Economic growth and poverty reduction: initial conditions matter

Abstract

The focus of this paper is on analytical examination of how the relation between growth and poverty can change with the initial levels of economic development and inequality. Using the idea of poverty elasticity, measuring the extent to which economic growth reduces poverty, the study offers several propositions to demonstrate that the initial levels of economic development and income inequality can have significant impacts on poverty reduction. It also demonstrates that the tradeoff between growth and inequality can be explained in terms of initial conditions of development and inequality. The theoretical elasticities derived in the paper are then utilized to compute the growth rates in many Asian countries that would be required to achieve the Millennium Development Goal of halving the incidence of poverty between 1990 and 2015.