Overthe years, emerging countries have played a significant role in bringing downworld poverty levels because of their high levels of economic growth.. High income inequality is seen as
Introduction
Introduction
The eradication of absolute poverty is a key policy goal for governments and international organizations, vital for societal well-being The World Bank's 2013 report indicates a decline in poverty levels since the 1980s; however, extreme poverty persists, with nearly one billion people living on less than $1.25 a day and about 2.7 billion on under $2.50 a day Most progress in poverty reduction has occurred in middle and high-income countries, while low-income nations have seen minimal improvements Notable successes in poverty alleviation are evident in China and India, contrasting sharply with stagnant poverty levels in many low-income countries over the past three decades Although the Millennium Development Goal of halving poverty by 2015 is within reach, developing countries continue to face significant challenges, alongside pressing issues such as child and maternal mortality, gender equality, and education.
Economic growth is crucial for reducing absolute poverty, prompting many developing countries to implement structural adjustment reforms from the Bretton Woods institutions in the early 1980s Key policies included adopting flexible exchange rates and embracing international trade, which attracted foreign investment and spurred economic growth In the 1990s, the World Bank advocated for a broader strategy to lower poverty levels, emphasizing environmental sustainability, human capital investment, privatization of state-owned enterprises, and overall economic development.
In the early 2000s, a renewed focus on poverty reduction transformed growth strategies in developing nations Governments were urged to create their own economic development plans, leading to the establishment of Poverty Reduction Strategy Papers (PRSPs), which became essential for addressing poverty These PRSPs integrated economic and social issues while outlining external financial needs, forming the foundation for comprehensive poverty analysis and targeted solutions This framework enabled the World Bank and the International Monetary Fund (IMF) to provide development assistance and debt relief to countries under the Highly Indebted Poor Countries (HIPC) initiative, with the ultimate goal of achieving the Millennium Development Goals (MDGs).
In many developing countries, the lack of essential human necessities such as shelter, food, education, and healthcare significantly contributes to poverty (Cypher and Dietz, 2004) Recognizing these needs, the United Nations Development Program (UNDP) shifted from income-based poverty measures to a more human-centered approach in the 1990s, introducing Human Poverty Indices (HPIs) that focus on key deprivations, including life expectancy These human needs are integral to the Poverty Reduction Strategy Papers (PRSPs), with multilateral and bilateral donors providing aid based on performance indicators According to the UNDP Human Development Report 2013, there has been notable progress in reducing global human poverty, particularly in lower-income countries, contradicting earlier World Bank claims that focused solely on income poverty measures The shift towards human poverty measures emphasizes economic growth, income inequality, and poverty reduction, highlighting the significant role of emerging economies like China, India, and Brazil in decreasing global poverty levels (Ravallion and Chen, 2007).
In recent years, many Asian countries have revamped their economies through technological innovations, enabling them to enhance production and export capabilities However, these advancements are overshadowed by mortality risks faced at birth, highlighting the need for basic education Additionally, economic provisioning remains a critical issue, particularly for those lacking access to improved drinking water and for underweight children.
Countries like China and India have transitioned from agriculture-based economies to technologically advanced ones, resulting in rapid growth that outpaces many developed nations In contrast, sub-Saharan Africa and Latin America primarily rely on natural resources and agricultural products for their economic growth The surge in commodity prices prior to the recent financial crisis significantly enhanced growth in sub-Saharan Africa, where exports of agricultural products, minerals, and oil accounted for approximately 70% of the region's export revenue, according to the Africa Development Bank (AFDB) and others.
Over the years, reforms and policies have enabled many developing countries, especially in Asia, to achieve notable economic growth However, despite this growth, numerous developing nations have found that it has not significantly benefited lower-income populations, highlighting a persistent issue of income inequality and poverty reduction.
Economic growth often leads to increased income inequality, which negatively impacts development by limiting the benefits that reach the poor As extensive poverty and rising income inequality pose significant challenges, reducing these issues has become a primary goal of economic development policies A critical question arises: have the poor truly benefited from economic growth, and how does income distribution influence efforts to combat poverty?
This thesis investigates developmental issues by analyzing data from South and East Asia, Latin America, and sub-Saharan Africa to empirically assess the relationship between economic growth and poverty in these regions It contributes to the discourse on economic growth, income inequality, and poverty by providing a thorough regional analysis of how economic growth influences poverty reduction The study specifically explores the varying experiences of poverty alleviation across different developing regions and compares the effects of economic growth on income inequality in both developed and developing areas.
This thesis examines the developmental dynamics of South and East Asia, Latin America, and sub-Saharan Africa, highlighting the significance of human development issues in these regions Developed countries, particularly in the OECD, are included in the analysis as they have largely addressed basic human development challenges South and East Asia has emerged as a leader in economic growth, income inequality reduction, and poverty alleviation, largely driven by the economic transformations of giants like China and India Despite these advancements, mass poverty persists In Latin America, a shared heritage and historical context have shaped its institutions, but the region faces high income inequality despite lower poverty levels Conversely, sub-Saharan Africa grapples with the highest global poverty rates, characterized by agrarian economies reliant on agricultural exports The study conducts a comparative analysis of growth effects on poverty and income inequality across these regions to assess their relative success in fostering economic equity and reducing poverty.
Economic Growth and Income Equality
Economic growth aims to foster economic development and reduce poverty, but the equitable distribution of its benefits is crucial In “Poverty, Inequality and Development,” Field (1980) identifies three growth types linked to income inequality The first, modern-sector enlargement growth, expands the modern, industrialized sector, enhancing absolute incomes and lowering poverty, particularly in advanced economies and some Asian nations This growth initially affects income inequality depending on whether the affluent or the poor benefit more As labor shifts from the low-income traditional sector to the higher-income modern sector, income inequality and poverty decrease The second type, modern-sector enrichment growth, benefits specific groups within the modern sector, often leading to increased average incomes but worsening income inequality and stagnant poverty levels, common in Latin America and sub-Saharan Africa Finally, traditional sector enrichment growth sees income gains in the traditional sector with minimal growth in the modern sector, allowing for significant poverty reduction and a more equitable income distribution, as countries prioritize poverty alleviation even at low income levels.
The alleviation of absolute poverty is closely tied to sustained economic growth and the equitable distribution of its benefits within society While some studies, such as those by Dollar and Kraay (2002), suggest that economic growth is the primary driver of declining poverty levels, they downplay the significance of income inequality However, the intricate relationship between income distribution, economic growth, and poverty reduction must not be ignored, as highlighted by researchers like Ravallion and Chen.
Research by Fosu (2008), Ali and Thorbecke (2000), and Easterly (2000) highlights the complex relationship between economic growth and poverty reduction, indicating that while economic growth can lower poverty levels, income inequality can hinder this process This implies that countries with similar economic growth rates may experience varying poverty levels due to differences in income distribution Kuznets' (1955) inverted-U hypothesis supports this notion, suggesting that initial economic growth may exacerbate income inequality, particularly as growth is concentrated in sectors with high wages but limited job creation However, as development progresses, improvements in human capital and technology can lead to increased employment opportunities and a subsequent decrease in income inequality, facilitating a transition from agricultural to industrial economies with higher productivity.
The Kuznets hypothesis relates to Field's (1980) theory of modern sector enlargement growth, suggesting that while countries may initially experience rising income inequality during early economic development, this trend can reverse as the modern sector expands to include lower-income individuals For developing nations, this implies that although income inequality might increase initially, it is expected to decline over time as economic growth progresses Furthermore, if developing countries adopt development strategies similar to those of established economies, they may be able to circumvent the inverted 'U' pattern of inequality.
Understanding income inequality among the poor is crucial for grasping the severity of absolute poverty and the effects of government policies on low-income groups Research, including studies by Ravallion (1995), Deininger and Squire (1998), and Schultz (1998), has explored the link between economic growth and income inequality, often concluding that there is no significant correlation This thesis aims to reevaluate the relationship between income inequality and economic growth by utilizing a consistent and efficient estimator, differing from those employed in previous studies.
In recent years, income inequality has been on the rise in many countries, regardless of their economic growth status (World Development Indicators, 2007) Ravallion (2011) noted that while China has seen sustained economic development since its structural reforms, income inequality has sharply increased In contrast, Brazil has experienced a reduction in income inequality alongside moderate economic growth Additionally, most advanced economies, including the United States, have faced rising income inequality, with the U.S exhibiting higher levels than any other high-income OECD country (Smeeding, 2005).
Research has shown that sustained high rates of economic growth are the primary driver of poverty reduction in many Southern and Eastern Asian countries However, rapid economic growth can sometimes have a negative impact on the poor, as they are often bypassed by growth that primarily benefits a small group of people in the modern sector of the economy This type of growth, known as modern-sector enrichment, can exacerbate income inequality and limit poverty reduction Ultimately, the effectiveness of economic growth in reducing poverty and income inequality depends on the nature of the growth itself, highlighting the need for a more inclusive and equitable approach to economic development.
Thesis Contribution
This thesis significantly contributes to the understanding of the relationship between economic growth, income inequality, and poverty by providing a comprehensive regional comparative analysis across both developed and developing nations Unlike previous studies, such as Fosu (2010), which focused on specific regions like Eastern Europe and Central Asia, this research examines the dynamics of economic growth and poverty in the three main developing regions while also comparing them with high-income OECD countries Although data on poverty lines in advanced economies are lacking, the inclusion of OECD nations allows for a comparison of income inequality and human development, highlighting that rising income inequality in advanced economies, as noted by Smeeding (2005) and others, can hinder poverty reduction efforts for middle and lower-class families Furthermore, the global economic downturn has adversely impacted growth and living standards across both developed and emerging economies, prompting an analysis of how these regions have translated economic growth into improved living conditions.
Many studies on poverty primarily utilize income-based measures like the headcount ratio and poverty gap index, often overlooking the significance of human development-based measures, which are vital for economic growth This thesis incorporates Human Poverty Indices (HPIs) alongside traditional income measures, highlighting that income-focused metrics tend to undervalue human development The 2013 MDGs report indicates that, while poverty has been halved, advancements in human development remain minimal HPIs play a critical role in poverty alleviation and achieving the Millennium Development Goals (MDGs) by encompassing broader socio-economic factors They demonstrate that countries can experience significant development and poverty reduction even at lower income levels, whereas nations with considerable income increases may still lag in human development.
This thesis enhances existing literature by utilizing a more suitable estimating technique for dynamic panel data analysis, specifically the System Generalized Method of Moments (SYS-GMM) developed by Blundell and Bond (1998) Unlike traditional methods such as OLS or fixed/random effects, which often overlook the endogeneity issue arising from correlations between explanatory variables and the error term, SYS-GMM effectively addresses these concerns The study explores the intricate relationships among economic growth, poverty, and income inequality while incorporating additional critical explanatory variables often omitted in previous research These variables, including inflation, unemployment, foreign aid, and education, are essential as they significantly influence income distribution and poverty levels.
Thesis Organisation
The thesis is structured into several key chapters Chapter Two reviews empirical literature on the interplay between economic growth, income inequality, and poverty Chapter Three analyzes trends in poverty, economic growth, and income inequality across selected regions Chapter Four outlines the methodology and model specifications, addressing econometric challenges and their solutions In Chapter Five, the models are estimated, and empirical findings are discussed Finally, Chapter Six summarizes the thesis and offers policy recommendations for addressing issues related to economic growth, income inequality, and poverty reduction.
Literature
A Brief Review of the Literature
This chapter examines the empirical literature on the interplay between economic growth, income inequality, and poverty The prevailing view is that economic growth plays a crucial role in eradicating absolute poverty and mitigating income inequality However, it is essential to comprehend the significance of income distribution throughout economic development A key theory in this discourse is the Kuznets hypothesis (1955), which posits that income inequality initially increases during early economic growth stages but improves over time This relationship is illustrated by an inverted ‘U’ shape, indicating that while developing countries may face greater income disparity in the beginning, they are likely to achieve a more equitable income distribution as development progresses.
The inverted 'U' hypothesis has sparked extensive research on the link between economic growth and income inequality Khasru and Jalil (2004) examined the Kuznets hypothesis across 24 countries, employing a fixed effect estimation technique for their panel data analysis Their findings revealed an un-inverted 'U' pattern, indicating that while the latter part of the hypothesis holds true for many nations, it does not apply to developing countries such as Ecuador, Cyprus, Egypt, Turkey, and Chile, nor to newly industrialized nations like Singapore.
While the impact of economic growth on poverty reduction is widely recognized, its effect on income inequality remains debated Research, including a study by Psacharopoulos et al (1995) focused on Latin American countries, indicates a negative correlation between economic growth and income inequality Conversely, other studies, such as those conducted by Ravallion and Chen, present differing perspectives on this relationship.
In 1997, research indicated that rising aggregate incomes did not significantly reduce income inequality in developing countries It is important to note that the studies utilized scatter points to examine the correlation between economic growth and income inequality Further investigations by Deininger and Squire (1998) and Schultz (1998) also revealed no substantial relationship between economic growth and income inequality.
The distribution of income is crucial for economic development, prompting numerous studies to explore the relationship between economic growth, poverty, and income inequality Tridico (2010) examined this dynamic in 50 emerging and transitional economies (ETEs), highlighting the significant impact that income inequality has on both economic growth and poverty levels.
Between 1995 and 2006, economic development was defined as a comprehensive process that encompasses not only economic growth but also institutional changes and human development Despite an average growth rate of 4.7 percent in these countries during this period, the lack of accompanying developmental components meant that economic growth did not lead to a significant reduction in poverty levels.
The investigation into the relationship between economic growth and income inequality revealed that economic growth exacerbated income inequality during the analyzed period The researcher attributed this trend to lower levels of education and insufficient public expenditure, which contributed to rising income disparities He concluded that without improvements in educational standards and enhanced institutional quality, along with targeted strategies for human development, economic growth is likely to continue increasing income inequality.
In his 2004 study, Adam analyzed data from 60 developing countries to explore the relationship between economic growth and poverty reduction He concluded that while economic growth generally contributes to decreasing poverty levels, the extent of this effect is influenced by the definition of economic growth used Adam identified two measures: survey mean income and GDP per-capita changes His findings indicated that economic growth consistently leads to poverty reduction, but the impact is more significant when mean income is considered compared to GDP per-capita.
Regional Studies
Regional analyses have explored the link between economic growth and poverty, with Fanta and Upadhyay (2009) examining data from 16 African nations They found that while economic growth is crucial for poverty reduction in Africa, the impact varies by country Their findings indicate that economic growth generally leads to lower poverty levels, and achieving higher economic development can enhance living standards Consequently, they advocated for policies focused on economic development and reducing income inequality across the continent.
Stevans and Sessions (2008) analyzed the relationship between economic growth and poverty levels in the United States from 1959 to 1999 using an error-correction model Their findings indicated that increases in economic growth are significantly associated with poverty reduction across all families Notably, the impact of growth on poverty was more pronounced during the economic expansions of the 1960s through the 1990s, as these periods provided greater employment opportunities for workers, especially those in lower-income brackets, compared to times of economic slowdown.
Sadoulet and Janvry (2000) explored the interplay between economic growth, income inequality, and poverty in Latin America, revealing that the region exhibits notably higher income inequality compared to other areas with similar per-capita income Their research, covering the period from 1970 to 1994, highlighted that economic growth effectively lowers poverty levels primarily in contexts of low income inequality They emphasized the significant costs associated with income inequality and advocated for government intervention to address this issue, arguing that merely relying on economic growth is insufficient for improving income distribution To achieve meaningful reductions in absolute poverty, they recommended that income inequality must be minimized and that countries should enhance educational opportunities.
Lee and Perera (2013) examined the interplay between economic growth and institutional quality in reducing poverty in Asia from 1985 to 2009 They highlighted that persistent poverty in developing countries cannot be solely attributed to economic growth, as factors like government stability, income inequality, the rule of law, and corruption also play crucial roles Their findings indicated that while economic growth significantly lowered poverty levels in South and East Asia, it did not alter income distribution, leading to a more substantial poverty reduction Furthermore, they identified a negative correlation between government stability, rule of law, and poverty reduction, suggesting that improvements in institutional quality contribute to decreasing poverty levels Interestingly, they noted that reductions in corruption and enhancements in democratic accountability had not effectively addressed poverty or income inequality The authors cautioned that while moderate corruption might not immediately hinder growth, it could ultimately have detrimental effects on economic development and exacerbate poverty They recommended that Asian governments implement policies to combat corruption and strengthen institutional quality.
Comparative Global Studies
Despite existing studies, global comparative evidence on the interplay between economic growth, income inequality, and poverty levels remains limited One notable study by Fosu (2010) offers valuable insights into how economic growth has contributed to poverty reduction in developing countries.
The study analyzed the relationship between economic growth and poverty reduction in various regions, including Eastern Europe and Central Asia (EECA), South Asia (SAS), sub-Saharan Africa (SSA), Latin America and the Caribbean (LAC), and the Middle East and North Africa (MENA) from 1981 onward.
Between 1990 and 2005, poverty levels significantly decreased across most regions, except for Eastern Europe and Central Asia (EECA) and the Middle East and North Africa (MENA), with greater declines observed in the mid-1990s The substantial economic growth during this period, largely attributed to structural reforms in developing economies since the early 1980s, played a critical role in reducing poverty However, income inequality remains a crucial factor influencing poverty patterns, as favorable income distribution enhances the impact of economic growth on poverty reduction Therefore, it is essential to focus on reducing income inequality, especially in countries with significant disparities in income distribution.
In summary, numerous studies in economic development indicate a negative correlation between economic growth and poverty levels, suggesting that economic growth contributes to poverty reduction Conversely, the link between income inequality and economic growth remains unclear, with most literature indicating no significant relationship between the two This thesis explores the interplay between economic growth, poverty alleviation, and income inequality through a novel approach, as outlined in the preceding chapter.
Research
Regional Trends in Economic Growth, Income Inequality and Poverty
This chapter examines economic growth, income inequality, and poverty trends in selected regions, specifically sub-Saharan Africa (SSA), South and East Asia (SEA), Latin America (LAC), and the OECD from 1985 to 2010 We analyze how regional economic development has influenced poverty and income inequality over time, dividing the study into two sub-periods The first sub-period (1985-1995) highlights structural reforms aimed at boosting economic growth and reducing poverty and inequality The second sub-period (1996-2010) focuses on the impact of the information technology boom, Poverty Reduction Strategy Papers (PRSPs), and debt relief initiatives for low-income developing countries.
Economic Growth
GDP growth has experienced significant volatility across various regions over the years Following the recession of 1982-83, many countries witnessed a growth surge in the mid-1980s, with South East Asian nations outpacing others This economic upturn in developing regions during the 1980s was largely driven by structural adjustment programs from Bretton Woods institutions, which encouraged international trade, relaxed foreign exchange restrictions, and promoted human capital investment The mid-1990s saw a notable increase in GDP growth across all regions, especially in South and East Asia, fueled by the information technology boom, benefiting countries like Thailand, Singapore, and Hong Kong However, this growth trend was disrupted in the late 1990s when many Asian economies faced a financial crisis.
The early 2000s marked a significant improvement in economic growth across developing regions due to the adoption of Poverty Reduction Strategy Papers (PRSPs) As illustrated in Figure 3.1, GDP growth consistently increased from the early to mid-2000s, with notable similarities in trends between the Sub-Saharan and Latin American regions, especially as prices for natural resources and commodities began to rise.
Between 2007 and 2009, the world experienced a significant GDP growth decline due to the financial crisis and the Great Trade Collapse, driven by speculative attacks on alternative investments like mortgage-backed securities In the U.S., falling asset prices led to banks becoming hesitant to issue loans, prompting households to cut back on consumption, especially durable goods, which resulted in a considerable output decrease Despite the Federal Reserve's efforts to lower interest rates and implement policies aimed at mitigating the economic slowdown, GDP growth fell across all global regions.
Countries that excelled under the Poverty Reduction Strategy Papers (PRSPs) received significant aid incentives and substantial debt relief through the Heavily Indebted Poor Countries (HIPC) initiative, allowing them to redirect resources from external debt repayments to productive economic sectors While these policies fostered economic growth and development in the region, poverty in Sub-Saharan Africa deteriorated from 1995 to 2010 The economic successes in both Latin America and Sub-Saharan Africa during this period were also driven by robust export growth and rising commodity prices, particularly in oil and minerals, prior to the recent financial crisis In contrast, developed nations, especially the United States, faced their lowest average economic growth since the Great Depression between 2007 and 2009.
Significant regional disparities exist in how poverty responds to economic growth in the developing world, particularly in sub-Saharan Africa, where factors such as rising income inequality and weak institutions hinder poverty reduction Fosu (2010) identifies two reasons for persistently high poverty levels in this region: economic growth may not accurately reflect improvements in household incomes, and income inequality may have increased over time In contrast, economic growth in South and East Asia has positively impacted the incomes of the poor, as evidenced by the poverty gap index, which measures the income needed to lift individuals out of poverty However, much of this progress can be attributed to China and India, indicating that lower-income countries in South and Eastern Asia still face significant challenges in poverty alleviation.
These developments are quite interesting because during the late-1980s to the early
In the 1990s, income poverty levels in Sub-Saharan Africa and South and East Asia were comparable; however, South and East Asia have since seen a significant decline in poverty rates, while Sub-Saharan Africa continues to struggle with high poverty levels This disparity can be attributed to the nature of economic growth and the effectiveness of various economic policies and reforms Technologically driven growth in South and East Asia has improved incomes and living conditions for the poor more effectively than the resource-dependent growth observed in Sub-Saharan Africa This raises concerns about the impact of economic reforms, such as the Poverty Reduction Strategy Papers (PRSPs) and the Millennium Development Goals (MDGs), on income inequality and poverty reduction in Sub-Saharan Africa Additionally, it prompts the question of whether Latin America's lower poverty levels compared to Sub-Saharan Africa can be linked to its relatively higher level of industrialization.
Summary and Conclusion
Policy Implications and Recommendations
Empirical analysis indicates that economic growth has significantly reduced poverty levels in the developing world, evidenced by declines in both human and income poverty However, addressing poverty requires more than just targeting the incomes of the poor; enhancing life expectancies and improving economic provisioning are also crucial Many Sub-Saharan African countries have recognized this and are taking steps to combat poverty While economic growth can improve basic human needs, factors such as macroeconomic stability, effective government program financing, and the strategic use of foreign aid are essential in this fight It is vital for governments to focus not only on growth but also on ensuring that development assistance is effectively channeled and spent Although foreign aid can play a significant role in poverty reduction, misappropriation remains a concern; thus, policies to reduce bureaucracy and combat corruption are necessary to enhance aid effectiveness With the recent shifts in foreign aid distribution, multilateral institutions and bilateral donors should prioritize support for countries that effectively utilize aid to benefit the poor, particularly in sectors like healthcare, which can lead to improved health outcomes and economic opportunities, ultimately reducing poverty and income inequality while fostering economic development.
Many developing countries, especially in Sub-Saharan Africa, face significant challenges in eradicating absolute poverty due to poor governance, political and ethnic violence, corruption, and a lack of political will To effectively transform lives through economic growth, governments must stabilize the macroeconomic environment, as this fosters sustainable development Creating a peaceful political atmosphere, free from violence and unrest, is crucial, allowing resources to be redirected towards vital sectors like health and economic provisioning that combat human poverty Additionally, multilateral institutions and development partners should reassess existing development targets, particularly the Millennium Development Goals (MDGs), to address current challenges and set new objectives aimed at eliminating extreme poverty and promoting human development.
Economic growth has played a significant role in reducing poverty levels and improving living standards in developing nations; however, income inequality remains a critical barrier to achieving these positive outcomes This issue is particularly pronounced in emerging markets and advanced economies To effectively tackle poverty, it is essential for governments to address the rising income inequality by implementing policies aimed at redistributing wealth in favor of low- and middle-income families.
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Economic growth plays a crucial role in addressing income inequality and reducing poverty The relationship between these factors is complex, as growth can sometimes exacerbate disparities while also providing opportunities for upliftment Effective policies are essential to ensure that the benefits of economic growth are distributed equitably, fostering inclusive development that targets the most vulnerable populations By focusing on sustainable growth strategies, societies can create a more balanced economic landscape that minimizes inequality and enhances overall well-being.