ANTHONY SHORROCKS AND ROLPH VAN DER HOEVEN
The relationship between growth, inequality, and poverty lies at the heart of development economics. It has been, and remains, one of the most controversial topics. Indeed, very few of the other core areas in development economics can compare with the shifts, reversals, and reaffirmations of views that have characterized the analysis of the interaction between growth, poverty, and inequality. Evidence that inequality and poverty rose in the 1980s and 1990s in many countries, including some of the OECD countries, rekindled the ongoing controversies, which have not so much evolved as fluctuated over the past 50 years.
From the 1950s to the early 1970s, the debate emphasized the likely trade-offs between growth and income inequality. This derived in part from Kuznets' famous 'inverted U-hypothesis', which posited that inequality rises during the initial phases of development and then declines after some crucial level is reached (Kuznets 1955). The idea of a trade-off between growth and inequality is supported by certain theories of growth. Kanbur (1998), for example, points out the obvious correspondence between Kuznets' empirical results and Lewis' labour surplus model (Lewis 1954). The latter predicts that in an economy with an 'unlimited supply of labour' the profit share rises relative to the wage share until the labour surplus is exhausted. Similarly, Kaldor's growth model, in which capitalists have a higher marginal propensity to save than workers, implies that redistribution in favour of profits raises the growth rate (Kaldor 1967). However, this model applies more to developed countries—where the functional distribution of income largely consists of wages and profits—rather than to developing countries.
The mood shifted in the 1970s when attempts were made to identify redistributive mechanisms which aid poverty reduction without hampering growth. Studies also began, for the first time, to emphasize non-income measures of poverty in the related 'basic needs' literature. This change of focus was relatively short-lived, and went into reverse with the rise of neoliberalism and the so-called 'Washington Consensus' in the early 1980s. Bolstered in part by the successful experience in East Asia, growth itself would be the main vehicle for poverty reduction, achieved through trickle-down mechanisms not always clearly specified.