Does Redistributing Income Reduce Poverty?

NEW YORK – Many on the left are suspicious of the idea that economic growth helps to reduce poverty in developing countries. They argue that growth-oriented policies seek to increase gross national product, not to ameliorate poverty, and that redistribution is the key to poverty reduction. These assertions, however, are not borne out by the evidence.

Since the 1950’s, developmental economists have understood that growth in GNP is not synonymous with increased welfare. But, even prior to independence, India’s leaders saw growth as essential for reducing poverty and increasing social welfare. In economic terms, growth was an instrument, not a target – the means by which the true targets, like poverty reduction and the social advancement of the masses, would be achieved.

A quarter-century ago, I pointed out the two distinct ways in which economic growth would have this effect. First, growth would pull the poor into gainful employment, thereby helping to lift them out of poverty. Higher incomes would enable them to increase their personal spending on education and health (as seems to have been happening in India during its recent period of accelerated growth).

Second, growth increases state revenues, which means that the government can potentially spend more on health and education for the poor. Of course, a country does not necessarily spend more on such items simply because it has increased revenue, and, even if it does, the programs it chooses to fund may not be effective.