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Too Poor to Grow

38 Pages Posted: 20 Apr 2016  

Humberto Lopez

World Bank - Research Department

Luis Servén

World Bank - Office of the Chief Economist; World Bank - Development Research Group (DECRG)

Date Written: October 1, 2009

Abstract

Recent theoretical literature has suggested a variety of mechanisms through which poverty may deter growth and become self-perpetuating. A few papers have searched for empirical regularities consistent with those mechanisms – such as aggregate non-convexities and convergence clubs. However, a seemingly basic implication of the theoretical models, namely that countries suffering from higher levels of poverty should grow less rapidly, has remained untested. This paper attempts to fill that gap and provide a direct empirical assessment of the impact of poverty on growth. The paper’s strategy involves including poverty indicators among the explanatory variables in an otherwise standard empirical growth equation. Using a large panel dataset, the authors find that poverty has a negative impact on growth that is significant both statistically and economically. This result is robust to a variety of specification changes, including (i) different poverty lines; (ii) different poverty measures; (iii) different sets of control variables; (iv) different estimation methods; (v) adding inequality as a control variable; and (vi) allowing for nonlinear effects of inequality on growth. The paper also finds evidence that the adverse effect of poverty on growth works through investment: high poverty deters investment, which in turn lowers growth. Further, the data suggest that this mechanism only operates at low levels of financial development, consistent with the predictions of theoretical models that underscore financial market imperfections as a key ingredient of poverty traps.

Keywords: Free Trade, Trade Law, Economic Theory & Research, Trade Policy, Currencies and Exchange Rates

Suggested Citation

Lopez, Humberto and Servén, Luis, Too Poor to Grow (October 1, 2009). World Bank Policy Research Working Paper Series, Vol. , pp. -, 2009. Available at SSRN: https://ssrn.com/abstract=1447205

Humberto Lopez (Contact Author)

World Bank - Research Department ( email )

1818 H Street, N.W.
Washington, DC 20433
United States

Luis Servén

World Bank - Office of the Chief Economist ( email )

Washington, DC 20433
United States
202-473-7451 (Phone)
202-522-3518 (Fax)

HOME PAGE: http://www.worldbank.org/research/bios/lserven.htm

World Bank - Development Research Group (DECRG)

1818 H. Street, N.W.
MSN3-311
Washington, DC 20433
United States

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