Abstract
The consequences of poverty and inequality for growth have long preoccupied academics and policy-makers. This paper revisits the inequality-growth and poverty-growth links. Using a panel of 158 countries between 1960 and 2010, we find that the correlation of growth with poverty is consistently negative: A 10 p.p. decrease in the headcount poverty rate is associated with a subsequent increase in per capita GDP between 0.5 and 1.2% per year. In contrast, the correlation of growth with inequality is empirically fragile—it can be positive or negative, depending on the empirical specification and econometric approach employed. However, the indirect effect of inequality on growth through its correlation with poverty is robustly negative. Closer inspection shows that these results are driven by the sample observations featuring high poverty rates.
Highlights
What is the effect of poverty on aggregate income growth? And the effect of inequality? Academics and policy-makers have long been concerned with these questions
This paper has examined two issues that have received limited attention in the otherwise extensive empirical literature of growth, inequality and poverty
The paper highlights the indirect effect of inequality on growth accruing through poverty
Summary
What is the effect of poverty on aggregate income growth? And the effect of inequality? Academics and policy-makers have long been concerned with these questions. The choice of this approach is dictated by the short time dimension and large cross-sectional dimension of our panel dataset—which makes panel time-series methods unsuitable—and by the potential endogeneity of the regressors—which demands an instrumental variable approach These issues affect much of the empirical literature on the links between poverty, inequality and growth, which—like our paper—has to contend with the potential problem of two-way causality between the variables at the core of the analysis. In this context, GMM represents a natural methodological choice, which we share with much of the related empirical literature..
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