Breaking Up The Relationship: Dichotomous Effects of Positive and Negative Growth on the Income of the Poor

Much influential research on the relation between economic growth and the income of the poor has relied on the unstated assumption that positive and negative growth rates are equivalent in their effect on the poor. The most notable paper based on this assumption is “Growth is Good for the Poor” by Dollar and Kraay (2002), which has established a one-to-one relationship between economic growth and the income growth of the poor implying that every part of society benefits in the same way from economic growth. The notion of growth benefiting the poor like all other parts of society quickly gained traction and remains influential to this day. This paper argues that a homogeneous effect of positive and negative growth rates is neither reconcilable with economic intuition nor supported by the authors’ own data. A breakpoint between positive and negative growth rates is identified and shown to be both statistically and economically significant. The effect of positive growth is estimated to be around 0.75% income growth for the poor for every 1% economic growth, while the effect of negative growth is found to be as high as 1.6%. A one-to-one relation could only be obtained by averaging these two effects. The bottom line is that the poor do not seem to profit from growth like everyone else – a one-to-one relationship does not exist.