Poverty, growth, inequality and pro-poor factors: new evidence from macro data

Poverty eradication will remain United Nations highest priority after the Millennium Development Goals-2015 deadline. Moreover, although impressive achievements in poverty cutting have been reached in the last decade, progress has been uneven, as inequality has been increasing. Hence, future poverty reduction strategies should be designed taking into account the nexus between economic development, inequality and the so-called "pro-poor factors", which represent the set of policies able to make economic growth beneficial for the poor. The aim of this paper is to provide a quantitative answer to the following questions: Does economic growth reduce poverty? If so, by how much? How economic inequality affects poverty? Does the responsiveness of poverty to growth and inequality depend on initial poverty and inequality? How do pro-poor policies influence the poverty-growth-inequality nexus? Although these questions have received a great deal of attention along the years, this paper makes use of the most complete and up-to-date comparable data on growth, poverty and inequality, as compiled by the World Bank PovcalNet. Moreover, it originally employs the System Generalised Method of Moments estimator. In particular, the present empirical exercise is built on an original unbalanced panel dataset, which comprises 109 developing countries observed between 1981 and 2008, in 8 different three-year growth spells. As for the econometric technique, System GMM has been proved to be the most efficient and best suited in the context of dynamic unbalanced panels. Our main results are in line with the existing literature. First, we find that the poverty elasticity to growth and inequality is, respectively, around -2% and 2%. Second, the poverty elasticity to growth is higher the more favorable the initial conditions (i.e. -0.89% and -2.5% for, respectively, high and low initial poverty and inequality). Third, the poverty elasticity to inequality is higher in relatively richer and more equal countries (i.e. 2.6%) than in poorer and more unequal countries (i.e. 0.39%). And, finally, we show that human capital, as measured as health and education, facilitates the effect of economic growth on poverty reduction (i.e. poverty elasticity of -0.89% and -2.5% for, respectively, high and low infant mortality). Our analysis suggests that, in designing policy reduction strategies, policy makers should carefully take into considerations initial poverty and the initial income distribution. Moreover, as for the fundamental importance of pro-poor policies, and human capital in particular, economic policies should go beyond the mere growth stimulus.