Tackling income inequality could help Africa quash extreme poverty

Addis Ababa, 31 October 2006 - There have been stark warnings that many sub-Saharan African countries will not be able to wipe out extreme poverty by 2015, the target date set by the Millennium Development Goals (MDGs).

According to a recent report by the International Monetary Fund, although there has been some progress in raising per capita income in recent years, economic performance will have to improve significantly if the region is to attain many of the MDGs.

“In particular, SSA [sub-Saharan Africa] will need to accelerate annual GDP growth to at least seven percent to attain the poverty MDG (MDG1) to reduce by half the proportion of people living on less than one dollar a day,” the report says.

Africa has one of the world's richest concentrations of minerals and precious metals, yet some 300 million of its people live on less than a dollar a day.

The IMF predicted that growth in the region as a whole would increase to about six percent next year, and by up to 10 percent in oil-exporting countries.

However, a study by the Economic Commission for Africa says that focusing on economic growth alone might not be the best way to halve poverty by 2015. It says a crucial factor in this equation is income inequality. According to the report, it is not so much the growth figures themselves that matter, but the fact that economic growth is “inextricably linked” to unequal income. It is the level of this inequality that determines the rate of poverty reduction.

So even if there is growth in a country, the way the income is distributed is critical and in many African countries it rarely filters down to the most needy.

The study believes that most African countries would only need a modest rate of growth in per capita consumption to reach the MDGs, if they manage to contain income inequality at its current level.

The study gives the example of Ethiopia, which it describes as a “typical case with very low initial income and high inequality”.

There was economic growth between 1981 and 1995, which could have reduced the number of poor people by 31 percent. But the fact that the benefits of this growth were unequally distributed instead led to a 37 percent increase in poverty.

“Poverty [in Ethiopia] caused by transitory factors is very high and also there is evidence of poverty persistence that could be caused by short-lived shocks,” the study says. “The policy challenge therefore would be to find appropriate mechanisms that reduce the persistence of shocks on poverty and inequality, which itself could be helpful for growth.”

The phenomenon is peculiar to Africa because of the continent's limited drivers of growth, exacerbated in some cases by government policies. However in Botswana, where the main driver of growth is income from the diamond industry, there is equitable distribution and the economy is experiencing a boom.

Therefore, the study concludes, it is the pace and character of growth that contributes to poverty reduction, rather than the growth rate alone. Ensuring fairer distribution of income and boosting limited resources would go far in alleviating poverty. The report suggests that the “sustainability of even small growth could take Africa very far in reaching the MDGs”.