Too Poor to Grow
Recent theoretical literature has suggested a variety of mechanisms through which poverty may deter growth and become self-perpetuating. A few papers have searched for empirical regularities consistent with those mechanisms such as aggregate non-...
| Main Authors: | , |
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| Language: | English |
| Published: |
2012
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| Subjects: | |
| Online Access: | http://www-wds.worldbank.org/external/default/main?menuPK=64187510&pagePK=64193027&piPK=64187937&theSitePK=523679&menuPK=64187510&searchMenuPK=64187283&siteName=WDS&entityID=000158349_20090805131938 http://hdl.handle.net/10986/4204 |
| Summary: | Recent theoretical literature has
suggested a variety of mechanisms through which poverty may
deter growth and become self-perpetuating. A few papers have
searched for empirical regularities consistent with those
mechanisms such as aggregate non-convexities and
convergence clubs. However, a seemingly basic implication of
the theoretical models, namely that countries suffering from
higher levels of poverty should grow less rapidly, has
remained untested. This paper attempts to fill that gap and
provide a direct empirical assessment of the impact of
poverty on growth. The paper s strategy involves including
poverty indicators among the explanatory variables in an
otherwise standard empirical growth equation. Using a large
panel dataset, the authors find that poverty has a negative
impact on growth that is significant both statistically and
economically. This result is robust to a variety of
specification changes, including (i) different poverty
lines; (ii) different poverty measures; (iii) different sets
of control variables; (iv) different estimation methods; (v)
adding inequality as a control variable; and (vi) allowing
for nonlinear effects of inequality on growth. The paper
also finds evidence that the adverse effect of poverty on
growth works through investment: high poverty deters
investment, which in turn lowers growth. Further, the data
suggest that this mechanism only operates at low levels of
financial development, consistent with the predictions of
theoretical models that underscore financial market
imperfections as a key ingredient of poverty traps. |
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