A Structural Analysis of Growth and Poverty in the Short-Term

Growth is good for the poor is a ubiquitous statement and one generally backed by theory, research and history. In the long-run, growth reduces poverty. Yet, growth in output - per se - is neither a necessary nor a sufficient condition for poverty reduction, especially in the short-term. And the short-term matters a great deal to the poor. The paper uses a number of parametric, non-parametric and decomposition methodologies to assess regional changes in output, income, poverty and inequality in one transition economy which experienced fast growth and fast poverty reduction over a short period of time. The purpose is to test what is behind this simple covariance that led observers to conclude that output growth determined poverty reduction. Combining macro e micro regional data, we find a very small trickle down effect of output growth on household incomes and no evidence that output growth is correlated with poverty reduction. We find instead that a modest growth in household income combined with a pro-poor distribution of such growth explains well poverty reduction. Effective short-term poverty reduction policies should focus on pro-poor actions where pro-poor means making sure that marginal changes among the incomes of the poor outperform marginal changes among the incomes of the rich