Assignment: Impact of Economic Growth on Poverty Reduction

Assignment: Impact of Economic Growth on Poverty Reduction

Assignment: Impact of Economic Growth on Poverty Reduction

Poverty is a multifaceted vulnerable challenge facing humanity throughout global history. One of the primary sustainable development goals (SDGs) in Health People 2030 is alleviating all forms and dimensions of poverty. However, the number of people struggling for basic needs such as food, water, clothes, and shelter significantly increased during the covid-19 pandemic (Tsalis et al., 2020). Similarly, poverty alleviation measures implemented during this period yielded fewer results than desired. Experts associate the increase in the population living below the poverty line with the worldwide economic recession experienced during the pandemic (Tsalis et al., 2020). Consequently, his assumption fueled the debate on how economic growth influences poverty reduction.

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Poverty is usually defined in terms of income. However, according to the World Bank’s report, poverty is any intolerable deficiency affecting human well-being. This deficiency can be physiological or social deprivation. On the one hand, physiological deprivation involves failure to fulfil basic needs or biological needs such as nutrition, shelter, education, and health (Hassan, Bukhari, & Arshed, 2020). Therefore, people may be considered poor if they fail to secure goods and services to meet these needs. In the same vein, social deprivation widens the needs and wants list to include factors such as vulnerability, lack of autonomy, lack of self-respect, and powerlessness (Hassan et al., 2020). Essentially social deprivation is usually a consequence of physiological deficiency. Therefore, poverty extends beyond low monetary income and consumption levels.

Economic growth is the most potent sole instrument in reducing poverty and improving the quality of life in developing countries. Collin and Weil (2020) posit that growth creates a virtuous circle of opportunities and prosperity, which allows people to invest significantly in their education and health and that of their children. As a result, the affected population boosts its income, paving the way out of poverty. Additionally, educated people can generate enough pressure for improved governance (Hassan et al., 2020). Therefore, solid economic growth significantly reduces poverty, which, in turn, promotes economic growth.

Nonetheless, research shows that similar economic growth rates can have varying impacts on poverty reduction. This difference results from poverty extending beyond economic factors to cultural, political, and social aspects. The extent to which economic growth positively influences poverty alleviation depends on the level at which the poor engage in activities contributing to this growth and the share they accrue from the proceeds (Singh & Chudasama, 2020). Overall, the impact of economic growth on poverty reduction is directly associated with the pace and pattern of this growth.

This paper explores how rapid and sustained economic growth and development can be utilized to reduce poverty in developing countries successfully. The evidence presented in this paper will be supported and analyzed using theoretical frameworks to increase relevance. Also, synthesized data will be included to support or refute arguments made in this research.

Why Should Economic Growth be considered in Poverty Reduction in Developing Countries?

Development research conducted in the last five decades indicates that economic growth is the most effective strategy for reducing poverty and improving the quality of life. According to studies comparing developing countries, rapid and sustained economic growth is the single most crucial tool for reducing poverty. Statistics indicate that a ten percent increase in a country’s average income translates to a poverty reduction between twenty and thirty percent (Omar & Inaba, 2020). For instance, due to massive economic developments, Vietnam experienced a fifty-eight percent poverty reduction between 1993 and 2002 (Omar & Inaba, 2020). Similarly, rapid economic growth in China between 1985 and 2001 saw over four hundred and fifty million people being lifted out of poverty (Omar & Inaba, 2020). Other countries that have experienced significant poverty reduction associated with tremendous economic development in the last three years include Mozambique and El Salvador. Overall, economic growth directly helps people move out of poverty.

Economic Growth Supports Societal Transformation

Although many researchers argue that economic growth significantly contributes to poverty reduction, some claim that high-income inequality levels in a given country may distort this relationship. Notably, initial income inequality rates play a crucial role in determining the effect of economic growth in alleviating poverty (Collin & Weil, 2020). For instance, one percent increase in income levels can lead to about a 4.3 percent decrease in poverty in developing countries with marginal income inequality (Wittmayer et al., 2019). In contrast, the one percent increase in income rate leads to only a 0.6 percent decline in poverty in nations characterized by highly high inequality of resource distribution (Wittmayer et al., 2019). Overall, income distribution substantially contributes to poverty alleviation measures.

However, even if income disparity increases as the economy spurs, the poor population still benefits from the growth. Contrastingly, research conducted in the 1980s and 1990s in developing countries shows that economic growth heightens income disparities only in some nations (Wittmayer et al., 2019). Therefore, the poor will still enjoy the benefits of economic spurring in countries with high-income differences but in fewer proportions than those in countries characterized by narrowed income distribution.

Economic Growth Enhances Education Levels

Economic growth leads to social infrastructure development, broadly defined as building and maintaining facilities supporting social services. These facilities include but are not limited to hospitals, schools and universities, public facilities and means of transportation (Bloom et al., 2019). The following are some ways enhanced education significantly reduces poverty in developing countries.

First, education fosters productivity, improving a country’s standards of living. Research shows that quality education allows small-scale farmers to adopt modern technologies over traditional methods in agriculture. For example, in Thailand, farmers with more education levels are more likely to utilize fertilizers and other current inputs than those with lower education levels (Bloom et al., 2019). Consequently, the former group harvests more yields than the latter. Notably, higher productivity in one sector improves other economic industries. For example, increased productivity in the agricultural sector means enhanced businesses in the hospitality sector (Bloom et al., 2019). The increased productivity means that the poor population can benefit from the surplus, leading to poverty reduction.

Furthermore, improved education is often associated with higher income per capita and equality. Ensuring all people have access to quality education helps low-income people seek better economic opportunities. Madani (2019) states that education also allows intellectual flexibility, increasing human labour’s value. Also, education helps families make important decisions such as childbirth. Statistics indicate that highly-learned populations tend to give birth to fewer children than those without primary education. Fewer children increase the parents’ capability to provide the children’s basic needs; thus, they do not contribute to the poor population. Besides, such families can afford to offer their children high-quality education levels, breaking the lineage’s cycle of poverty (Madani, 2019). Therefore, economic growth enhances education in a given country, which, in turn, helps fight against poverty.

Economic Growth Increases Job Opportunities

Economic growth generates high demand for labour and increases employment rates in third-world countries. Populations living in poverty use employment as the sole asset out of these deteriorated living conditions. According to United Nations, full and productive employment is one of the primary ways of improving human well-being (Magdalena & Suhatman, 2020). The tremendous growth in the global economy in the past decade has seen the majority of the working population employed. Additionally, the real wages for low-skilled jobs have increased with the global gross domestic product increase. This increase indicates that workers experiencing poverty have benefited from increased international trade and economic growth (Magdalena & Suhatman, 2020). Overall, economic growth provides myriad employment opportunities for citizens—whether learned or unlearned- supporting poverty alleviation measures.

Looking at the downside of economic regression will help understand the impact of economic growth on poverty reduction. The covid-19 pandemic and the war between Russia and Ukraine led to a significant economic downturn. The pandemic-induced unemployment rose to a new record. Over two hundred and twenty-five million people lost their jobs—almost four times the number of full-time jobs lost during the 2007 and 2009 financial crises (Magdalena & Suhatman, 2020). Subsequently, the economic regression reversed the significant gains in reducing poverty in the last quarter century. Officials elected to oversee that the world achieves the Healthy People 2030’s objective have been forced to redouble their efforts to combat poverty. Indeed, economic growth reduces poverty by increasing the available job opportunities.

Theoretical Framework Explaining the Relationship between Economic Growth and Poverty Reduction

Based on the evidence presented above, economic growth increases per capita income, reducing poverty. Some studies have tried to quantify poverty responsiveness to economic growth by developing the concept of growth elasticity of poverty. Poverty elasticity measures the percentage of poverty caused by a one percent change in per capita income. This segment will build on this information to develop a theoretical framework explaining the relationship between economic growth and poverty reduction or increase. The analysis will also be founded on Foster-Greer-Thorbecke (FGT)’s a general class of poverty (Ogwang, 2022):

P_α =

The symbol α represents inequality aversion, x is the measure of an individual’s standard of living, and z is the poverty line (Ogwang, 2022). The poverty level depends on two primary factors: average income and income inequality (Ogwang, 2022). An increase in average income leads to poverty reduction, while an increase in income inequality increases the degree of poverty (Ogwang, 2022). The responsiveness of poverty to middle income, assuming that income inequality is constant, can be expressed as:

P = p (µ, L(p))

In this case, µ is the average income of a given population, while L(p) is the Lorenz curve used to measure the relative income distribution. The definition of L(p)  is the percentage of income enjoyed by the bottom 100 x p percent of the population. Therefore, the growth elasticity of poverty can be expressed as:

Which is the percent change of poverty after a one percent growth rate provided that income inequality measured using the Lorenz curve remains constant. Essentially, the growth elasticity η must be negative. Overall, the growth elasticity of poverty measures the extent to which economic growth reduces poverty when income inequality remains constant. The following section gives five propositions to explain this concept in cross-country studies.

1: growth elasticity of poverty for the whole class of poverty measures P_α decreases similarly to the initial economic growth level.

As seen in the above snippet, the higher the initial level of economic growth, the more significant the poverty reduction caused by a given growth rate. This principle applies if the growth process does not alter income inequality. Based on this framework, it is more challenging to reduce poverty in poorer (developing) countries than in wealthier (developed) nations, even though both of them experience similar economic growth (growth rate per capita income). Moreover, this principle indicates that economic growth significantly decreases poverty even when income inequality neither decreases nor increases. That explains the declining nature of the growth elasticity.

2: growth elasticity of poverty η_α decreases similarly to α

Proof of this proposition is provided in the snippet above. Based on the proposal, the greater the value of α, the more significant the percentage reduction in poverty for a given growth rate. An increase in the value of α means that the consideration accorded to populations whose income is below the poverty line significantly increases. Consequently, the rate of poverty reduction increases by more significant proportions. Therefore, this principle suggests that the benefits of economic growth on poverty reduction among the poor are better among impoverished individuals and families.

According to the first proposition, economic growth can positively influence poverty reduction, provided the development does not affect income inequality. However, in some cases, economic growth may lead to an increase or decrease in income distribution. Therefore, it is essential to consider the impact of income inequality on the relationship between economic growth and poverty reduction. When one relates aggregate inequality measures, such as the Gini index, to changes in poverty, one comes up with a complex formula that will be challenging to apply in subsequent propositions. However, assuming that the Lorenz curve shifts by a constant proportion represented by the difference between total income accruing to every income, and equal shares, it is possible to express P_α concerning the Gini index (ε_α). ε_α is the inequality elasticity of poverty.

3: The inequality elasticity of poverty is positive only when the poverty line is below the mean income

Typically, poverty should increase if income inequality increases, but the mean income remains constant. As seen in this proposition, this case can only occur if the poverty line is below the mean income. If the poverty line is more than the mean income, then a situation whereby an increase in income inequality leads to poverty reduction may occur. Any income transfer from individuals whose income is below the mean income to those above the mean income occurs, and income inequality increases. Since the poverty line is above the mean income, the income transfer may lead to some people moving out of poverty, which leads to poverty reduction. This theoretical framework shows that a country’s poverty line should never exceed the mean income. Therefore, the two dollars a day poverty line is an inappropriate measure of poverty in many developing countries.

4: Inequality elasticity of poverty increases similarly to the initial level of economic growth

The theoretical framework developed from this proposition shows that the higher the initial mean income level, the greater the poverty rates for a given increase in the Gini index. This means that economic growth that causes an increase in income inequality may not significantly reduce poverty, as was the case where the growth caused no changes in inequality. Overall, rapid and sustained growth may lead to a slower reduction in poverty or an increase in this phenomenon, depending on the rate at which inequality increases.

5: inequality elasticity of poverty increases similarly with inequality aversion

Based on the evidence presented above for this proposition, the greater the value of inequality aversion, the more significant the percentage increase in poverty for a particular rise in inequality. As a result, an increase in income disparity hurts the extremely poor (those living far beyond the poverty line) more than the poor. The vice versa also holds. Economic growth leading to reduced income inequality benefits the extremely poor more than the poor.

Conclusion

The covid-19 pandemic and the war between Ukraine and Russia have fueled debates on whether economic growth positively impacts poverty reduction. Poverty is a multidimensional problem that has existed throughout history. Tremendous economic growth in developing countries during the pre-covid-19 period led to a significant decrease in poverty. Economic growth supports societal transformation, enhanced education, and increased job opportunities. These factors help reduce poverty and, in turn, further spur the economy. The theoretical framework used in this paper shows that economic growth leads to a significant reduction in poverty, provided income inequality remains constant. It also suggests that those living in extreme poverty enjoy the benefits of economic growth more than those experiencing modest poverty. An increase in income disparity due to economic growth may lead to a slower reduction or increase in poverty depending on the rate of change of inequality. Therefore, it is essential to consider financial growth aspects when developing measures meant to alleviate poverty and support sustainable global development objectives.

References

Bloom, D. E., Canning, D., Kotschy, R., Prettner, K., & Schünemann, J. J. (2019). Health and economic growth: reconciling the micro and macro evidence (No. w26003). National Bureau of Economic Research. https://docs.iza.org/dp11940.pdf

Collin, M., & Weil, D. N. (2020). The effect of increasing human capital investment on economic growth and poverty: A simulation exercise. Journal of Human Capital, 14(1), 43-83. https://openknowledge.worldbank.org/handle/10986/30463

Hassan, M. S., Bukhari, S., & Arshed, N. (2020). Competitiveness, governance and globalization: What matters for poverty alleviation? Environment, Development and Sustainability, 22(4), 3491-3518. https://ideas.repec.org/a/spr/endesu/v22y2020i4d10.1007_s10668-019-00355-y.html

Madani, R. A. (2019). Analysis of Educational Quality, a Goal of Education for All Policy. Higher Education Studies, 9(1), 100-109. https://ideas.repec.org/a/ibn/hesjnl/v9y2019i1p100-109.html

Magdalena, S., & Suhatman, R. (2020). The Effect of Government Expenditures, Domestic Investment, and Foreign Investment on the Economic Growth of Primary Sector in Central Kalimantan. Budapest International Research and Critics Institute-Journal (BIRCI-Journal), 3(3), 1692-1703. https://doi.org/10.33258/birci.v3i3.1101

Ogwang, T. (2022). The Foster–Greer–Thorbecke Poverty Measures Reveal More. Social Indicators Research, 164(3), 1481-1503. https://doi.org/10.1007/s11205-022-03001-9

Omar, M. A., & Inaba, K. (2020). Does financial inclusion reduce poverty and income inequality in developing countries? A panel data analysis. Journal of economic structures, 9(1), 1-25. https://doi.org/10.1186/s40008-020-00214-4

Singh, P. K., & Chudasama, H. (2020). Evaluating poverty alleviation strategies in a developing country. PloS one, 15(1), e0227176. https://doi.org/10.1371/journal.pone.0227176

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Wittmayer, J. M., Backhaus, J., Avelino, F., Pel, B., Strasser, T., Kunze, I., & Zuijderwijk, L. (2019). Narratives of change: How social innovation initiatives construct societal transformation. Futures, 112, 102433. https://doi.org/10.1016/j.futures.2019.06.005