The effect of growth on poverty reduction
The aim of this paper is to understand the impact of growth on poverty reduction in a right-skewed income distribution setting. Ex- isting literature focuses on the effect of aggregate growth on the mean income of the poor by means of a regression of the latter on the for- mer. This, however, neglects the effect of other distributional changes (e.g. inequality change) on the income of the poor thus making the above regression misspecified. This paper proposes a suitable theoret- ical framework consistent with the right-skewness for examining the growth impact on poverty taking inequality (dispersion) into account. We show that an economic policy that positively affects the median income of the distribution has a proportional change on the median income of the poor, whatever be the change in inequality. On the other hand, when a policy has a positive impact on the mean income, its effect on the mean income of the poor can be uncertain depending on the accompanying change in inequality. This is illustrated by sim- ulations as well as an empirical application.
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