Does lower inequality mean less poverty?

Published on Thursday, 05 January 2017

Published by Arturo Martinez on Thursday, 05 January 2017

A slum in Dhaka, Bangladesh.
A slum in Dhaka, Bangladesh.

Co-written by Iva Sebastian

It is widely assumed that reducing inequality goes hand-in-hand with poverty reduction – but this is not always the case.

Asia and the Pacific has an impressive development scorecard: massive reduction in poverty, expanded access to clean drinking water, and close to universal primary education enrolment rates. Where the region has not improved, however, is in reducing inequality. The gap between the haves and have-nots within Asian countries continues to widen.

The UN Sustainable Development Goal (SDG) No. 10 focuses on reducing inequalities within and among countries. To monitor progress toward it, we track the differences between the income growth of the bottom 40% of a given country’s total population and the national average. This is founded on the assumption that promoting faster income growth for the bottom 40% relative to the national average will allow the poor to catch up with the rest, and thus bring about a more equitable distribution of economic opportunities.

But this is not necessarily the case, as we discovered by analyzing data from the World Bank’s Povcalnet database for 26 of ADB’s developing member countries. We found that there may be elements of a trade-off between fighting poverty and reducing inequality.

Figure 1: Comparison of annualized percentage point reduction in $1.90 poverty rates between countries with equalizing and non-equalizing distribution, 1990-present.

Notes: The y-axis corresponds to the annualized percentage point reduction in poverty rates. Positive values represent reduction in poverty over time while negative values represent increase in poverty over time. Source: ADB estimates using World Bank’s PovcalNet database (accessed October 2016).

Figure 1 describes the rate at which $1.90 a day poverty incidence has changed for selected ADB developing member countries with available data. It also distinguishes between countries on the basis of whether the bottom 40% experienced income growth higher than average incomes, or not. The former countries are labeled as having ‘equalizing’ distribution, while the latter have a ‘non-equalizing’ distribution.

The data show that some of the fastest reductions in poverty were registered by countries with widening inequality as defined by SDG 10. This pattern is consistent even if we use the $3.10 poverty line or other measures of inequality such as the Palma ratio.

In fact, the countries with the highest average income growth—but higher levels of inequality—saw some of the largest reductions in poverty. Millions of people have been lifted out of poverty in Bangladesh, the People’s Republic of China (PRC), Indonesia, and Viet Nam because these countries posted remarkable average income growth rates. For instance, per capita income in the PRC has grown at an annual rate of 7% since the 1990s, while the annual growth rates for Viet Nam and Indonesia for the same period have been 6% and 4%, respectively.

Thus, it can be problematic to assume too much about a country’s development performance just because income growth is skewed to higher earners, without considering the impact of this on other SDGs such as ending poverty (SDG 1). It is also conceivable that excessive focus on SDG 10 could render countries with declining incomes across the board as ‘performers’, simply because average income growth is falling faster than growth for the bottom 40%.

As we have seen in the PRC, India, Indonesia, and Viet Nam, ADB’s developing member countries can reduce poverty significantly as long as their average income growth is fast – even if the income of the upper 60% of the population grew faster than that of the bottom 40%. On the other hand, in countries such as the Philippines—where income growth of higher earners was not significantly faster than for lower incomes—the average income (and, accordingly, the national poverty rates) hardly budged.

There is no question that inequality needs to be addressed through the SDGs. However, we should take a closer look at how we measure poverty and inequality, as well as  the links and possible trade-offs between the two. And we must do this without losing sight of other important dimensions of development beyond inequality—such as increasing access to high-quality jobs, services, and infrastructure for the poor.

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