Optimal Poverty Reduction, Adjustment, and Growth

This article analyzes poverty reduction policies in an appliedoptimal growth framework. Assuming that poverty reduction iseffected through redistribution, it focuses on the static anddynamic tradeoffs between equity and efficiency and on the choicebetween current income and future income (that is, current productiveasset) transfers to the poor. By numerically estimating a stylizedeconomy, it is shown that, given reasonable assumptions aboutbehavioral parameters, the efficiency cost of poverty reductionin an economy on a steady growth path is relatively low. Ina period of adjustment following a severe exogenous shock, however,the scope for redistribution may be extremely limited if thereis a constraint on foreign borrowing. Plausible examples aregiven of adjustment cases in which poverty reduction becomesoptimal only after partial adjustment has been achieved.