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Symposium 2014

Virtual Library File - Pro-growth, pro-poor: Is there a Trade off?

The Challenge

Inequality is rising in most parts of the world, irrespective of whether one looks at it in terms of annual income, in terms of wealth (i.e. of accumulated capital and other assets) or in terms of o ...

Inequality is rising in most parts of the world, irrespective of whether one looks at it in terms of annual income, in terms of wealth (i.e. of accumulated capital and other assets) or in terms of opportunity. In most high-income countries, the share of national income earned by households at the top of the income distribution has soared since the past decades (from the 1980s onward). As the World Top Incomes Database shows, the income share of the richest households continued to climb during and after the crisis of the past few years. In 2012, the income of the top 1% of households accounted for 22.5% of total income; the highest figure since 1928. One explanation is that globalization expands the market for a small group of people with sought-after talent, but competes away the income of ordinary employees. In turn, the competition among countries for skilled individuals constrains the ability of governments to maintain high tax rates on the wealthy.

Is a pro-growth strategy always the best pro-poor strategy? To address this issue, this paper provides an empirical evaluation of the impact of a series of pro-growth policies on inequality and headcount poverty. We rely on a large macroeconomic data set and estimate dynamic panel models that allow us to differentiate between the short- and longrun impacts of the policies under consideration on growth, inequality and poverty. Our findings indicate that regardless of their impact on inequality, all the pro-growth policies we consider lead to lower poverty levels in the long run. However, we also find evidence indicating that some of these policies may lead to higher inequality and, under plausible assumptions for the distribution of income, to higher poverty levels in the short run. These findings would justify the adoption of a pro-growth policy package as the center of any poverty reduction strategy together with pro-poor measures that complement such a package by offsetting potential short-run increases in poverty.