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The Metamorphosis of Growth Policy

Industrialization has been essential to reducing poverty historically. But today’s global and technological context implies that economic growth in developing countries is now possible only by raising productivity in smaller, informal firms that employ the bulk of the poor and lower-middle classes.

CAMBRIDGE – Development policy has long been divided between two types of approaches. One approach targets poor people directly and seeks to alleviate the poverty of individual households – through income support, health and education interventions, and enhanced access to credit. The other focuses on enhancing economic opportunities and raising overall productivity – through economy-wide macroeconomic and trade policies or legal and regulatory reforms. Call the first social policy and the second growth policy.

These two types of policies are generally complementary. Aggregate growth may not always help everyone, especially the poor. Consequently, anti-poverty programs will be necessary even when growth policy is doing its job properly. Occasionally, however, social and growth policies have been viewed as substitutes.

For example, the increased use of randomized policy experiments has allowed analysts to develop causal evidence about social policies – such as cash grants or education and health interventions – in ways that are rarely possible with macroeconomic or economy-wide policies. This, in turn, has led many academics and practitioners to downgrade the practical importance of growth policy relative to social policy.