Why Inequality Matters for Poverty - ODI Inequality Briefings 2

After around twenty years of neglect, inequality has been brought out of the cold. Inequality has re-entered the mainstream development policy agenda by featuring prominently in the World Bank’s World Development Report 2000/01. Inequality matters in its own right (see Inequality Briefing No 1) and it is key to reducing poverty. This paper draws on recent research to explore in what ways inequality matters for poverty, and how important it is relative to economic growth. Inequality and poverty affect each other directly and indirectly through their link with economic growth. Section 2.1 explores the (direct) sensitivity of poverty to distribution changes, as well as the magnitude of possible changes in inequality. Section 2.2 discuses the dynamics of the triangular relationship between distribution, poverty and growth. Poverty can be reduced through increases in income, through changes in the distribution of income, or through a combination of both. Section 2.3 introduces what the latest research tells us about the relative importance of growth and inequality in reducing poverty, while section 2.4 shows how distribution affects the capacity of growth to reduce poverty. Poverty and inequality have often been separated conceptually both in research and in operational work. Using the links between absolute and relative measures of poverty, section 3 shows why it is not possible to dissociate poverty from inequality. The main conclusions are summarised in the last section.