Economic Growth, Poverty, and Income Inequality: Implications for Lower- and Middle-Income Countries in the Era of Globalization

Abstract

The main goal of this article is to establish a dynamic profile of poverty and to evaluate the impact of economic growth on poverty and income inequality. The economic literature inspired by the previous theoretical works of Alesina and Perotti (1993), Ravallion (2004), Stiglitz (2013), and Ferreira (2016) shows that there is an inverse correlation between the income inequality approached by the Gini index and the economic growth measured by the gross domestic product (GDP), but the facts prove that this is not always the case. The objective of this article is to establish whether there is econometric evidence of such relationships. For this purpose, the authors used econometric methods to take into account the heterogeneity of the panel data used (lower-middle-income countries in the period covering 1970–2018). Using a fixed-effect approach and consistent with expectations, the authors argue that an increase in income inequality decreases GDP per capita in the selected sample. The authors found, after controlling for heterogeneity, an overall one-percentage-point rise in the poverty gap and that the Gini index decreased GDP per capita by around 3.8% and 6.8%, respectively. Accordingly, the path to sustainable economic growth in the future passes through a reduction of inequalities, especially income inequalities, by instituting public actions and policies for the poorest people.

TOPIC: Financial crises and financial market history

Key Findings

• • Using a fixed-effect approach the authors argue that an increase in income inequality decreases GDP per capita in the selected sample. The authors found, after controlling for heterogeneity, an overall one percentage-point rise in the poverty gap and that the Gini index decreased GDP per capita by around 3.8% and 6.8%, respectively.

• • Accordingly, the path to sustainable economic growth in the future passes through a reduction of inequalities, especially income inequalities, by instituting public actions and policies for the poorest people.

• • They affirm that economic growth is not enough to eradicate poverty. Although it is a necessary and insufficient condition, it must be combined with the implementation of targeted actions and policies to reduce present and future inequalities.