Revisiting Growth‐Poverty Relationship: A Medium‐Term Causality Approach

• Published date: 01 December 2016
• Date: 01 December 2016
• DOI: http://doi.org/10.1111/saje.12120
• Author: Salvador Pérez‐Moreno

REVISITING GROWTH-POVERTY RELATIONSHIP:

A MEDIUM-TERM CAUSALITY APPROACH

SALVADOR PE

´REZ-MORENO*

Abstract

This article examines the potential medium-term causal relationship between changes in

Gross Domestic Product (GDP) per capita and poverty in developing countries during the

1970s–1990s. For this purpose, we use panel data model evaluation techniques to test the

out-of-sample forecasting performance of competing models. We conclude that the evidence

supports the hypothesis that increases in GDP per capita cause unidirectional poverty reduc-

tion, measured by the $1/day poverty rate, in the period 1970s–1980s. The results are simi-

lar when analysing low- and middle-income countries and mid-hig h- and very high-

inequality countries separately. However, in the period 1980s–1990s, it is only statistically

significant for low-income countries.

JEL Classification: I32, O40

Keywords: Poverty, growth, causality, developing countries

1. INTRODUCTION

There is a large literature on the relationship between economic growth and poverty

in developing countries. A wide range of empirical analyses have found that growth

is connected to poverty reduction, frequently alleging that economic growth is signifi-

cant in reducing poverty (see e.g. Ravallion and Chen, 1997; Dollar and Kraay,

2002; Bourguignon, 2003; Adams, 2004; Kraay, 2006; Fosu, 2008; Ram, 2011;

Johnson et al., 2011; Iniguez-Montiel, 2014). There is much less consensus surround-

ing the empirical evidence for poverty having a causal impact on aggregate growth,

in spite of arguments that link poverty to growth in matters such as sociopolitical

instability (see e.g. Alesina and Perotti, 1996; Benhabib and Rustichini, 1996), credit

constraints (see e.g. Galor and Zeira, 1993; Aghion, et al., 1999), taxation and redis-

tribution (see e.g. Alesina and Rodrik, 1994; Persson and Tabellini, 1994), and nutri-

tional and associated cognitive deficits (see e.g. Dasgupta, 1997; Ravallion, 1997). In

this context, some authors argue that the relationship between growth and poverty

can run in both directions (see e.g.Lustiget a l., 2002). They highlight multiple

complementarities between growth and poverty reduction, and point out that actions

* Corresponding author: Department of Applied Economics (Economic Policy), University of

Malaga, Campus El Ejido, 29071 Malaga, Spain. E-mail: sperezmoreno@uma.es

The author thanks the Department of International Development of the London School of

Economics and Political Science for their support, and particularly Diana Weinhold for her

helpful comments. The author is also indebted to two anonymous referees for their valuable

suggestions.

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C2016 Economic Society of South Africa. doi: 10.1111/saje.12120

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South African Journal of Economics Vol. 84:4 December 2016

South African Journal

of Economics