Incomes in the poorest two quintiles on average increase at the same rate as overall average incomes. This is because, in a global dataset spanning 118 countries over the past four decades, changes in the share of income of the poorest quintiles are generally small and uncorrelated with changes in average income. The variation in changes in quintile shares is also small relative to the variation in growth in average incomes, implying that the latter accounts for most of the variation in income growth in the poorest quintiles. These findings hold across most regions and time periods and when conditioning on a variety of country-level factors that may matter for growth and inequality changes. This evidence confirms the central importance of economic growth for poverty reduction and illustrates the difficulty of identifying specific macroeconomic policies that are significantly associated with the relative growth rates of those in the poorest quintiles.
This article updates and elaborates on the authors’ earlier work, ‘Growth is good for the poor’ from the year 2002, revisiting the relationship between growth in average incomes and growth in the poorest quintiles. The research is based on a dataset combined from POVCALNET database of the World Bank for developing countries, and the Luxembourg Income Study (LIS) data for advanced economies, which covers 118 countries for which household surveys are available for at least two years since the 1970s.
Key findings:
- Incomes of the bottom 20 percent and bottom 40 percent of the income distribution generally rise equiproportionally with mean incomes as economic growth proceeds. This result is established in a data-set spanning 118 countries and four decades, updating and expanding the results of Dollar and Kraay (2002). The result holds across decades, including in the 2000s — hence the conclusion that “growth still is good for the poor.” The shares of the bottom 20 percent and bottom 40 percent are measures of income inequality, and the foundation of the result is that changes in this particular measure of inequality generally are small and uncorrelated with economic growth. The finding is good news in the sense that economic growth can be expected to lift people out of poverty and lead to shared prosperity on average. The result also helps us understand how the rapid growth in the developing world in recent decades has led to such dramatic poverty reduction.
- A second important finding is that the income shares of the bottom 20 percent and bottom 40 percent show no systematic tendency to decline over time; that is, there is no worldwide trend towards greater inequality, using these measures on a country-by-country basis. During 299 minimum-five-year spells, the average annual growth rate in the income share of the bottom 40 percent is 0.000. Furthermore, there is no tendency for that result to change over time. The average change was 0.003 in the 1980s, -0.003 in the 1990s, and 0.004 in the 2000s.
- The third result is that around three-quarters of the variation across countries and over time in growth rates of income of the bottom 20 percent or 40 percent can be explained by variation in growth rates of mean income, while the remainder comes from changes in quintile shares. The fact that changes in quintile shares are zero on average does not mean that there are not some striking changes in inequality in particular countries at particular time periods. These changes in inequality can potentially be explained with variables used in the empirical growth literature, such as measures of macroeconomic stability, trade openness, and political stability. Variables that might plausibly increase the income share of the poor (measures of agricultural productivity and government spending in health and education) are also included. This part of the work essentially provides non-results: none of the macro country-level variables considered robustly correlates with changes in the income shares of the poorest quintiles.
- So, if we are interested in “shared prosperity”, the results bring both good news and bad news. The good news is that institutions and policies that promote economic growth in general will on average raise incomes of the poor equiproportionally, thereby promoting “shared prosperity”. The bad news is that, in choosing among macroeconomic policies, there is no robust evidence that certain policies are particularly “pro-poor” or conducive to promoting “shared prosperity” other than through their direct effects on overall economic growth.
- A final interesting puzzle is raised by the recent experiences of Latin America and Asia. In parsing the data by region and time period, there are almost no cases in which growth is significantly pro-poor or pro-rich. The exceptions are Latin America in the 2000s, in which income growth of the bottom 40 percent is 1.2 times mean growth; and Asia in the 1990s and 2000s, where income growth of the bottom 40 percent is only about 0.6 of mean growth. In both cases the coefficients are statistically different from 1.0. So, it would be interesting to understand better how Latin America achieved such inclusive growth while Asia is going in the opposite direction. At the same time it is important to keep in mind that growth of income of the bottom 40 percent has been much faster in Asia than in Latin America because the overall growth rate has been so much higher.