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Poverty reduction is considered one of the most essential development goals for developing and developed countries both (United Nations, 2000). However, the poverty outcomes have varied extensively across countries depending on the particular success of their development strategies. Research that compares the experiences of a wide range of developing countries finds consistently strong evidence that rapid and sustained growth is the single most important way to reduce poverty. A typical estimate from these cross-country studies is that a 10 per cent increase in a country’s average income will reduce the poverty rate by between 20 and 30 per cent (Adams, R, 2002) .
Initial levels of income inequality are important in determining how powerful effect of growth has in reducing poverty. For example, it has been estimated that a one per cent increase in income levels could result in a 4.3 per cent decline in poverty in countries with very low inequality or as little as 0.6 per cent decline in poverty in highly disparate countries (Ravallion 2007).
Such calculations need to be interpreted with care, given the multitude of variables involved. Even if inequality increases alongside growth, it is not necessarily the case that poor people will fail to benefit – only that they will benefit less from growth than other households. But contrary to widespread belief, growth does not necessarily lead to increased inequality. While some theoretical research suggests a causal relationship between growth and inequality (and vice versa), the consensus of the latest empirical research is that there is no consistent relationship between inequality and changes in income.
The experiences of developing countries in the 1980s and 1990s suggest that there is a roughly equal chance of growth being accompanied by increasing or decreasing inequality (Ravallion 2001). In many developing countries, rates of inequality are similar to or lower than in developed countries. A series of studies using cross-country data all suggest that growth has neither a positive nor a negative effect on inequality (Chen and Ravallion 1997).
This is not to say that increased growth has not led to increasing inequality in some countries. Both China and India have seen widening inequality as their growth rates picked up over the 1990s. Both Bangladesh and Uganda would have seen higher rates of poverty reduction, had growth not widened the distribution of income between 1992 and 2002. For example, one study suggests that the proportion of people living in poverty in Uganda at the end of this period would have been 30% instead of 38%, had the poor benefited proportionally from growth (Besley and Cord 2007).
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