Poverty, growth, inequality and pro-poor factors: new evidence from macro data

Does economic growth reduce poverty? If so, by how much? How economic inequality affects poverty? Does the responsiveness of poverty to growth and inequality depend on initial poverty and inequality? How do pro-poor policies influence the poverty-growth-inequality nexus? \n \nThis paper provides novel quantitative answers to such questions. In particular, the System Generalised Method of Moments estimator is employed to estimate the intertwined relation between poverty, growth, inequality and pro-poor policies on an original unbalanced panel dataset, built from World Bank – PovcalNet data, which comprises 109 developing countries, observed between 1981 and 2008. \n \nOur main results are in line with the existing literature. First, we find that the poverty elasticities to growth and inequality are, respectively, around -2% and 2%. Second, the poverty elasticity to growth is higher the more favorable the initial conditions (i.e. -0.89% and -2.5% for, respectively, high and low initial poverty and inequality). Third, the poverty elasticity to inequality is higher in relatively richer and more equal countries (i.e. 2.6%) than in poorer and more unequal countries (i.e. 0.39%). And, finally, we show that human capital, as measured as health and education, facilitates the effect of economic growth on poverty reduction (i.e. poverty elasticity of -0.89% and -2.5% for, respectively, high and low infant mortality). \n \nOur analysis suggests that, in designing policy reduction strategies, policy makers should carefully take into considerations initial poverty and inequality as well as how income is distributed. Moreover, as for the fundamental importance of pro-poor policies, and human capital in particular, economic policies should go beyond the mere growth stimulus.