Growth, Inequality, and Poverty : A Robust Relationship?
An extensive literature on poverty traps suggests that high levels of poverty deter growth. However, a seemingly basic implication of the underlying theoretical models, namely that countries suffering from higher levels of poverty should grow less...
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| Language: | English |
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World Bank, Washington, DC
2018
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/248621536264773958/Growth-Inequality-and-Poverty-A-Robust-Relationship http://hdl.handle.net/10986/30422 |
| Summary: | An extensive literature on poverty traps
suggests that high levels of poverty deter growth. However,
a seemingly basic implication of the underlying theoretical
models, namely that countries suffering from higher levels
of poverty should grow less rapidly, has remained untested.
A parallel literature has suggested a variety of mechanisms
through which inequality may affect growth in opposing
directions. Because inequality and poverty are different
aspects of the income distribution, inequality can also
affect growth through poverty, an indirect channel that has
not been explicitly analyzed. This paper contributes to fill
both gaps. Using a large cross-country panel data set, it
estimates a reduced-form growth equation adding both
inequality and poverty to an otherwise standard set of
growth determinants. Given inequality, the correlation of
growth with poverty is consistently negative. In contrast,
given poverty, the correlation of growth with inequality can
be positive or negative, depending on the empirical
specification and econometric approach used. Yet, 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 (but not extremely high) poverty
rates. These empirical findings are consistent with the
predictions from an analytical framework with
learning-by-doing and knowledge spillovers, in which
consumers cannot save and invest if their initial endowment
is below a minimum consumption level. |
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