Selected for the Global Economic Symposium 2009

Poverty reduction has become the central objective of development policy, as evidenced for example by the formulation of the UN Millennium Development Goals (MDGs). While economic growth is regarded as an important ingredient to achieve sustainable poverty reduction, the emerging consensus is that growth has to be pro-poor in order to reach ambitious targets such as those laid out in the MDGs.

There is much less consensus about interventions to address inequality within developing countries, even though they might directly contribute to poverty reduction, especially in very unequal societies. Should a poverty strategy have a growth bias or instead mainly concentrate on empowering the poor to benefit from growth? Does lowering inequality promote or hinder economic growth? And how does the level of initial inequality affect the impact of growth on poverty reduction?

The lack of consensus is arguably due to the fact that measures tackling inequality tend to involve larger trade-offs between equity and efficiency. Inequality-reducing policies may target household assets or household income, gender discrimination or discrimination of ethnic minorities, and backward regions. Should land reforms, for example, be strictly market-based or can they involve partial confiscation of land? To which extent can the tax and expenditure system be used for explicitly redistributive purposes? What is the scope for relying on progressive income taxation in developing countries?