A Message to Policy-makers in the Arab Region: Address Income Inequality to Reduce Monetary Poverty in the Arab Region

Dony El Costa, 12 Jul 2017
Dony El Costa

There is an understanding among development economists that poverty reduction requires a combination of growth-enhancing and inequality-reducing policies. On the one hand, there is a long-lasting recognition that sustained economic growth is essential for durable poverty reduction as notably encapsulated by the "rising tide lifts all boats" adage. On the other hand, reducing social and economic inequalities, on top of constituting a moral development goal on its own right, is increasingly understood as "good economics"[i] and the reverse is perceived as leading to economic, social and political costs.[ii]

 

In order to explore the relative contributions of the growth and distribution effects to poverty reduction in the region, I have applied one of the growth-redistribution decompositions methodologies available in the literature to Egypt, Morocco, and Tunisia over 1995- 2008, 1998-2007, and 1995-2010, respectively.[iii] The results show that in the case of Egypt, poverty reduction was equally due to growth and redistribution effects; while in Morocco and Tunisia, inequality reduction contributed (for 15% and 35% respectively) less than growth to poverty reduction. Hence, while growth is an essential factor to poverty reduction, inequality reduction reinforces the impact of that growth.

 

To further look into the dynamics of poverty, inequality and growth in the region, I used more than 30 standardized household surveys (covering Egypt, Jordan, Morocco, Palestine, Mauritania, Tunisia, and Yemen in the 1990s and 2000s)[iv] to explore potential relationships between trends in mean household consumption levels, changes in relative inequality (measured by the annual percentage changes in the Palma ratio),[v] and various poverty measures (of which I present headcount poverty ratios at the international poverty lines of 2USD and 3USD, at 2005 PPP).

 

This exercise shows that - at the USD 2 poverty line, numerous low growth episodes have in some cases been accompanied by important reductions of poverty, with these poverty reduction outcomes further supported by reductions in relative inequality. Importantly, where increases in mean consumption did not lead to poverty reduction, this has generally translated into increases in relative inequality. Intriguingly, there appears to be no clear link between growth and the reduction of poverty incidence at the USD 2 poverty line. However, increasing the poverty line to USD 3 (at 2005 PPP) reveals that growth episodes did indeed reduce poverty, but for those falling between the USD 2 and USD 3  a day thresholds, indicating that growth might have been pro-poor, yet not pro-poorest. Finally, while most de-growth episodes have led to increases in headcount poverty, a few have been accompanied by decreases in both poverty and relative inequality, meaning that de-growth might have been relatively pro-poor during these episodes.[vi]

 

In a further investigation, I explore the extent to which the growth and inequality each affect poverty reduction as countries escape (mass) poverty.[vii] Put differently, do growth and inequality developments impact poverty reduction differently as countries develop? The result of this exercise shows that at USD3 per day, for Egypt, Jordan, Mauritania, and Tunisia over 17 episodes in the 1990s and 2000s, as poverty incidence decreases, poverty reduction becomes relatively more responsive to inequality-reducing than to growth-increasing policies.

 

In sum, the data and literature on the poverty-growth- inequality arithmetic seem to send out a clear message to policy-makers in the Arab Region: notwithstanding the importance of sustaining economic growth, the reduction of income inequality should be a priority for reducing monetary poverty.

 

[i] See Christine Lagarde's “Reducing excessive inequality is not just morally and politically correct, but it is good economics”; which is in striking contrast with Anne Kruger's 2003 “One has to wonder about this preoccupation with inequality. Poor people are desperate to improve their material conditions in absolute terms rather than to march up the income distribution. Hence it seems far better to focus on impoverishment than on inequality.”

[ii] See Stiglitz, J. (2012) The Price of Inequality. NY: Norton; and Galbraith, J. (2012) Inequality and Instability. Oxford University Press.

[iii] Namely a methodology proposed by Shorrocks (1999). See Shorrocks, A. F., (1999), 'Decomposition Procedures for Distributional Analysis: A Unified Framework Based on the Shapley Value', mimeo.

[iv] Data is from the World Bank's PovcalNet database of standardized household surveys.

[v] The Palma ratio is an index of income (or consumption) concentration defined as the ratio of the share of national income accruing to the richest 10% over the share accruing to bottom 40% of the distribution. 

[vi] An episode is the time period between two household surveys here.

[vii] See Olinto, P., Ibarra, G., & Saavedra-Chanduvi, J. (2014). Accelerating poverty reduction in a less poor world. Policy Research Working Paper No. 6855, The World Bank.

 


Dony El Costa is a poverty, energy and environmental economist with an 18-year professional experience in the consulting industry, academia and research centers, and the United Nations System since 2011, holding various positions and assignments notably with the United Nations Economic and Social Commission for Western Asia, the United Nations Convention to Combat Desertification, and the United Nations Development Program.

 


The views expressed here are solely those of the author in his/her private capacity and do not in any way represent the views of neither the Arab Development Portal nor the United Nations Development Programme. 

 


Note to readers from ADP: for more information on the methodology that Dony El Costa has adopted, await the upcoming paper titled "Leaving No-One Behind in the Arab Region: Revisiting the Pre-Arab Spring Poverty, Growth, and Inequality Nexus and Exploring Trajectories to 2030", which will soon be published exclusively on ADP.

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