Academic journal article The Journal of Developing Areas

Does Income Inequality Dampen Growth Effect on Poverty? Evidence from the U.S. County Data

Academic journal article The Journal of Developing Areas

Does Income Inequality Dampen Growth Effect on Poverty? Evidence from the U.S. County Data

Article excerpt

(ProQuest: ... denotes formulae omitted.)

INTRODUCTION

According to the U.S. census report of 2011, around 15.1 percent of the country's population or more than 1 in 7 persons in the United State lived in poverty in 2011, the highest since 1993. Review of data from 767 U.S. counties over 2006-10 period also reveals that poverty rates increased in 656 counties, real household income fell in 623 counties, and inequality increased in 445 counties. Overwhelming evidence that all three indicators of quality of life are on the wrong path is alarming as they concern the purchasing power of U.S. consumers and competitiveness of the U.S. economy.1 The literature on poverty recognizes economic growth as the most important determinant of poverty reduction (Ravallion 1997; Ravallion and Chen 1997; Bourguignon 2003; Adams 2004; Dollar & Kraay 2002; Ram 2011 & 2012). The U.S. data illustrated in figure 1 also indicates a strong negative correlation between poverty rates and income growth during 1985-10 period.

In figure 1, the poverty rates are displayed in the primary vertical axis, median household income growth on the secondary vertical axis and year on the horizontal axis. The trend in poverty rates is shown by the line and the growth rate by the bars. As illustrated in the figure, poverty rates fell with growing income during 1985-89. During 1990-93, poverty rates increased with falling income. Then, during 1993-2000 poverty rates fell with rising income. The recession of 2000-01 seemed to push poverty rates up again in 2001 until 2004. After a brief period of declining poverty rates during 2005-07 with growing income, the poverty rates began to increase in 2008 with the advent of great recession to reach around 15% in 2011.

Besides economic growth, the literature also analyzes the effects of inequality, government policies, and institution on poverty. For example, Ravallion, (1997), Bourguignon (2003), and Adams (2004) find that the rising inequality weakens the magnitudes of growth effects on poverty. Ravallion (1997) particularly argues that the extent and magnitude of poverty reduction attributed to higher economic growth also depend on the initial level of inequality. Using household survey data from 23 developing countries for a $1.50/day measure of poverty, Ravallion shows that that, with growing inequality, the share of the benefits of income growth going to higher income groups is larger than the share goes to the lower income groups, thereby rising inequality dampening the growth effect on poverty reduction. Ravallion also shows that at maximum inequality growth elasticity of poverty is perfectly inelastic. Bourguignon (2003) shows the dampening effect of rising income inequality on growth effect. Analyzing the sample of 50 countries, which include mostly developing countries and few transition economics, Bourguignon estimates the magnitudes of the growth elasticity of poverty in poverty models that control for initial inequality and growth-initial inequality interaction effect. When allowing for initial inequality to increase by one standard deviation, growth effect on poverty decreases by a little less than 1 percentage point. Adams (2004) estimates the dampening effects while splitting the data into lowand high inequality regions.

Analyzing poverty, growth, and inequality data from 50 low- and lower-middle income countries, Adams finds that economic growth and poverty maintain a strong negative relationship and that the growth rate based on survey mean income (consumption) provides more robust estimates of growth elasticity over poverty than those obtained from growth rate based on GDP. Splitting the data into low and high inequality regions, Adams also finds that for a given rate of economic growth countries with low inequality would be twice as much effective in fighting poverty than countries with high inequality. Ravallion and Chen (1997) construct 64 spells from 42 countries for 1981-94 period using109 surveys. …

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