun ts , bo th sour ces en ta i l m easur em ent e r r o r s bu t f o r the su r vey m ean the a t t enua t ion b ia s wi l l be o f f s e t by a b ia s in the

o p p o s i t e d i r e c t i o n d u e t o t h e u s e o f a c o m m o n s u r v e y t o e s t i m a t e b o t h t h e p o v e r t y m e a s u r e a n d t h e g r o w t h r a t e ; i n d e e d ,

unde r ce r t a in cond i t ions the two sour ces o f b ia s wi l l be exac t ly o f f s e t t ing ( Rava l l ion , Chen , 1997) . Us ing the na t iona l

accoun ts , however , w i l l g ive the a t t enua t ion b ia s on ly , w hich cou ld be l ar ~, .e g iven the im per f ec t m a tc h ing be tween sur vey

da te s and the accoun t ing pe r iods f o r the na t iona l accoun ts .

' ~ T h e v a l u e o f F ( 8 , 3 2 ) = 1 . 4 6 "/ , w h i c h i s s i g n if i c an t a t o n l y t h e 2 1 % l e v e l; s i m i l a r ly t h e L M t e s ts g a v e C h i - s q u a r e ( 8 ) =

i .003, s ignif icant a t the . same level .

"The t - r a t io i s based on the OLS s tanda r d e r a ) r , i f one in te r p r e t s the f o l lowing equa t ion a s the f i r s t d i f f e r ence o f an equa t ion

I br the log o f the pove r ty m easur e which has a whi te no i s e e r r o r t e r m then the r e wi l l be non- ze r o o f f d iagona l e l em ents in

the e r r o r cova dan ce m a t r ix , it " one a l lows f o r th i s in e s t im a t ing the s t anda r d e r r o r , the t - r a t io r i s e s s l igh t ly ( to 4 . ?6) . I f one

a l so a l lows f o r any gene r a l type o f he te r oscedas t i c i ty , the r obus t t - r a t io f a l l s to 4 . 26 . S o such cor r ec t ions m ake l i t t l e

d i t l~ . rence he re ,

~ T h e F - t e s t w a s F 8 , 3 2 ) = 1 , 7 61 a n d th e L M t e s t g a v e C h i - s q u a r e ( 8 ) = 1 2 . 53 2 : b o t h w o u l d o n l y r e j e c t t he n u l l a t th e 1 2 %

level .

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M. Ravailion I Economics Letters 56 1997) 51-5 7 55

r = 16.096(1 - l )g - 6 . 6 6 3 g + r e s i d u a l ( 2 . 1 8 9 ) ( - 1 . 5 9 6 ) .

4 )

Though the re i s c lea r ly a s t rong cor re la t ion be tween these two va r iab les , th i s regress ion s t i l l sugges t s

t h a t i t i s t h e d i s t r i b u t i o n - c o r r e c t e d m e a n w h i c h m a t t e r s m o r e t o p o v e r t y r e d u c t i o n t h a n t h e o r d i n a r y

mean . Eq . (3 ) i s a s t a t i s t i ca l ly accep tab le res t r i c ted fo rm of (4 ) .

I r e p e a t ed t h e a n a l y s i s r e p l a c i n g t h e p r o p o r t i o n o f p e o p l e l i v i n g b e l o w $ 1 . 5 0 / d a y b y a d i s tr i b u ti o n -

s e n s i t i v e p o v e r t y m e a s u r e ( f o r t h e s a m e p o v e r t y l i n e ) , n a m e l y t h e F o s t e r e t a i . ( 1 9 8 4 ) i n d e x b a s e d o n

s q u a r e d p o v e r t y g a p s . T h e s a m e q u a l i t a t i v e r e s u l t s w e r e o b t a i n e d , t h o u g h t h e e s t i m a t e d v a l u e o f / 3

rose to 8 .098 (with a t - ra t io of 3 .905~4) .

3. Co m bining the induced-growth and growth-elastici ty arguments

The above resu l t s ind ica te tha t h igher inequa l i ty t ends to en ta i l a lower ra te o f pover ty reduc t ion a t

any g iven pos i t ive ra te o f g rowth . Eq . (3 ) sugges t s tha t ihe g rowth e las t i c i ty dec l ines sha rp ly as

inequa l i ty inc reases . At the lowes t Gin i index in the sample (0 .25) the g rowth e las t i c i ty i s 3 .33 , whi le

a t the h ighes t Gin i index (0 .59) i t i s 1 .82 . At the mean Gin i index (0 .41) , the g rowth e las t i c i ty o f the

pover ty reduc t ion i s 2 .62 .

As no ted in the In t roduc t ion , the re i s a l so ev idence tha t h igher inequa l i ty resu l t s in a lower ra te o f

g rowth . To b r ing these two sources o f ev idence toge the r , l e t us fo l low pas t spec i f i ca t ions used in the

growth l i t e ra tu re and wr i te the ra te o f g rowth as :

g = g o + 6 1 + v ( 6 < 0 ) , ( 5 )

wh ere go i s the expec ted ra te o f g row th a t ze ro inequa l i ty and v is an innov a t ion e r ro r . The expec ted

ra te o f pover ty reduc t ion (cond i t iona l on go and i ) i s then :

= P g o + 1 0 (8 - g o ) l - i0 8 1 ~ .

6 )

This i s s tr i c tly dec rea s ing ( inc reas ing) in a s long as the ra te o f g rowth a t ze ro inequa l i ty is abov e

( b e l o w ) 8 ( 1 - 2 / ) . A n d ? is s tr ic t ly c o n v e x in ( f o r 8 < 0 a n d / 3 > 0 ) . F i g. 2 d e p i c ts t he r e la t io n s h ip

i m p l i e d b y ( 6 ) .

I f g o > 0 a n d < - 0 . 5 t h e o p o v e r t y w i l l f a ll , a n d a t a f a s te r r at e t h e l o w e r t h e i n e q u a li ty . T h e s a m e

d i f f e r e n c e i n i n e q u a l i t y w i l l m a t t e r m o r e t o t h e r a t e o f p o v e r t y r e d u c t i o n a m o n g s t l o w i n e q u a l i t y

c o u n t r i e s t h an a m o n g s t h i g h - i n e q u a li t y c o u n tr i e s . F o r g o > 0 b u t • >0 .5 , i t i s p o s s i b l e f o r i n e q u a l it y t o

be su f f ic ien t ly h igh tha t the ra te o f g rowth becomes nega t ive and pover ty r i ses , a s ind ica ted by the

u p p e r d a s h e d l in e i n F i g . 2 ; th i s r e q u i re s t h a t 6 < - g o ( i m p l y i n g t h a t th e l e f t d e r i v a t iv e o f t h e R H S o f

(6 ) w . r .t . I i s pos i t ive a t = 1 ) , and pov er ty wi l l be ri s ing ( in exp ec ta t ion) fo r I in the in te rva l ( -go/

1 ) . F o r g o <0 a n d / - >0 . 5 , ? m u s t b e s t r i c t l y i n c r e a s i n g i n I ; h o w e v e r , i f 8 < g o then ? wil l be

decrea s ing in a t su f f ic ien t ly low inequa l i ty (F ig . 2 ) .

So the va lue o f 8 i s c ruc ia l . What i s the ev idence on th i s? There a re c lea r ly many o the r fac to rs

t41n th is case, the correct ion for heteroscedastici ty and non-zero off d iagonal elem ents in the covariance m atrix us ing the

method described in footnote 12) made more d ifference to the s tandard error; the reported t -rat io here is based on the

corrected s tandard error; without correct ions , the t -rat io was 2 .45.

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5 6 M . R a v a ll io n E c o n o m i c s L e t te r s 5 6 ( 1 9 9 7 ) 5 1 - 5 7

p s t

0. ~ ~

r j

6<s.}

Fig, 2, Rate of poverty reduction (r) i ts a function of init ial inequality {I).

detennining the rate of growth, including the initial income level, initial human capital, and the

policies pursued. Control l ing for these factors, Clarke (1995 ) est imates that 8 = - 0 . 0 7 ( i.e., a one

percentage point increase in the Gini index resul ts in about a 0.07 percentage point decrease in the

annual rate of economic growth). The growth regressions in Deininger, Squire (1996) suggest a

s imi lar value of 8=-0 .05, on a data set d i f ferent to Clarke 's in many respects . Both es t imates are

significantly different from zero at the 5 level or better.

These est imates of - 8 are sufficient ly h igh to suggest that , once the impact of inequali ty on grow th

is factored in, even countries with relat ively good growth prospects (at low inequali ty) wil l see

contract ion and rising poverty at sufficient ly high levels of inequali ty. Returning to the data used in

the previous sect ion, and using the D einin ger-S quire est im ate of & I found that go > 0 (in expectat ion)

for 33 o f the 41 spells, t'~ In 24 o f those 33 sp ells, pove rty wa s fallin g (the g row th rate was p ositive in

26 cases); so in nine cases the data are in the region with go > 0 but r ising poverty. U sing the Clarke

est imate o f ~ instead the resul t is unchanged; I~' again go > 0 in 33 cases, and these w ere the same 33,

so again nine had rising poverty.

How ever, there is (of court-'e) stat ist ical imprecision in the est imate of - 6 and (hence) go. If instead

one set s 6 = - 0 , 0 3 (one stanoard er ror above the Dein inger-Squ i re poin t es t imate) , then the number

of spel ls for which g , > 0 and yet pover ty was r is ing drops f rom nine to three.

4 . C o n c l u s i o n

Household survey data for developing countries suggest that ini t ial distr ibut ion does matter to how

much the poor share in r ising average incomes; higher ini t ial inequali ty tends to reduce the impact of

growth on absolute poverty. By the same token, higher inequali ty diminishes the adverse impact on

the poor of overal l contract ion,

Further interpretat ion is possible when one combines this evidence with that from recent

~ T h i s i s t h e e x p e c t e d v a l u e o f g , , g i v e n b y g - 6 L T h e m e a n v a l u e o f g . i s 2 . 8 % p e r a n n u m t h o u g h t h e v a r i a n c e is h i g h .

w i t h a s t a n d a r d d e v i a t i o n o f 6 , 2 % .

~ T h o u g h t h e m e a n g , i s o f c o u r s e h i g h e r , a t 3 . 6 % .

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M. Ravallion I Economics Letters 56 1997) 51- 57

57

i n v e s t i g a t i o n s o f t h e i m p a c t s o f i n e q u a l i t y o n g r o w t h . O n e t h e n f i n d s t h a t , i f i n e q u a l i t y i s s u f f i c i e n t l y

h i g h , c o u n t ri e s w h i c h w o u l d h a v e v e r y g o o d g r o w t h p r o s p e c t s a t l o w l e v e l s o f in e q u a l i ty m a y w e l l s e e

l i t t l e o r n o o v e r a l l g r o w t h , a n d l i t t l e p r o g r e s s i n r e d u c i n g p o v e r t y , a n d e v e n a w o r s e n i n g o n b o t h

c o u n t s . A n d , b y t h e s a m e t o k e n , f a c t o r i n g i n t h e g r o w t h e f f e c t s m a g n i f i e s t h e e s t i m a t e d h a n d i c a p th a t

t h e p o o r f a c e i n c o n t r a c t i n g l o w - i n e q u a l i t y c o u n t r i e s . ) T h e d a t a u s e d h e r e s u g g e s t t h a t s u c h c a s e s d o

o c c u r . T h e p r e c i s i o n w i t h w h i c h k e y p a r a m e t e r s h a v e b e e n e s t i m a t e d m a k e s i t d i f fi c u l t t o s a y w i t h

c o n f i d e n c e h o w c o m m o n s u c h c a s e s a r e, a lt h o u g h t h e y d o a p p e a r to b e in th e m i n o r i ty . W h a t w o u l d

a p p e a r t o b e t h e b e s t a v a i l a b l e e s t i m a t e s s u g g e s t t h a t a b o u t o n e f i f t h o f t h e s p e l l s b e t w e e n s u r v e y s

a n a l y z e d h e r e w e r e c a s e s i n w h i c h p o v e r t y w a s r i s in g , y e t p o s i ti v e g r o w t h i n t h e m e a n a n d h e n c e

f a l l ing pove r t y ) i s pr e d ic t e d a t z e r o ine qual i t y . Ine qual i t y c an be su f f i c i e n t ly h igh t o r e su l t in r i s ing

p o v e r t y d e s p i t e g o o d u n d e r l y i n g g r o w t h p r o s p e c t s .

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applications to Brazil and India in the 198 0s. Journa l of Develop ment E conom ics 38, 27 5-29 5.

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Foster , J ., Greer , J . , Tho rbecke, E. , 1984. A class of decomposable poverty measures. E conom etrica 52, 761-765 .

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121-139.

Lipto n, M., Ravallion, M ., 1 995 . Poverty and policy. In: Behrman, J. , Sriniv asan , T.N. (Eds.), Handbook of Development

Economics, Vol. 3. North Holland, Am sterdam.

Persson, T. , Tabellini, G. , 1994 . Is inequality harmful for growth ?. Am erican E com~mic Review 84, 600-6 21.

Ravallion, M., 1995 . Gro wth a nd poverty: Ev idence for the developing w orld. Econ. Lett. 48, 411-4 17 .

Ravallion, M., Datt , G. , van de Walle, D. , 199 1. Qua ntifying absolute poverty in the developing world. Review of Incom e

and Weal th 37, 345-361.

Ravallion, M ., Chen, S. , 1997 . What can new survey d ata tell us abou t recent chang es in distr ibution and poverty ? W~rld

Bank Economic Review, forthcoming.

Squire, L. , 1993. Fighting Poverty. American Econ om ic Review, Papers and Proceedings 83 (2) , 377 -382 .

Wo rld Bank, 1990. World Development Report. O xford University Press, New York.

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