Question

Explain how economic growth can reduce the incidence of poverty

Answer 1

Economic growth is the most powerful instrument for reducing poverty and improving
the quality of life in developing countries. Both cross-country research and country case
studies provide overwhelming evidence that rapid and sustained growth is critical to
making faster progress towards the Millennium Development Goals – and not just the
first goal of halving the global proportion of people living on less than $1 a day.
Growth can generate virtuous circles of prosperity and opportunity. Strong growth and
employment opportunities improve incentives for parents to invest in their children’s
education by sending them to school. This may lead to the emergence of a strong and
growing group of entrepreneurs, which should generate pressure for improved
governance. Strong economic growth therefore advances human development, which,
in turn, promotes economic growth.
But under different conditions, similar rates of growth can have very different effects on
poverty, the employment prospects of the poor and broader indicators of human
development. The extent to which growth reduces poverty depends on the degree to
which the poor participate in the growth process and share in its proceeds. Thus, both
the pace and pattern of growth matter for reducing poverty.
A successful strategy of poverty reduction must have at its core measures to promote
rapid and sustained economic growth. The challenge for policy is to combine growth-
promoting policies with policies that allow the poor to participate fully in the
opportunities unleashed and so contribute to that growth. This includes policies to make
labour markets work better, remove gender inequalities and increase financial inclusion.

Growth helps people move out of poverty
Research that compares the experiences of a wide range of developing countries finds
consistently strong evidence that rapid and sustained growth is the single most
important way to reduce poverty. A typical estimate from these cross-country studies is
that a 10 per cent increase in a country’s average income will reduce the poverty rate
by between 20 and 30 per cent.

Growth transforms society
The positive link between growth and poverty reduction is clear. The impact of the
distribution of income on this relationship – in particular, whether higher inequality
lessens the reduction in poverty generated by growth – is less clear.

Growth creates jobs
Economic growth generates job opportunities and hence stronger demand for labour,
the main and often the sole asset of the poor. In turn, increasing employment has been
crucial in delivering higher growth. Strong growth in the global economy over the past
10 years means that the majority of the world’s working-age population is now in
employment.

Growth drives human development
Economic growth is not just associated with reducing poverty. There is also clear
evidence for a positive link between economic growth and broader measures of human
development.
Economic growth is not fundamentally about materialism. Nobel laureate Amartya Sen
has described economic growth as a crucial means for expanding the substantive
freedoms that people value. These freedoms are strongly associated with
improvements in general living standards, such as greater opportunities for people to
become healthier, eat better and live longer.

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