Poverty and Distributional Impact of Economic Policies and External Shocks: Three Case Studies from Latin America Combining Macro and Micro Approaches by Jann Lay

1. General introduction and main findings 
The extent to which economic growth reduces poverty has always been a central 
issue in development economics. Obviously, the extent depends on the distribution 
of the benefits of growth. Already by the late 1950s, it became apparent that 
growth in "underdeveloped countries" did not trickle down to the population at 
large, but was instead accompanied by massive underemployment and 
unemployment. This "employment problem" implied that growth did not 
necessarily translate into poverty reduction, but rather to increasing inequalities 
between those who remained poor and those who were lucky enough to find 
employment in modern urban sectors. This was consistent with the Kuznets' 
(1955) hypothesis of an inverted U-shaped relationship between inequality and 
development, according to which inequality would tend to increase in the early 
stages of development. Kuznets (1955) admits that his often cited paper is 
"perhaps 5 percent empirical information and 95 percent speculation, some of it 
possibly tainted by wishful thinking." 
Despite these observations, it took until the 1970s and the work of Adelman and 
Morris (1973) and Chenery et al. (1974) until the question of income distribution 
within a country explicitly entered the debate. Adelman and Morris ( 1973) even 
reached the conclusion that "development is accompanied by an absolute as well 
as relative decline in the average income of the very poor", although they were 
challenged by Cline (1975) and Lal (1976) that this finding was not borne out by 
their data. Lal (1976) harshly criticized these studies and argued that the "concern 
with distributional issues amongst the international agencies and American 
development economists marks more their acknowledgement of their neglect of 
what a number of Third World governments and many development economists 
have for a long time recognized to be a major area of concern". This assessment 
certainly contained some truth, but these studies had a significant influence on the 
research agenda. Lal (1976) went on to conclude that these studies "may perhaps 
do indirect damage to the prospects of the poor by not emphasizing enough that 
efficient growth, which raises the demand for labor is probably the single most 
important means available for alleviating poverty in the Third World". The latter 
statement illustrates the ideological nature of the discourse between those who 
"emphasized" growth and others who "emphasized" distribution. This is mainly 
owed to the fact that the debate of the 1970s still rested, to stick to Kuznets' 

wording, on very little empirical information, a lot of speculation, and possibly 
even more on wishful thinking. 
The emphasis on distributional and poverty issues however was relatively short-
lived. With the arrival of the debt crisis in the early 1980s, the focus of both 
development policy and research shifted towards structural adjustment to current 
and capital account imbalances. As this went along with the arrival of conservative 
governments in OECD countries, the view that development and poverty reduction 
could best be reached through economic growth and free markets dominated. In 
this environment, little research effort was dedicated to resolve the issues raised by 
earlier empirical studies on the relationship between the distribution of income and 
economic development and it took until the early I 990s to put the issue back on 
the agenda.
In the late 1980s, concerns were raised that the costs of structural adjustment 
programs, which were implemented in most developing economies, were 
disproportionately borne by the poor (Adelman and Robinson 1989). In the course 
of the I 990s, this concern was replaced by the worries, in particular voiced by 
non-governmental organizations, that the benefits of globalization would be 
concentrated on the rich in the developing world. In the policy arena, the adoption 
of the Millennium Development Goals in 2000, which put poverty reduction at the 
centre of development policies, created demand for detailed micro datasets 
necessary to monitor progress on the poverty reduction goals. Possibly, the major 
reason why income distribution was back on the research agenda is related to data 
availability. Investigators could rely on more data of much better quality, in 
particular on household survey data, thereby dramatically reducing the degree of 
speculation contained in earlier studies.
In recent years, a burgeoning literature has significantly improved our 
understanding of the relationship between growth, poverty, and inequality. Today, 
it is widely acknowledged that on average growth is distribution-neutral and hence 
reduces poverty (Ravallion and Chen 2003, Dollar and Kraay 2002). In that sense, 
"growth is good for the poor" (Dollar and Kraay 2002). Ravallion (2001a) 
however suggests that one needs to look "beyond averages", as the impact of 
economic growth on poverty differs substantially across countries. In addition, he 
notes that this impact can also vary among the poor in a given country. That it is 
indeed worthwhile to look "beyond averages" is confirmed by many country 
studies that in recent years have cast light on the very different income distribution

Poverty and Distributional Impact of Economic Policies and External Shocks: Three Case Studies from Latin America Combining Macro and Micro Approaches by Jann Lay