Growth raises income for the poor

This page summarises research on the relationship between economic growth and poverty reduction. Note that this page does not address the specific ways in which growth may translate into poverty reduction. For evidence between employment and poverty reduction, click here.

A number of cross-country studies confirm a positive correlation between per capita income growth and poverty reduction:

  • Dollar and Kraay (2002) use panel data from 137 countries to estimate the relationship between GDP per capita (or average income) and the income per capita of the poorest fifth in society. They find that when average income rises, the income per capita of the poorest fifth rises proportionality. This holds across regions, periods, income levels and growth rates. An updated version (2013) uses newly available household survey data on income distribution to revisit the evidence: Using mean income per capita rather than GDP per capita, the authors re-affirm their conclusions.
  • Dollar, Kleineberg and Kraay (2014) expand on this work by considering more general measures of social welfare and their relationship with changes in mean income per capita. Across a large sample of panel data from industrial and developing countries over the last 40 years, most cross-country and over-time variation in social welfare is due to changes in average incomes.
  • Dollar, Kleineberg and Kraay’s findings are supported by Adams (2003). Using data from fifty countries, Adams also finds that a 10%  increase in mean income per person is associated with a 26% decrease in the proportion of people living in poverty (defined as living on $1 or less per person per day).

Some country-specific research confirms a link between growth and poverty reductions, such as the following studies on Indonesia:

  • Bhattacharyya and Resosudarmo (2014) find that growth in non-mining activities significantly reduced poverty and inequality, based on panel data covering 26 Indonesian provinces over the period 1977-2010. For example, for the poorest province in their sample, they estimate that a one percentage point increase in the growth rate of non-mining GDP per capita in 1999 would have pulled 134,682 individuals (6.22% of the province’s population in 1999) out of poverty.
  • A study by Suryadarma and Suryahadi (2007) decomposes data from Indonesia between 1984 and 2002 to compare how private and public sector spending as part of the country’s GDP affects the poverty rate. They find that growth in private sector spending reduces poverty with the same elasticity as public sector spending. In other words, increasing both public and private sector spending will reduce poverty twice as fast as just relying on public spending.