Productivity Growth and Poverty Reduction in Developing Countries

The United Nations has set as a goal for the world community the halving of the rate of poverty between 1990 and 2015. Previous literature and empirical work provides a strong consensus that growth reduces poverty, and several recent studies have also found that the higher is income inequality within a country the more limited is the impact of growth on reducing poverty. But in dynamic economies most economic growth comes from productivity growth, and few studies have tested the relationships between productivity growth, poverty and inequality. The present study uses several sources of international data on labour productivity, poverty and income inequality, and finds that across the developing countries for which data are available productivity growth plays a substantial role in reducing poverty. This effect is also found to be stronger in countries with relatively low income inequality. Furthermore, productivity growth is found to account for changes in poverty better than the more commonly used economic growth. This conclusion suggests that developing countries, in attempting to reach their poverty reduction objectives, should pursue policies that foster productivity growth. However, a strong social safety net is also required to ensure that the adjustment costs that come with productivity increases do not fall disproportionately on the poor and that all members of society realize the gains from growth.