July 16, 2000

SURPRISE! ECONOMIC GROWTH IS ALSO GOOD FOR THE POOR

Economists commonly speak to each other in bristling equations, but World Bank economists David Dollar and Aart Kraay don't let that obscure their plain-English conclusion for the rest of us. ``Growth Is Good for the Poor,'' they title their paper, the italics acknowledging the widespread belief that it isn't.

The authors' data include 370 observations in 125 countries over four decades, and they conclude that ``over 80 percent of the variation in incomes of the poor is due to variation in overall per capita income, and only 20 percent is due to differences in income distribution over time and/or across countries.''

In 236 observations detailed enough to allow comparisons in growth of incomes, their result is that ``growth in the overall economy is reflected one-for-one in growth in income of the poor.''

One-for-one doesn't mean dollar-for-dollar (or ringgit-for-ringgit); it means the incomes of the poorest one-fifth of the population go up, or down, at the same rate as incomes as a whole.

Even activists very much exercised by inequality normally concede that for poor people more income is better than less. If inequality doesn't get worse as countries get richer, they should favor policies that help countries get richer.

But the conventional wisdom is that inequality does get worse as poor countries begin to climb the development slope. Not so, say Dollar and Kraay; comparing poor countries and rich countries shows no difference in the pattern of income.

Another bit of folklore claims that the poor suffer most in times of economic crisis. That may be true in the sense that a 10 percent fall in income is likely to be painful for the affluent, but catastrophic for the poor. But it's not because the incomes of the poor fall further than others.

And the notion that development used to benefit the poor, but no longer? That's not true either.

Dollar and Kraay look at several factors that economists broadly agree promote economic growth. ``The basic policy package of private property rights, fiscal discipline, macro stability, and openness to trade increases the income of the poor to the same extent that it increases the income of the other households in society.'' Though these things increase income, they have no significant effect on its distribution. Opponents of globalization should take note.

The authors ``find no evidence that formal democratic institutions or a large degree of government spending on social services have any effect on income of the poor.''

That doesn't mean the redistribution of income has no effect within a country, only that in comparisons among countries it matters little whether there's a lot of redistribution or not much. The authors note that's because in many countries spending on social services doesn't primarily benefit the poor.

The comparative insignificance of democratic governance might be disappointing but it's long been clear that countries like Taiwan or South Korea can go a long way toward economic development before they adopt robust political democracy.

And finally there are two things that are bad for everybody and are particularly bad for the poorest members of the population, that is, they make the income distribution more unequal.

One is high inflation. That shouldn't be a surprise even for Americans, who have been hearing since the 1970s that incomes have been stagnant or declining at the bottom of the distribution while ``the rich get richer,'' as those who deplore it are fond of saying. But the effect is much stronger in countries that have experienced periods of runaway inflation.

The second is more government. An increase in the share of the national economy commandeered by bureaucrats reduces not only growth overall, but the extent to which the poor participate in it.

You'd think that would have everyone clamoring for less government, but no. Perhaps Al Gore is not on the World Bank's mailing list.

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