Does Poverty Reduction Cause Economic Development

Abstract

Extreme poverty is a threat faced by billions of people making economic development as a chief goal for most of the countries all over the world. Having a deep understanding of the whole gamut of poverty, this study attempts to empirically investigate that whether a causal link exists between poverty reduction and economic development or not? And if it exists, then what is the direction of that causal link. The Panel data cover 26 developing countries, on the basis of the availability of data, for the years from 1994 to 2015. Through Co-integration to Pairwise Granger Causality Test & Granger Causality based on VEC Model, this study analyses the causality between poverty reduction and economic development. This study, apart from poverty reduction, also incorporates some other independent variables affecting economic development. The trickle-up theory, adopted in this study, explains the channels through which poverty reduction could cause economic development. The main conclusion drawn from the empirical results is that a causal link running from poverty reduction to economic development exists. This implies that poverty reduction causes economic development.