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Growth, Inequality, and Poverty Reduction

Income Growth Has Reduced Poverty in Developing Countries around the World, but Inequality Remains a Challenge

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Aerial view of Jakarta financial district, Indonesia capital city in Asia. (Image © istock.com/AsianDream)

Each month the Elsevier Atlas Award recognizes research that could significantly impact people's lives around the world.

Growth, inequality, and poverty reduction in developing countries: Recent global evidence

Augustin Kwasi Fosu
Research in Economics
, Volume 71, Issue 2, June 2017, Pages 306-336

In the last two decades, developing countries have outstripped developed countries when it comes to economic growth. In many places around the world, that economic growth has fueled reductions in poverty levels. And yet, many countries around the world continue to suffer from high poverty rates even as the monetary value of all the finished goods and services produced within their borders, or gross domestic product (GDP), continues to grow.

Atlas-award winner Augustin Kwasi Fosu at the University of Ghana examined these trends in regions and countries around the world in an article published in Research in Economics. The hope is that his analysis can now serve as a roadmap for further study and continued efforts to reduce poverty around the world.

“In some countries, there’s been tremendous growth, but because of an increase in inequality or an initial inequality that’s so high, the poverty reduction outcome has been quite discouraging,” Fosu said. “We can try to understand what are the variables that might have contributed to this outcome and how changes can be made to ensure next time an increase in growth can be transformed into higher poverty reduction.”

Fosu analyzed regional trends in GDP growth and poverty reduction for the periods 1981-1995 and 1996-2005. He selected those two time periods because of a clear shift in the mid-1990s, when economic growth in developing nations took off. The question Fosu sought to explore was how that increasing growth at the level of entire countries has played out in terms of income growth and poverty reduction.

His findings show that GDP growth has led, on average, to income growth in many parts of the world. That’s been a major driving force behind poverty reduction.

“Most developing countries have done well,” Fosu said. “There has been significant progress on poverty reduction.”

Most countries have reached Millennium Development Goal 1, which aimed to cut poverty in half by the year 2015. But it’s also clear that growth hasn’t translated into poverty reduction as well in some places as it has in others. Fosu notes the contrasting examples of China and India. Both have seen considerable growth. In China, economic growth has led directly to income growth and poverty reduction as a labor-intensive economy put more people to work. In India, the situation hasn’t worked out as well for the poor. While the economy has grown, incomes have remained low for many.

“Amongst 80 countries, China ranks in the top decile in terms of GDP growth and also income growth,” Fosu said. “On the other hand, in India, it’s quite different. Even though India ranks in one of the top two deciles in GDP growth, when it comes to income growth, it drops all the way to the 7th decile.”

On the whole, although African countries have also experienced significant poverty reduction since the mid-1990s, they haven’t fared as well as countries in Central or South Asia, he says. First, African countries’ growth has not been as strong. And, second, in many cases, even when growth was considerable, poverty reduction was not as high, due in large part to high initial inequality and/or low incomes.

By documenting these trends and trying to understand them, Fosu hopes it might be possible to find ways to prime countries for further poverty reduction as economies in the developing world continue to grow.

“Perhaps there’s a rational way to help African countries by raising income levels on average,” he said. “That would help to improve the rate at which future growth can be translated into higher poverty reduction.”

A Conversation with Augustin Fosu

Atlas spoke with Augustin Fosu from the University of Ghana in Legon about growth, inequality, and poverty reduction in developing countries. Listen now

Atlas: What changed in the mid-1990s in terms of economic growth around the world?

Augustin Fosu: Since about 1990 or the late 1980s, growth in developing countries has outstripped that of developed countries and in fact the gap has been increasing. So there’s no doubt that developing countries have been doing well since about that time. In the final analysis the question is: has the growth been transformed into reduction in poverty?

Atlas: You write about the $1.25 and $2.50-level headcount standards. What is the significance of those standards?

Augustin Fosu: The World Bank produced those poverty lines. It’s believed that $1.25 represented a high enough or subsistence level standard of living and $2.50 is twice that. If you go back to 2000 when we had the Millennium Development Goals (MDG), there was this target to reduce poverty by a half by the year 2015 based on these standards. In many countries, that’s been achieved.

Atlas: There has been progress as you say. Are there other things you found particularly striking when you looked at how this varied from region to region or country to country?

Augustin Fosu: The question was: what was the rate at which growth could be transformed into poverty reduction? It turns out that the initial inequality mattered, and income levels mattered—so, in that sense, a country can grow pretty fast, but if it turns out it has huge initial inequality or very low income then poverty reduction can be very little. Normally, we talk about growth and what we hear has to do with GDP growth, but that often doesn’t reflect income growth which is much more important for poverty reduction.

Atlas: So countries can be doing well and in some cases many of the people still may not be?

Augustin Fosu: Absolutely, there is a lot of variation in progress in poverty.

Atlas: Is it clear or are there clues in what you’ve determined about why there are those differences or how things can be in place such that growth does lead to reduction in poverty?

Augustin Fosu: Number one, it really depends on the nature of growth. If growth occurs on the upper end of the income distribution, then those at the bottom will not benefit as much. The question becomes: what is the proper growth that may lead to maximum poverty reduction? That’s the kind of thing one needs to interrogate.

Atlas: By getting this clearer picture of what has happened or is happening and how it’s happening differently, is your hope we can learn from this in ways that help to reach goals of poverty reduction?

Augustin Fosu: Absolutely. It seems to me that if we can think of having an economy that indeed is geared for a growth process that benefits the poor, then we can expect pretty good progress in poverty. In some sense, if you look at the Chinese situation, much of the investment has been in the area of a labor-intensive type of production. That means a lot of people are employed—there’s no doubt about that. Also, you have to think about transferring resources so that people can engage in meaningful economic activity. If you just let the process lead itself, the outcome might not be as desirable. We can look around and if we, for example, see significant growth from, say, natural resources, it should be reinvested into infrastructure to make business easier to undertake. You have to also be sure the poor have the human capital to participate in the economy.

Atlas: What’s next for you?

Augustin Fosu: I’d like to update this work to see what might have happened since this analysis was initially conducted. I think the work provides a roadmap that future researchers can utilize to go to certain countries to find out what ails them in terms of poverty reduction and try to understand. For example, growth has been the main engine of poverty reduction, but in some countries it has been reduction in inequality. If that’s the case, researchers could go to certain countries armed with information to try to understand what are the idiosyncratic features of that country that are giving rise to these results and how can those be corrected?

Atlas: Is there anything else you’d like for people to know?

Augustin Fosu: I think it’s a matter of ensuring this study doesn’t end here. It can serve as a resource that can be utilized to understand historically what variables have helped in the poverty progress we’ve made in the last couple of decades number one. And, number two, we need to understand how we can go forward in those countries that haven’t done as well. For example, a number of African countries haven’t done as well as East Asian Pacific or South Asian countries, so the question is what is it about African countries that growth hasn’t contributed as much to poverty reduction and what can be done to change that?

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About Research in Economics

Research in Economics is one of the oldest general-interest economics journals in Europe, and publishes important research contributions on a wide range of topics. The purpose of the journal is to select original theoretical and empirical articles that will have high impact in the economic debate.

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