The Nexus between Growth, Inequality, and Poverty: Lessons from Long-term Trends in Tanzania, 1961-2017

Abstract

What is the relationship between growth, inequality, and poverty? This is perhaps one of the most important questions of economic development that, in the context of sub-Saharan Africa, it has gained prominence against the backdrop of two decades of almost uninterrupted growth since the turn of the millennium. Despite strong growth, there have been doubts as to whether it translated into substantial poverty reduction. A missing piece in this puzzle is economic inequality, which, while often neglected in the past, is currently at the centre of attention in economic research. The aim of this paper is to re-evaluate the existing quantitative evidence and to disentangle the competing narratives concerning growth, inequality, and poverty for Tanzania, which provides an interesting case that is at once representative of the wider sub-Saharan African growth experience, while simultaneously highlighting the complexity of the growth-inequality-poverty nexus.

Our contribution is threefold. First, we provide a unique long-term study of growth, inequality, and poverty covering (almost) the entire six decades of Tanzanian independence. Second, we show how a triangulation of data sources can help establish aggregate patterns of development more firmly in the face of wide-spread concerns that data on sub-Saharan African economies are not only lacking, but also of questionable reliability. We further introduce an indicator that has received little attention in the economic development literature so far: the inequality extraction ratio. We provide estimates for the inequality extraction ratio and employ it as a novel tool to analyse the complex linkages between growth, inequality, and poverty in African countries. Third, we highlight the role of different policies in determining the interrelations between growth, inequality, and poverty – and element that is often missing from dominant approaches to modelling the different linkages.

We draw several general conclusions. First, the nature of the different linkages between growth, inequality, and poverty is not predetermined, but depends on the development strategies and concrete political decisions employed. The Tanzanian experience confirms that growth does not always “trickle down” to the poor. For economic growth to realise its full potential in terms of poverty reduction, the development strategy is essential. Still, we see that, in a very poor country, growth is an important precondition for people to be able to move out of poverty. Second, the role of inequality in the development process is ambiguous and observed levels of income inequality are difficult to interpret. In Tanzania, high levels of income inequality after independence were not a constraint on economic growth, while the reduction in inequality resulting from the collapse of African Socialism came at the cost of almost two decades of economic stagnation. Third, the inequality extraction ratio is a useful tool to make sense of this ambiguous role of income inequality and to contextualise trends in income inequality into the wider processes of growth and poverty reduction. Thus, while income inequality in Tanzania always appeared relatively low, this was often because the Tanzanian economy produced little surplus above subsistence which would have allowed for higher levels of inequality.