Binding constraints of economic growth on poverty: A dynamic panel data analysis

This study assesses the role of initial poverty and inequality in predicting the speed at which poverty responds to changes in mean income. The study sought to answer whether the initial levels of poverty and inequality muffle the speed at which growth is effective in reducing poverty and whether the initial levels of poverty are more of a binding constraints to the effects of economic growth on poverty reduction than initial levels of inequality. We used an annualised panel data (at USD1.9/day) of 112 developing countries segregated into six world regions, for the period 1981-2013. An autoregressive growth-poverty model is developed and system GMM techniques are employed. Over and above the specifications of the well-known growth-poverty identity model, the autoregressive model subjects the change in poverty to its earlier shocks. We first replicated the estimates within the growth-poverty identity model and the results support the previous findings on the negative effect of high initial inequality and high ratio poverty line over mean income on the poverty effects of growth in mean income. However, when changes in poverty were subjected to earlier shocks within the autoregressive framework, the initial poverty is found to be the most binding constraint of the poverty reduction effects of growth. As such, the results support the dominant role of high initial poverty over high initial inequality in predicting the speed at which poverty responds to changes in mean income. The autoregressive framework suggests that poverty reduction policies should be differentiated according to regional specifics. Growth versus inequality policies as measures of improving poverty reduction efforts cannot be used as a “one-size-fits-all” approach. The cross-regional variations in income and inequality elasticities suggests that redistribution policies could be more fruitful in achieving poverty reduction in Eastern Europe and Central Asia, the Middle East and North Africa, and in East Asia and Pacific. However, for regions such as Sub-Saharan Africa and South Asia, growth-boosting measures must triumph over redistribution for sustainable poverty reduction