There is a very strong link between economic growth and poverty reduction; Dollarand Kraay (2002) found, based on a study of 418 “episodes” worldwide that a 1 percent increase in per capita income is associated with a 1 percent increase in the incomes of the poor. The relationship is robust and has not changed over time. Although a num-ber of policy variables, as measured by economic openness, the rule of law, and fiscal discipline, appear to boost economic growth, they do not have a discernible inde-pendent effect on the incomes of the poor. Is Growth Good for the Poor? Few economists doubt that economic growth is necessary for the long-term reduction of poverty. But how close is the link between the two? If the incomes of the poor rise closely in line with incomes overall, the key to poverty reduction is rapid economic growth; however, if the relationship is weak, other policies, such as targeted subsidies, are likely to be important and the concept of “pro-poor growth” has more relevance. David Dollar and Aart Kraay have addressed the problem directly, in a paper entitled “Growth is Good for the Poor” (Dollar and Kraay 2002). They gathered information on the per capita incomes of the poor (defined as those in the bottom quintile of the income distribution) and on overall per capita income. The data come from 137 countries over the period 1950–99. Dollar and Kraay were able to piece together 418 “episodes”—periods with an interval of at least five years dur-ing which it was possible to measure changes in the income of the poor and of the country overall. They first regressed the log of per capita income of the poor (ln(poor)) on overall per capita income (ln(inc)) and got ln(poor) = 1.07 ln(inc) –1.77. R2 = 0.88.
Posted on: Sat, 05 Jul 2014 12:28:16 +0000
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