The Causes of Poverty (10): Lack of Economic Growth

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Economic growth is the increase in value of the goods and services produced by an economy or a country. It is the percent rate of increase from one year to the next in gross domestic product or GDP of an economy or a country. In order to correct for the population sizes of different economies and countries, GPD per capita rather than national or total GPD is used.

GDP per capita of an economy is often used as an indicator of the average standard of living of individuals in that country, and economic growth is therefore often seen as indicating an increase in the average standard of living. “Average” means that GDP growth is not the same as poverty reduction. GDP growth per capita does not provide information on the distribution of income in a country/economy. A rise in the average standard of living can be accompanied with greater inequality and poverty for some or even many.

Therefore separate measurements of distribution or inequality and poverty are necessary.

However, there is a strong correlation between these measurements. As an empirical matter, economic growth (annual growth in GDP per capita) and poverty reduction go hand in hand.

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Since growth and poverty reduction go hand in hand, it is of the utmost importance that those who care about poverty reduction do everything possible to promote economic growth. Even though our knowledge about the kinds of policies that stimulate growth is limited, we know that some things in some circumstances drive economic growth and others do not. Good institutions, good education, investments, respect for human rights and the rule of law, free markets etc. are generally considered to be good for growth.

This doesn’t mean that economic growth is all that matters, that poverty reduction follows automatically from growth or that only policies that are targeted on growth can generate poverty reduction. This kind of “invisible hand” theory, or “trickle down” theory has been discredited. Other policies such as redistribution are also necessary for poverty reduction, but it is precisely economic growth that delivers the means for redistribution. Conversely, policies specifically aimed at poverty reduction can benefit growth. It’s interesting to note that poverty reduction is one of the drivers of growth. So the causation goes both ways, as is often the case in correlations.

Policies that are effective in increasing the incomes of the poor–such as investments in primary education, rural infrastructure, health, and nutrition–are also policies that enhance the productive capacity of the economy in aggregate. (source)

John Rawls

So specific policy measures aimed at improving the lives of the poor are necessary. An exclusive focus on fostering growth is wrong. One could even say that the focus on the poor is the priority, and that measures aimed at growth are only a means to help the poor, and only one means among many. This has become known as the difference principle of John Rawls: social and economic inequalities are to be arranged so that they are to be of the greatest benefit to the least-advantaged members of society.

“From this perspective, it can be entirely rational and proper for a government to select, among two competing growth strategies, the one that has greater potential payoff for the poor even if the aggregate growth impact is less assured. (source)

There is a correlation between poverty reduction and economic growth, not because economic growth automatically and single-handedly reduces poverty, but because policy makers can use growth to reduce poverty and because these efforts in turn promote growth. Growth is good for the poor, but growth without poverty measures will be unequal growth, growth which doesn’t benefit everyone equally. Growth can indeed lead to lesser gains, no gains at all or even absolute losses for some people at the bottom of the income distribution scale, for example those people who were previously working in factories that were closed because of the industrial reforms necessary for overall growth (such as liberalization).

None of the above is meant as a denial of the possible negative aspects of economic growth: the costs to the environment aren’t factored in, disasters create economic growth because of the reconstruction etc.

More on poverty.