Growth, inequality and poverty: a robust relationship?
Gustavo A Marrero1,2, Luis Servén3
1Departamento de Economía, Contabilidad y Finanzas, CEDESOG, Universidad de La Laguna, San Cristóbal de La Laguna, Spain.
Empirical Economics
|November 29, 2021
Summary
Economic growth reduces poverty, but its link with inequality is complex. High poverty rates significantly drive the negative relationship between inequality and growth, indicating poverty reduction is key.
Area of Science:
- Economics
- Development Studies
- Econometrics
Background:
- Poverty and inequality are persistent global challenges impacting economic growth.
- The relationship between economic growth, poverty, and inequality remains a subject of extensive academic and policy debate.
Purpose of the Study:
- To empirically investigate the dynamic links between economic growth, poverty reduction, and income inequality.
- To analyze the direct and indirect effects of inequality on growth, considering its correlation with poverty.
Main Methods:
- Utilized a panel dataset of 158 countries spanning from 1960 to 2010.
- Employed econometric approaches to assess the correlation between growth, poverty rates, and inequality measures.
Main Results:
- A consistent negative correlation was found between economic growth and poverty reduction; a 10 percentage point decrease in poverty correlated with 0.5-1.2% annual GDP per capita growth.
- The direct link between inequality and growth proved empirically fragile, showing inconsistent positive or negative correlations.
- The indirect effect of inequality on growth, mediated through its correlation with poverty, was robustly negative.
Conclusions:
- Economic growth effectively reduces poverty, with significant implications for development policy.
- While the direct impact of inequality on growth is uncertain, its indirect negative effect via poverty underscores the importance of poverty alleviation strategies for sustainable economic development.
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