After many years of pessimism and negative news, today, observers and naysayer alike have come to agree that the Ethiopian economy has been growing strongly over the past four years - consecutively. Gross Domestic Product (GDP) at constant prices grew by 9.6pc during the fiscal year 2005/06, according to the National Bank of Ethiopia (NBE). This high growth was achieved for the third time in a row: 10.5pc in 2004/05 and 11.9pc in 2003/04, placing Ethiopia among the top performing economies in sub-Saharan Africa.
 

The highest growth rate was realised in 2006. All the signs that the economy will continue to perform well in 2007 as well are present. Thus, leaving aside minor differences on the exact figure, the 'unusual' strong performance of the economy has been 'confirmed' by domestic and international observers and commentators known to be very sceptical about the Ethiopian economy.
 

This high growth is also reflected in the positive development on the labour market, particularly during the last two years. As a result, employment has grown at a rate of nearly two per cent, whereas the unemployment rate declined from 6.7pc in 1997 (Gregorian Calendar) to five per cent in 1998. It is expected that this trend will continue in the Ethiopian budget year that ended in early July 2007. Almost all groups in unemployment have benefited from this decrease. Long-term unemployment has also fallen, but at a lower rate than total unemployment.
 

These developments are all good news for Ethiopia if it were not for the niggling and seemingly intractable problem of inflation that has accompanied the healthy economic growth. The issue of high rates of inflation is known to be bad for long-term investment. It is also a worrisome problem on many other counts.
 

However, what has caught the attention of the policymakers and the popular imagination is the fact that inflation is disproportionately hurting those with fixed incomes and the poorest segment of the Ethiopian society.
 

For instance, a civil servant with a monthly salary of 1,000 Br a year ago has lost something like 170 Br to inflation because the 1,000 Br now is equivalent to around 830 Br of last year. If we were to assume that the rate of inflation is 17pc, it implies that 117 Br buys goods and services that used to be bought for just 100 Br a year ago.
 

On the other hand, a person who earns her income from renting a house is affected less by inflation because the value of her house has gone up at least at a rate equivalent to that of inflation; she has the room to increase the house rent on tenants to compensate for inflation.

This raises a broader and divisive issue in the field of economics: income distribution. Economists have long sought to understand the links between economic growth and income distribution.

Much neo-liberal theorising on the issue has tended to assume that growth and inequality are inversely and inextricably linked, such that the problems of material inequality can be solved largely as a consequence of the benefits of growth 'trickling down' the income and social hierarchy. Looking at the empirical record - at least for the developing world - the situation is ambiguous. For instance, most recent discussion in the standard economics literature has been concerned not with the impact of growth and inequality, but the reverse: how inequality might affect growth and indeed, whether high levels of inequality might be harmful to growth.

An example of the latest mainstream policy thinking on the matter comes from the flagship of the World Bank - World Development Report 2006 - which was devoted to "equity and development".
 

However, the Bank insists that "from an equity perspective, the distribution of opportunities matters more than the distribution of outcomes". It appears to be concerned with equity primarily because "with imperfect markets, inequalities in power and wealth translate into unequal opportunities, leading to wasted productive potential and to an inefficient allocation of resources"; and because "unequal power leads to the formation of institutions that perpetuate inequalities in power, status and wealth - and that typically are also bad for investment, innovation and risk-taking that underpin long-term growth".
 

Such concerns of the World Bank are not controversial, but, the quotes make it clear that, while paying lip-service to "intrinsic motives" for promoting equity, its main concern is only with the possibility of inequity undermining economic growth.
 

In fact, one possible mechanism by which effects of inequality - primarily of assets - are transmitted is through financial markets. Access to credit is conditional on ownership of assets - land - that can be used as collateral. If certain investments in physical or human capital - basic education - are affected by individuals' access to credit markets, then the distribution of assets in an economy, in addition to the mean income, will determine how many individuals are able to undertake such investments.
 

In more unequal economies, fewer individuals would be able to make such investments, resulting in lower stocks of human and physical capital and, as a consequence, lower economic growth.
 

Nevertheless, economic growth itself can exacerbate or at least amplify inequality in a society. This is because not only does potential for economic growth and poverty reduction but also the potential of an individual or a household critically depends on a household's initial private endowments. Households with larger private endowments - be it more and better qualified labour or land - not only tend to be less poor, they are also better placed to profit from new opportunities generated by liberalisation and institutional change, for example.

This observation is what has come to be termed as 'pro-poor growth'. The pro-poor growth debate has its roots in the pro-distribution arguments by Chenery and Ahluwalia in the 1970s. Their proposal for 'redistribution with growth' could be regarded as the inception of the whole debate on pro-poor growth, as well as a culmination of the critique of the 'trickle-down' hypothesis.
 

More recently, pro-poor growth was also implicit in the term 'broad-based growth' used in the 1990 World Development Report. While the concept was never defined at that time, it subsequently shifted to become referred to as pro-poor growth during the course of the 1990s.

The more specific relationship between growth and poverty, there has been an assumption that pro-poor growth, which by definition would reduce absolute poverty, also tends to moderate the mal-distribution of income. While this may well be the case, there are many situations in which growth benefits the 'non-poor' as well as - inevitably - the wealthy (lifting many of the former into a new middle class, as in parts of East Asia, for instance) and thus improves income distribution overall, but tends to leave levels of absolute poverty more or less the same.
 

The relevant question is not whether growth affects distribution (or vice versa), but whether economic policies designed to promote growth affect distribution. The worry of governments such as in Ethiopia should be more about how to minimise the negative impacts of their economic policies and strategies on income distribution. Their worst fears should, in terms of poverty reduction, be erroneously pursuing policies which sacrifice distribution to prioritise growth but which in practice fail to generate faster growth. Unfortunately, this can be said to be the story of most developing countries for most of the past 30 years.
 

The strong growth of the Ethiopian economy has and will continue to have noticeable effects on income distribution among different economic groups and geographical locations across the country. In addition, different economic groups such as fixed income earners and tenants will be impacted by the economic growth differently. Initial endowments and economic roles of individuals and households will influence the way economic growth in the country will be felt by different groups and individuals. These issues should be given due attention by policymakers.

Nevertheless, since these issues are facts of life, the most important issue is not to compromise on distributional policies while pursuing further economic growth in the coming years. Yes, achieving accelerated and sustained economic growth is a laudable goal in the current Ethiopian context. However, the policies and strategies devised by the government - and supported by donors - should try not to undermine or compromise the already existing distributional and social policies. More importantly, they should make income distribution and redistribution an integral part of all economic policies and strategies from inception to implementation and evaluation.
 

This is because the important question in terms of poverty reduction is not whether or not the policy objective should be economic growth or no growth, nor should there be steps taken to redistribute the income arising from this growth. Rather, economic policies should aim to maximise total income, and hope for poverty reduction as a by-product, or a more specific aim to increase the incomes of poorer households and treat growth (or the lack of it) as a by-product - that is, whether distributional effects should be integrated into the design of economic policies as a whole.