Industrial development and economic growth: Implications for poverty reduction and income

3. Economic growth and the poor
Rapid economic growth is often essential for achieving a reduction in
absolute poverty. As growth may be associated with increased income
inequality, it does not automatically address the whole poverty problem. The
traditional economic development literature considered highly unequal
income and wealth distribution as a necessary condition for continued and
rapid economic growth. The basic economic argument to justify large
income inequalities was that high incomes (personal and corporate) were a
necessary condition for higher savings, which in turn were needed for invest-
ment and economic growth (Todaro, 1994). 

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The new political economy literature, on the other hand, links greater
inequality to lower future growth paths, and considers it an impediment to
poverty-reducing growth, as the elasticity of poverty with respect to growth
is found to decline when inequality increases (e.g. Nissanke and Thorbecke,
2004). The research in this area has not, however, been able to identify the
mechanisms through which this happens (Helpman, 2004). One possible
explanation is credit market failure, whereby the poor are unable to use
growth-promoting investment opportunities (in physical and human capi-
tal). The higher the proportion of credit-constrained people, the lower the
level of investment and the rate of growth are. High inequality, manifested
in a large proportion of population having poor health, nutrition, and edu-
cation, is also likely to impact on overall labour productivity and to cause
slower economic growth (Todaro, 1994). Raising income levels of the poor,
on the other hand, stimulates demand for domestic products and increases
employment and production. More equitable distribution of income may
also act as a material and psychological incentive to widespread public par-
ticipation in the development process (Todaro, 1994), whereas inequality
may cause political and economic instability. 
Even if there is no consensus on the proportion of the world’s popula-
tion living in absolute poverty, it is highly likely that the share of the poor in
the global population has declined during the last two decades (see e.g.
Wade, 2004).
2 
This is largely due to rapid economic growth in countries like
China and India. Differences between regions are, however, remarkable in
the developing world. Especially in Sub-Saharan Africa, the number of poor
people [living on less than $1.08 a day (PPP)] significantly increased
between 1981 and 2001 (Chen and Ravallion, 2004). Inequality between
countries seems to have increased (e.g. Wade, 2004) . Evidence on that is,
however, somewhat controversial (as examples see e.g., Sala-i-Martin, 2002,
and Milanovic, 2002) and depends e.g. on the methods used, countries
included, timeframe and so on.
During the 1950s and 1960s there was a widespread move towards
greater egalitarianism in many developing countries. Despite a decline, how-
ever, inequality remained high in many places because of the persistence of
the traditional causes of inequality like high land concentration, unequal
access to education and other public services, and the dominance of the min-
ing and plantation sectors (Cornia, 2005). During the past twenty five years,
inequality has been increasing again in many developing and developed
countries. In Latin America, income inequality increased in many countries
in the 1980s and also in the 1990s. Trend reversal also occurred in highly
successful East Asian countries – where inequality decreased between the late
1950s (or early 1960s) and the late 1970s and early 1980s – and in India and
China. Over the past 50 years, income inequality in China has followed a U-
shaped pattern with the turn-around point located around the mid-1980s.
Due to rapid economic growth there has, however, been a dramatic reduc-

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tion in overall poverty in the 1981-2001 period. In India, the Gini coeffi-
cient of household consumption expenditure fell in the 1950s as a result of
the partial land reform and affirmative action in favour of low caste groups,
and stayed more or less at the same level until it rose in the 1990s during the
years of gradual liberalization and globalization (Cornia and Kiiski, 2001).
However, due to rapid growth India has also experienced a significant decline
in poverty since the 1980s.
As the growth experiences of Taiwan and South Korea show, rapid eco-
nomic growth does not inevitably lead to increased inequality at the early
stages of development. Taiwan and South Korea have been able to combine
economic growth and industrialization with decreased inequality, even if
inequality has somewhat increased during recent years. However, some other
countries have been less successful. In Thailand, for instance, rapid growth
was accompanied by increased income inequality (e.g. Sarntisart, 2000). In
general, the impacts of inequality on growth and of growth on inequality
depend very much on national characteristics and initial levels of poverty and
inequality, but especially on the nature of the development process – how
growth is achieved, who participates, which sectors are given priority. The
choice is not so much between growth and equality, but about the type of
economic growth to be pursued (Todaro, 1994) and the policies to achieve
it.