DOES ECONOMIC GROWTH REDUCE POVERTY? Technical Paper

The study examines the question of whether economic growth tends to reduce poverty, where poverty is measured by the incomes of the poorest 20% and 40% of a population. Using the most recent data available, the paper shows that an increase in the rate of GDP growth translates into a direct one-for-one increase in the rate of growth of average incomes of the poorest 40%. GDP growth of ten percent per year is associated with income growth of ten percent for the poorest 40% of the population. For the poorest 20% the elasticity of response is 0.921; GDP growth of 10% is associated with income growth of 9.21%. These results give strong support to the proposition that growth in per capita GDP can be and usually is a powerful force in reducing poverty. In addition, the paper indicates that sound macroeconomic policies and openness to the world economy may be important in reducing poverty. These policies operate mainly through the effect on economic growth: countries with better macroeconomic policies grow faster, and this growth alleviates poverty.