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Why Inequality Matters for Poverty

Briefing/policy papers

This paper looks at the relationship between inequality and poverty and how important it is relative to economic growth. Poverty and inequality, this paper argues, have often been seperated conceptually in theory and in practice. Using the links between absolute and relative poverty, this paper shows why it is not possible or useful to draw such distinctions. The paper suggests that inequality and poverty affect each other directly and indirectly through the medium of economic growth. It finds that there is a dynamic and triangular relationship between poverty, distribution and growth. The paper goes on to consider the relative importance of growth and inequality in reducing poverty and how distribution affects the capacity of growth to reduce poverty. It concludes that reducing inequality is key to fighting poverty and that it should be an integral part of any poverty reduction strategy. It finds that there is no inevitable trade-off between equity and efficiency, rather the converse is true: they are complementary as opposed to competing objectives in the fight against poverty. Finally it finds that the relative importance of growth and distribution varies across countries and that while growth effects dominate in the majority of cases, in a significant minority of cases, distribution was found to have a larger impact on poverty. 

Felix Naschold