How does economic growth reduce poverty
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Economic Growth and Poverty Reduction
How quickly growth reduces poverty depends both on the initial income distribution and how it evolves over time. In societies with more unequal distributions the same growth rate makes far less of a dent in poverty. Latin America and the Caribbean, for example, have some of the widest income disparities in the world. Given these initial levels of inequality, the region would have to post a 3.4 percent annual growth rate in per capita income (twice that recorded in the past decade), on average, in order to halve the percentage of people living on less than two dollars a day (in purchasing power parity) by 2015.
How efficiently average growth will reduce poverty also depends on how the income distribution shifts as the economy grows. In Mexico, for example, per capita real income rose by 4.8 percent annually between 1996 and 1998, but there was virtually no change in extreme poverty. Yet in Costa Rica, where per capita real income edged up by barely 1 percent annually between 1990 and 1998, poverty was reduced significantly.
Which growth pattern is the most pro-poor? A recent study on India found that growth has a greater impact on poverty when it is concentrated in rural areas and the initial education and infrastructure conditions are more favorable. Generally, a sole focus on maximizing per capita income growth may be less than successful in reducing poverty if the growth bypasses geographic areas or sectors in which the poor are concentrated, or fails to make intensive use of the most abundant factor of production available to the poor, namely, unskilled labor. This is more than twice the 1.5 percent average per capita growth recorded in the past decade, and would call for annual per capita growth rates of between 2 percent and 6 percent depending on the country.
In sum, economic growth is a crucial factor in poverty reduction, but the level of inequality and its evolution affect its impact on poverty. We now offer theoretical and empirical evidence suggesting that the causation runs in the opposite direction as well; that is, reducing poverty can help boost economic growth rates.
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How quickly growth reduces poverty depends both on the initial income distribution and how it evolves over time. In societies with more unequal distributions the same growth rate makes far less of a dent in poverty. Latin America and the Caribbean, for example, have some of the widest income disparities in the world. Given these initial levels of inequality, the region would have to post a 3.4 percent annual growth rate in per capita income (twice that recorded in the past decade), on average, in order to halve the percentage of people living on less than two dollars a day (in purchasing power parity) by 2015.
How efficiently average growth will reduce poverty also depends on how the income distribution shifts as the economy grows. In Mexico, for example, per capita real income rose by 4.8 percent annually between 1996 and 1998, but there was virtually no change in extreme poverty. Yet in Costa Rica, where per capita real income edged up by barely 1 percent annually between 1990 and 1998, poverty was reduced significantly.
Which growth pattern is the most pro-poor? A recent study on India found that growth has a greater impact on poverty when it is concentrated in rural areas and the initial education and infrastructure conditions are more favorable. Generally, a sole focus on maximizing per capita income growth may be less than successful in reducing poverty if the growth bypasses geographic areas or sectors in which the poor are concentrated, or fails to make intensive use of the most abundant factor of production available to the poor, namely, unskilled labor. This is more than twice the 1.5 percent average per capita growth recorded in the past decade, and would call for annual per capita growth rates of between 2 percent and 6 percent depending on the country.
In sum, economic growth is a crucial factor in poverty reduction, but the level of inequality and its evolution affect its impact on poverty. We now offer theoretical and empirical evidence suggesting that the causation runs in the opposite direction as well; that is, reducing poverty can help boost economic growth rates.
mark as brainliest
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