Clearly, the view that growth spurs poverty reduction is valid, as is concern that inequality dampens prospects for poverty reduction. The focus should not be on the debate about the relationship between growth, poverty and inequality, but on how to foster growth that has a higher impact on poverty. Why does inequality matter One reason for the resurgence of interest in inequality is the better understanding of the potential costs of high or rising inequality. In countries where inequality rises with growth in average living standards, poverty, on average, still decreases, but it typically falls at a much slower rate than in countries experiencing more equitable growth. By contrast, the median rate of poverty reduction was seven times higher, about 10 percent per year, in the countries that combined growth in average living standards and falling inequality.
Inequality also matters greatly in countries with falling average growth rates.
On average, when inequality rose while average living standards fell, the poverty rate rose by a dramatic 14 percent per year, while with falling inequality the poverty rate rose by less than 2 percent. And even when inequality does not rise, a high initial level of inequality can stifle prospects for pro-poor growth. A country with persistently low inequality can expect to see a 75 percent higher rate of poverty reduction over time than a high-inequality country with the same growth rate in average income. The higher the income share of the poor initially the higher their share in the growth in total income. To put this another way, high inequality can reduce the poverty impact of a given growth rate.