Skip to main content

Pro growth or pro poor?

Nobody doubts by now the importance of economic growth for poverty reduction. It is also widely accepted that growth with progressive distributional changes will have a better impact in reducing poverty than growth with no redistribution. But some pro-growth policies may bring higher poverty levels in the short run.

World Bank economist Humberto López, speaking at IDB headquarters, presented evidence indicating that some pro-growth policies may have significantly different short-run and long-run poverty impacts. These policies, including government burden and trade and financial sector liberalization, can lead to higher inequality and bring higher poverty levels in the short run, even if they tend to reduce poverty levels in the long run.

“The possibility of policy interventions that increase poverty in the short run but reduce it in the long run appears when we allow income levels and income distribution to have different speeds of adjustment to policy changes,” he said.

According to López, pro-growth policies produce slow transitions, and therefore could increase poverty for years, even if they reverse poverty in the long run. “We find that regardless of their impact on inequality, all the pro growth policies we consider lead to lower poverty levels in the long run,” López said. But negative short-run effects are common, and he highlighted the need to assess the possible political implications of this situation.

Pro-poor policies, or redistribution policies, are more effective in richer countries, according to López. In countries with low income, he said, it will be difficult to reduce poverty reduction merely through distributional change.

With this evidence, López suggested that poorer countries should think about using pro-growth policies more than pro-poor policies, while policies inclined toward inequality reduction should be implemented for richer or extremely unequal countries.

In the long run, concluded López, everybody benefits from growth policies, since they bring growth despite inequalities and short-run negative impacts. But decision-makers should be guided by the knowledge that pro-growth policies might bring a storm before better times.


Jump back to top