The constant problem of poverty within both the developed and the developing nations has made many researchers question the effectiveness of the economic development and growth, as a significant approach towards poverty alleviation (Persson and Tabellini, 1994). However, it is worth noting that poverty generates a lot of cost for government. For instance, according to the Census Bureau, it is estimated that approximately 37 million people lived below the poverty line in the United States in 2005. Some of the costs created by this phenomenon are basically considered in terms of the productivity losses as well as programmatic outlays that impact on the whole economy. Apparently, lack of convergence, particularly with regard to the living standards across various states, remains to be one of the most significant challenges in growth and development economics. Furthermore, the connection between poverty and economic development has been one of the very essential discussed issues within the development economics, and the existing literature appears to be quite controversial.
Indeed, some studies highlight that economic growth minimizes the rates of absolute poverty, however, depending on income distribution within the economy (Goudie and Ladd, 1999). Simultaneously, some studies also highlight that income inequality being detrimental for a nation’s economic growth (Persson and Tabellini, 1994; Alesina and Rodrick, 1994; Aghion et al., 1999), while others disagree with these claims (Partridge, 1997). However, the study carried out by Barro (1999) highlighted that a negative relationship exists between poverty and economic development among the poor countries, and, on the other hand, a positive relationship exists among the developed countries. However, it is worth noting that poverty reduction and increasing economic development remain to be some of the most significant goals that most governments globally are pursuing through various distinct approaches. Nonetheless, economic research indicates that establishing growth approaches that are particularly efficient in alleviating poverty is critical for any country (Alesina and Rodrick, 1994). If, for instance, these approaches are exclusively directed towards poverty alleviation, rather than enhancing economic growth, Alesina and Rodrick (1994) highlight that this could result in reduced economic growth, which would translate into increased poverty. Basing on such views, this paper will analyze the link between economic growth and development and poverty. Apparently, economic research indicates that there is positive correlation between the overall economic growth and the issue of poverty reductions (Persson and Tabellini, 1994). In addition, it is highlighted that effective approaches aimed at promoting economic growth will also result in reduction in the poverty levels. This paper will basically apply the United States as the case study, and look at poverty and economic development in this nation.
This paper is arranged as follows. A definition of poverty as it is understood in the U.S., and economic development will be provided in the first section. The second section of the paper examines the arguments that have been brought forward linking economic growth and development, and poverty reduction. The third section analyzes some of the economic tools that are applied in determining and evaluating poverty. The fourth section provides the evidence regarding the link between economic growth and poverty alleviation. The fifth and the final section will look at the connection among the economic structure, economic growth and poverty reduction. A summary of these will be provided at the conclusion section.
Definition of Poverty and its Rates in the United States
Poverty is always considered as a condition of need and lack of basic wants. It basically denotes a state where an individual lacks the usual or the socially adequate amount of material possessions or income. In the United States, the definition of poverty is basically determined by the total income being received. The poverty threshold is the most common applied measure of poverty in the United States (Rector and Sheffield, 2011). It is worth noting that the United States Census Bureau is the body that is charged with the main responsibility of establishing the poverty threshold amount annually. This measure highlights poverty as a state of lack of the goods, as well as services that are often taken for granted, particularly by the members of the ordinary society. However, families or persons earning a basic income lower than the ascertained amounts are often regarded as living in poverty (Rector and Sheffield, 2011). Basically, it is the threshold that determines the amount of funds of individuals or families required for paying their basic needs. The threshold is often adjusted on annual basis basing on the consumers’ price index. Therefore, it follows that the poverty rate is considered to be the percentage of the families or individuals living on a basic income below the estimated thresholds as outlined by the United States’ Census Bureau (Rector and Sheffield, 2011). Experts have been debating over the years, with regard to the approach that should be adopted in calculating the poverty threshold, considering the fact that some experts have articulated that the current approach should be changed. Basically, the current approach incorporates the pretax income only, and excludes the tax transfers and the noncash benefits, which according to recent reports, comprise significant proportions of the aid package to the low income earners. In addition, experts highlight that the official poverty threshold either underestimates or overestimates the country poverty levels. For instance, the 2011 poverty level was set at $ 22 350, which is the total yearly income for a household of four. Thus, this implies that most of the Americans, approximately 58.5 per cent, will basically spend about one year under the poverty line at some time between the ages of 25 and 75 (Rector and Sheffield, 2011).
Basing on the data released by the United States’ Census Bureau in September 2011, the United States’ poverty level had risen to 15.1 per cent, representing about 46.2 million in 2010 (Levernier et al., 2000). The nation’s poverty levels in 2009 were estimated being 14.3 per cent, which is approximately 43.6 million. In 2008, the poverty rates were estimated being 13.2 per cent, representing about 39.8 million people. However, it is worth noting that the recent figures were rated to be the highest levels that the nation had ever recorded since 1993 (Levernier et al., 2000). . However, it is important to bear in mind that there are two main categories of the federal poverty measures. These are the poverty thresholds and the poverty guidelines. The poverty thresholds are determined by the Census Bureau and are basically applied for the statistical purposes while the poverty guidelines are issued by the Department of Health and Human Services, as well as employed to gauge whether an individual qualifies for any aid provided by the federal government (Levernier et al., 2000). Since the early 1960s the federal government resorted into defining the nation poverty levels in the absolute terms. This is a state in which families or individuals are considered to be missing the resources required for them to meet their basic wants; having inadequate income to cater for their clothing, shelter and food necessary for preserving health. Two significant changes were implemented to the definition of poverty in 1969. The thresholds for the non-farm families were linked to the Consumer Price Index annual changes, rather than the economy food plan cost changes (Levernier et al., 2000). In addition, the farm thresholds had to be increased from 70 to 85 per cent of the non-farm rates. Additional changes were made in 1981 considering the fact that the distinct thresholds for the female-householders and farm families were abolished. A family consisted of nine persons or more was considered to be the largest family size. However, despite the various changes that were incorporated into the definition of poverty, the United States government main approach of determining the poverty rates in the country remains static (Levernier et al., 2000). The rates of poverty vary depending on age, race, ethnicity, and gender, among many other factors (Rector and Sheffield, 2011). For instance, in 2007 5.8 per cent of the married families were considered to be living under poverty, just as it was 19.1 per cent of the individuals living alone, and 26.6 per cent of the single parent families. The rates of poverty also vary depending on the geographical location; for instance, it is estimated that the poverty rates are higher within the urban areas compared to the suburbs. However, it is worth noting that various concerns have been brought forward with regard to the accuracy of the United States’ official poverty measure (Levernier et al., 2000). Apparently, it is alleged that the country official poverty measure is flawed and does not provide a precise figure of the total figures of the people living under poverty, which even presents challenges to the policy makers (Rector and Sheffield, 2011). Indeed, most of the government officials as well as the sociologists have asserted that the United States poverty levels have actually been understated implying that there are other households living under poverty than those that is being indicated using the poverty threshold measures (Levernier et al., 2000). For instance, one recent report highlighted that an estimated 30 per cent of the Americans encountered some challenging when it comes to meet their basic needs. This is supported by some advocates who claim that the poverty levels within the United States are actually higher compared to that is provided according to the poverty threshold. However, despite the fact that poverty threshold is often updated on annual basis, basing on the inflation rates, economic experts highlight that the food basket being often applied in determining what amounts to the condition of being unable to meet the socially acceptable minimum living standards has not been restructured since 1955 (Levernier et al., 2000). Therefore, the contemporary poverty line incorporates only the food purchases that were basically applied over 50 years ago. On the other hand, some critics argue against that the official United States’ definition of poverty is not consistent with the manner in which this is defined by the country’s citizens, as well as by the rest of the world considering the fact that the United States’ government regards many citizens to be statistically poor regardless of their capacity to satisfy their basic needs sufficiently (Levernier et al., 2000).
Various approaches have been brought forwards for measuring the poverty levels, and it is crucial to note that the choice of an indicator varies across countries (Alesina and Rodrick, 1994). For instance, in the U. S. the federal government has adopted two main approaches of determining its poverty levels, that is, poverty threshold and the poverty guidelines (Rector and Sheffield, 2011). The poverty threshold is often applied for statistical approaches, whereas the poverty guidelines are basically applied for administrative purposes. However, most of the economic experts apply the welfare approach which presupposes that people have clear understanding of what is healthy for them, and that the financial measures of income and consumption can be applied as a gauge of wellbeing (Goudie and Ladd, 1999). Basing on this approach, economic experts define poverty in terms of the income levels, whereby the individuals earning an income below the estimated level are considered to be poor (Goudie and Ladd, 1999). Considering the non-welfarist approach, the nutritional standards or other essential human wants are often examined, and estimate is made basing on the level of income to meet the identified wants. The estimated level of income required to meet the identified needs thus becomes the poverty line (Levernier et al., 2000). Basically, the welfare approach combines the living standards with the individual consumption, which is generally determined by the expenditure data, and can also incorporate consumption from the country’s own production (Alesina and Rodrick, 1994). However, if the expenditure data is not available, economic experts highlight that income can be opted as an alternative for consumption. Apparently, most of the contemporary literature on measures of poverty is derived from the broad household surveys (Goudie and Ladd, 1999). However, one of the major issues associated with the use of household surveys as a measure of the poverty levels is the fact that the household is used as the survey unit, while in actual sense, whatever that is need is the measure of the individual’s welfare (Goudie and Ladd, 1999). For instance, when using the household income as a unit of analysis, a comparative of two households having the same per capita income would mean that a larger household has a higher welfare compared to the smaller one, which may not be the case in actual sense (Goudie and Ladd, 1999). Therefore, this requires that the household information is converted to an individual per capita income.
Apparently, a poverty line can be determined in either relative or absolute measures (Alesina and Rodrick, 1994). The relative poverty line is considered as a set at a constant fraction of the median or mean income within a specific nation, for instance, 50 per cent of the median or mean income (Rector and Sheffield, 2011). However, it is worth noting that each country has its own relative poverty line, which is considered as change in relation to its income. The absolute poverty line is often determined basing on a specific living standard, and it is applicable to all countries or regions under consideration (Levernier et al., 2000). For instance, an absolute poverty line could be set at 20 per cent of the United States’ mean or median income and then it is applied as the cut-off to determine poverty across various countries. Basically, according to the economic studies, three measures are often applied in measuring poverty:
- The headcount index applied to determine the poverty prevalence
- The poverty gap index applied to determine the poverty depth, and
- The Foster-Greer-Thorbecke index used to determine poverty severity
The Headcount Index
Using the headcount index, the total proportion of the population is considered to be poor being often defined as those whose living standards, basing on expenditure or income, fall under the poverty line. As experts highlight, the headcount index is a relatively easer approach as it is simple to estimate and even communicate (Goudie and Ladd, 1999). This approach is significant, especially when it comes to address the general poverty changes. However, the main weakness of the headcount index is that it only incorporates the changes in income across the estimated poverty line and disregards the changes taking place below the poverty level. If, for instance, a poor individual turns to become poorer, such changes will not be revealed by the headcount index.
The Poverty Gap Index
The poverty gap index measures the cumulative poverty rates in proportion to the poverty line. However, it is worth noting that the poverty gap corresponds to the income transfer to the poor, which is considered as necessary in eradicating poverty. Basically, the poverty gap index is the average poverty gap existing across the whole population (Rector and Sheffield, 2011). Its major weakness is that it does not provide information regarding the severity of the country’s poverty. It is worth noting that the poverty gap index is always averaged among all the poor and this can cover the desperate poverty within the comparative country. For instance, supposing that there are two countries being analyzed. Within the first country, all the incomes of the poor fall below the poverty line, while there are a few of the poor in the second country earn an income just below the median while the others earn much lower incomes. However, considering the fact that the poverty gap index is often averaged across various countries, the very poor people within the second country could be covered up.
The Foster-Greer-Thorbecke Index
The Foster-Greer-Thorbecke is basically used to determine the levels of extreme poverty. It is often considered as the square of the country’s poverty gap, which is then divided by the total population. A square of the poverty gap, apparently gives more attention to the poverty of the very poor groups compared to the poverty gap index, considering the fact that all of the income gaps have to be squared. However, one major disadvantage of using this approach is that it is often difficult to interpret. It is always composed of two main parts, an amount attributed to the poverty gap, and the other one is always attributed to the inequalities existing among the poor.
However, as economic experts highlight, the option of the type of indicator to apply in determining poverty is not necessary if the income distribution within the society is not changed. If income is distributed in equal proportion among the people within the society, it is highlighted that all of three measures of poverty will result in the equal poverty ranking. Therefore, it is important to note that economic growth contains significant impacts with regard to poverty reduction considering the fact that the distribution of income often tends to change over time. In situations when the distribution of income becomes worse, economists highlight that there is still capacity for economic growth to increase the total income earned by the poor, as result of boosting their wellbeing.
Definition of Economic Growth
Economic growth is defined as the increase in the value of the products and services generated in an economy. Under the conventional terms, economic growth is often measured in terms of the increase in percent arte of the nation’s real domestic product. Basically, economic growth is often determined in real terms, basically the inflation-adjusted terms, with aim to determine the impact of inflation on the cost of both goods and services being produced by the country. In the field of economics, it is highlighted that economic growth, sometimes being considered as the economic growth theory, is defined as the potential output growth, or the production at full employment, attributed to the growth in observed output or the cumulative demand (Ruapsingha and Goetz, 2007). Apparently, the real Gross Domestic Product per capita of the economy is most often applied as the indicator of the general living standards of the citizens within that economy. Therefore, this implies that economic growth is an indicator of increase of the general living standards. However, according to the economic experts the application of economic growth in Gross Domestic Product to determine the general wellbeing of the economy presents some challenges (Levernier et al., 2000). For instance, the Gross Domestic Product per capita does not offer the relevant information regarding income distribution within the country. In addition, it does not incorporate the value of all the practices conducted outside the market place, for instance, the cost-free holiday activities such as hiking. Due to the weaknesses that has been highlighted regarding this measure, economic experts highlight that Gross Domestic Product per capita should be applied as an indicator, rather than an absolute scale (Levernier et al., 2000).
The Debate Surrounding Economic Growth and Poverty
Over and over the years, there has been a heated debate with regard to the relationship between economic growth and poverty. However, one should note that this topic is often looked under two perspectives; i.e. the effect of poverty one a country’s economic growth, and the impact of economic growth on poverty. While a significant body of research highlights that economic growth being significant for the country considering the fact that this results in reduction of the poverty levels, some economic experts highlight that a negative correlations exists between economic growth and poverty (Goudie and Ladd, 1999). Apparently, the economic literature highlights that poverty does not only affect the individuals, but also can prove to be challenging when it comes to the attainment of economic growth. In the past, most of the economic studies were focused on the significance of economic growth with regard to resulting in higher living standards, as well as poverty alleviation (Levernier et al., 2000). For instance, the early hypothesis that was developed by Kuznets (1955) generated a lot of literature regarding the ability of economic growth to increase inequality, hence worsening the condition of the poor people. However, more recent studies are focused on the role of poverty on the economic growth. Looking at the case of the United States, for instance, poverty can affect the country economic growth through its effects on human capital accumulation and increasing the rates of social unrest and crimes within the country (Rector and Sheffield, 2011). Despite the fact that few research has been carried out in this field, however, the existing studies suggest that there is a negative association between economic growth and poverty considering the fact that higher poverty rates result in slow economic growth. However, it is worth noting that one of the most significant drivers of economic growth is the human capital accumulation. Basically, human capital is comprised of the knowledge, skills, talents, and the abilities of the individuals as applied in employment. Human capital accumulation is often viewed to be a function of the individual’s education level, training, work experience as well as the workforce healthiness (Ruapsingha and Goetz, 2007). It is important to note that the accumulation of human capital can be weakened when a significant fraction of the population is experiencing prolonged, or is living under poverty. Apart from affecting the human capital, poverty can also affect the country economic growth, considering the fact that this might generate social unrest, violence, and crime (McKay, 1996). Several studies have highlighted that when the people take part in unproductive criminal practices, the efforts of the other people to make significant investment that might boost the country economic growth is derailed (Rector and Sheffield, 2011). In addition, the resources that could be directed to investment get to be diverted into other activities that are aimed at ensuring for safety of the people. Bhatta (2001) highlights that despite the fact that social unrest is often considered to have negative impact on economic growth, it can also generate positive impact considering the fact that this can result in growth of some sectors such as surveillance, security or the legal services. However, despite the fact that various theories have been brought forward linking poverty to criminal activity and human capital deficiencies, the scale of their effects on economic growth, particularly in the United States remains unclear (Goudie and Ladd, 1999). Furthermore, the citizens living under the impoverished conditions create some budgetary expenses for the federal government that in turn is forced to pay out billions of dollars implementing programs that are aimed at assisting the low-income earners (Levernier et al., 2000). However, despite the fact that the economic theory offers a deeper understanding with regard to the correlation between economic growth and poverty, the empirical researchers have not conducted extensive studies to indicate how poverty affects economic growth in the United States (Rector and Sheffield, 2011). Apparently, the empirical evidence on the developed nations, such as the United States is quite limited, but the recent studies highlight that a negative relationship exists between economic growth and poverty (Ruapsingha and Goetz, 2007). For instance, one recent study having highlighted that economic growth is much lower within the metropolitan areas of the United States than that are depicted by the higher poverty rates.
Indeed, numerous economic experts have highlighted that a country’s economic growth is beneficial to all the citizens, which so is translated into a reduction of the poverty levels, regardless of the fact that these benefits are not always shared equally (Goudie and Ladd, 1999). The degree to which the claimed benefits are attained by the various groups is often represented as a change in the income distribution. However, it is important to note that economists highlight that if the economic growth increases the income of every individual within the society in equal amounts, then the income distribution will not be altered in any way (Ruapsingha and Goetz, 2007). Two cases are often brought out with regard to the claim that economic growth helps in reducing the poverty levels. The first case was proposed by Simon Kuznets in what came to be known as the Kuznets curve hypothesis, in 1955. Kuznets (1955) highlights that the inequality in income follows an inverted U shape basing on the economic growth process. He claims that as incomes increase during the initial stages of development, the distribution of income would worsen first, and then get better as the wider segment of the country’s population engage in increasing the national income. Therefore, if the distribution of income reduces and equals with the levels of growth, then this is a clear indication that there is no significant reduction in the poverty levels (Levernier et al., 2000). For instance, it is viewed that people move away from the open rural agricultural sector to the richer industrial sector, during the initial stages of economic development. The shifting workers will attain an increased per capita income, which will initially worsen the income inequality. However, when a significant amount of the rural workers shift to work for the industrial sector, it is highlighted that the decline in the size and amount of workers working for the agricultural sector will raise the relative wages of that sector. In addition, the initial workers who had been working at the bottom of this sector will rise up in relation to the sector’s richer workers. According to Kuznets (1955) it is through such processes that the gap existing in income inequality is eventually closed. This implies that income inequality will first grow and eventually decline as the country’s economy transforms to become more developed, resulting into a curve that looks like an inverted U-shape. However, most studies have highlighted that the distribution of income does not change significantly in most nations, even with increased time (Levernier et al., 2000). Moreover, economic experts highlight that the Kuznets hypothesis is not applicable to most of the countries.
The second case regards the common persistence and depth of poverty has generated doubts about the country’s economic growth ability to alleviate poverty (McKay, 1996). Furthermore, the structure and the stabilization measures that are often considered to be significant in enhancing the country economic growth are widely viewed to deepen the poverty levels, especially within the short-run (Levernier et al., 2000). Therefore, this generates further doubts with regard to the claims that poverty could be alleviated through faster growth. According to Goudie and Ladd (1999) the impact of the growth of an economy on the income inequality depends on the country specific features. The effectiveness and magnitude of the transfers, for instance, will significantly determine the impacts on the inequality. Looking at an open economy, which in essence has a higher probability of attaining a growth, an improvement in income distribution would as well be experienced if the country’s exports are considered to be labour intensive (Levernier et al., 2000). Similarly, if the exports are considered to be capital intensive, this would be translated into worsened income distribution. It is worth noting that the imports also contain significant impacts on income distribution, however, depending on the composition of the imports, as well as the degree of domestic competition (Goudie and Ladd, 1999). Therefore, a country policy environment plays an important role with regard to the relationship between income inequality and the country’s economic growth. Some of the early studies also highlighted that the benefits of a country’s economic growth will eventually drip down to the country’s poor (Ruapsingha and Goetz, 2007). Apparently, most economists have over the recent past concurred that the distribution of income plays a significant role in determining how much benefits the poor will attain from the economic growth. McKay (1996) highlights that continuous growth, particularly in the household income, helps in minimizing the levels of absolute poverty, without considering the initial income inequality levels. However, according to Lipton and Ravallion (1995) an increase in the levels of income cannot be exclusively relied on to help in alleviating poverty. Generally, having income distribution and population constant, growth in a country’s economy will translate into an increase in each person’s income, hence lowering the levels of absolute poverty (McKay, 1996). Furthermore, the accelerator and multiplier effects, especially in investment and income, will also be translated into increase in income related to economic growth (Ruapsingha and Goetz, 2007). On the contrary, it is argued that if the poor people do not take a significant part in the growth process, then the levels of absolute poverty will not decline with economic growth. Unfortunately, besides raising incomes, scarce studies are available to address the link between the economic growth and the wellbeing of the society’s very poorest.
United States Specific Studies
It is important to note that poverty remains to be one of the challenging issues, which face most of the Asian states today. Consequently, the search for economic development remains to be priority in this region. However, as studies highlight, the poverty trends have continued to decrease within Southeast and East Asia until lately. The recent changes in this trend are basically attributed to the recent financial crisis that resulted into a decline in the Gross Domestic Product figures (Rector and Sheffield, 2011). Moreover, the crisis has reversed the benefits that had been accrued during the period of the economic booms. However, it is even feared that the poverty levels within the region might increase considering the fact that most of the economies within this region are now facing reduced levels of economic activity. This has been worsened by the high levels of unemployment within the region (Rector and Sheffield, 2011). However, various approaches have been developed to ensure this situation being reverted. In Latin America for instance, policies have been formulated and are being implemented aimed at enhancing and supporting economic development.
A study conducted by Bhatta (2001) aimed at exploring how poverty and income inequality are linked to economic growth, particularly within the United States Metropolitan Statistical Areas. The study found out that whereas a negative correlation exists between the initial poverty level and growth, a positive correlation exists between the initial inequality level and growth (Bhatta, 2001). The study also found out that the Metropolitan Statistical Areas having high growth rates experience low diminishing of the poverty period. It is also highlighted that the institutional and social factors are behind the differences in the economic growth among the various counties in the United States (Rupasingha et al., 2002). Basically, as Rupasingha et al. (2002) highlight, higher rates of income inequality are translated into lower economic growth rates within the counties. Ruapsingha and Goetz (2007) conducted a study that was aimed at examining the structural determinants regarding poverty within the United States’ metro and non-metro areas. The study found out that the initial rates of income inequality enhances the termination of the period poverty level. However, according to Partridge and Rickman (2005) the economic policies that are expected to stimulate the growth of jobs as well as enhancing the human capital, actually help in lowering poverty, even for the high poverty counties. It is worth noting that there are various factors contributing to poverty and as Levernier et al. (2000) highlight, employment growth, migration, population characteristics, industrial restructuring, job-skill mismatch, and educational attainment are some of the main factors affecting poverty among both the metropolitan and the non-metropolitan areas in the United States, although at varying levels.
Economic Structure and Income Distribution
It is worth noting that for economic growth to happen without having any significant impact on the poverty levels; this implies that the distribution of income remains more unequal. However, one of the issues that have been highly debated by the economic experts is whether a rapid economic growth can occur without resulting in any reductions in the poverty levels. However, as highlighted by various studies, such a scenario is possible, though unlikely. Furthermore, it is highlighted that it can be possible to have the income distribution worsen, whereas the income of the most poor increases. However, it is significant to note that the extent to which a certain growth rate affects the country poverty levels is based on various factors, most significantly, the economic polices and the economic structure of the country. For instance, research highlights that the economic growth will most likely result into a direct poverty reduction when the country’s economic assets are equally distributed, or when this growth is dependent on the intensive employment of numerous factors of production, particularly labour. The developed nations such as the United States often considered having rich economies, research highlights that such state have concentrated income distributions considering the fact that the nation wealth is often found to be concentrated within very few individuals (Rector and Sheffield, 2011). Therefore, when growth is generated from the country exports, the market approaches that would engage the lower income groups within that growth will always be weak. Therefore, this means that the government programs have to be structured in such a manner that will ensure the revenue obtained from the exports being tricked down to benefit the country’s poor through such programs as education, rural works and even health.
Economic policies and development strategy may also contain diverse effects on poverty alleviation through their effect on growth (Li and Zhou, 1998). For instance, the outward-looking policies facilitate the intensification of the country’s production, especially, within the industries employing abundant and low-cost resources. Thus, it follows that if such economies are either or both labour and land abundant, the policies will boost the impact of economic growth on poverty reduction. However, it is important to note that these arguments suggest that economic growth often tends to minimize the poverty levels.
Relationship among Economic Growth, Income Inequality, and Poverty
It is worth noting that three main theories have been brought forward with regard to economic growth, income distribution and poverty. These are the political economy argument, the savings rate argument and the credit market imperfection argument. The savings rate argument is basically grounded on the Harrod Domar model which highlights that higher inequality in income result in higher economic growth (Li and Zhou, 1998). This implies that the economy savings rate is proportional to the income levels. Therefore, a country’s richest person will save generally larger fraction of the income compared to the poorest person. Accordingly, when the country income is concentrated among the few rich individuals, thus the cumulative savings rate within an economy is maximized compared to distributing income equally among the country’s population (Li and Zhou, 1998). As Fields (1989) highlights inequality in income results in a higher economic growth, and considered this as one of the null hypothesis. However, the underlying assumption within this claim is that an increased saving rate will in turn be translated into increased investment, which will then result in an increased economic growth (Li and Zhou, 1998). However, it is worth noting that this assumption is not applicable to all the economies, especially the open small economies. The credit-market imperfection theory highlights that income inequality limits the people’s ability to build up both physical and human capital (Li and Zhou, 1998). Typically, income levels of the people, along with the assets being possessed is a significant factor when it comes to accessing the credit markets. So this implies that people living within the unequal societies encounter significant challenges when it comes to getting credits, which thus bars them from investing in both physical and human capital. Moreover, it is worth noting that the stocks of both human and physical capital within an unequal society are often rated to be lower compared to those of the equal or rather egalitarian societies, hence resulting in reduced per capita income, as well as low income growth rate (Li and Zhou, 1998). Therefore, it is suggested that income and assets should be concentrated in the hands of the few rich individuals within the society, which will then enable a faster economic growth rate, considering the fact that the larger investments would often yield increased returns compared to the smaller investments (Barro, 1999). However, as Goudie and Ladd (1999) highlight, the credit-market imperfection theory will not be applicable within a rich, but unequal society. This is because in such a society, most of the people would be considered to be well-off and thus only a small proportion would be considered to be credit constrained. However, considering the fact that high inequality is not always an indication of a larger proportion of the poor people, indeed this theory can be applied to explain the correlation between economic growth and poverty.
The political economy argument looks at the distortion interventions within the unequal society that may generate a slower economic growth. Apparently, it is highlighted that a majority of the people would prefer having the distributive policies if their basic income was to fall below the median income (Alesina and Rodrik, 1994). This is because such policies, often considered to be just like the higher capital taxes, serve to lower the investment incentives, which would in the end result in a slowed economic growth. Moreover, as Bhatta (2001) asserts, the more equal societies have a higher probability of adopting the redistributive policies, which would in the end lead to a lower economic growth, compared to the unequal societies. An endogenous growth model was developed by Alesina and Rodrik (1994) to study the distributive conflicts between capital and labour, and generate some evidence that indeed inequality lowers economic growth, especially among the democracies, whereas this appears to be non-significant among the non-democracies. The politico-economic model developed by Persson and Tabellini (1994) which indicates that the initial inequality levels affect economic growth within the democracies exclusively. Deininger and Squire (1998) applied the same model and highlight that an inequality in terms of assets is negatively correlated to long-term economic growth. This study also confirmed that indeed inequality reduces the growth in income, especially among the poor people. Another study conducted by Li and Zhou (1998) found out that income inequality enhances economic growth, and that the developed nations have a more equal distribution of income compared to the developing nations. According to Barro (1999) income inequality often tends to derail economic growth within the poor nations and encourage growth among the developed nations, such as the United States.
Poverty and Economic Structure
Economic experts highlight those nations that are considered to be relatively rich in terms of the natural resources, often tending to experience a lower growth in the economy (Deininger and Squire, 1998). In addition, it is highlighted that income in such nations tends to be more concentrated, and, thus the implementation of the market forces alone will be actually inefficient when it comes to the translation of the country’s Gross Domestic Product into significant reductions of the poverty levels (Deininger and Squire, 1998). Therefore, this implies that the income growth of the poorest individuals within the rich nations is much slower, compared to the developing nations. Indeed as Persson and Tabellini (1994) highlight, the resource endowments have a propensity to work counter the poverty alleviation strategies considering the fact that they tend to derail a country economic growth, which is apparently considered to be one of the poverty reduction strategies. However, when analyzing the impact of resource endowments on poverty alleviation, it is worth noting that there are a few outliers. Apparently, some studies have confirmed that some countries considered to be well endowed with the natural resources have experienced a rapid growth, which has in turn led to considerable reduction in their poverty levels (Deininger and Squire, 1998). However, it is worth noting that the resource endowments do not censure a country into a condition of entrenched poverty, rather, these resources could be converted into greater benefits that would help the country counter poverty. However, this depends on the country’s government policies and the manner in which economic developments are carried out in the country. Furthermore, it is highlighted that it is the resource political economy that often generates and drives growth that in turn is translated into less poverty levels.
The Link between Economic Growth and Poverty Reduction
A significant amount of studies concur that economic growth helps the poor in almost all countries across the globe (Deininger and Squire 1998; Barro 1999; Goudie and Ladd, 1999). Apparently, economic growth is considered as significant approach that could be applied to counter the poverty crisis. On the other hand, economic research highlights that poverty contains considerable negative effects on economic growth (Aghion et al., 1999). According to the economic theory, human capital is indeed considered as one of the most essential key forces behind a nation’s economic growth. However, some of the conditions related to poverty can sometimes counter the human capital development by restraining the capacity of the individuals to lead healthy lifestyles, or attain some training, hence reducing their capacity to contribute ideas, labour of even skills to the economy. Therefore, according to the economic theory, poverty contains significant impacts on the economic growth; it highlights that poverty derails the process of attaining economic growth within a country (Persson and Tabellini, 1994). However, despite the fact that most of the previous studies have laid greater emphasis on the role of economic growth when it comes to poverty reduction, some of the recent studies have started to indicate that increased rates of poverty being often associated with low economic growth rates (Ravallion, 2001). The early hypothesis that was developed by Kuznets generated a lot of literature regarding the ability of economic growth to increase inequality, hence worsening the condition of the poor people. However, as more and more studies have been conducted with regard to this claim, the evidence has disapproved the claim brought forward by Kuznets, considering the fact that studies have confirmed that economic growth tends to reduce the poverty levels.
Supporting and encouraging economic growth is one of the most fundamental priorities for most governments today. Moreover, this subject touches on all the aspects of the government decision making process. However, when looking at this topic it can be noted that numerous controversies surround the whole subject of the link between poverty and economic growth. According to empirical evidence, it is highlighted that poverty generates negative impacts that may derail the economic growth process. However, despite the fact that the economic theory supports the notion that poverty compromises on the process of economic growth, it is worth noting that extensive research has not been conducted with regard to how poverty is actually a determinant of economic growth within the United States of America. Indeed, the empirical evidence on the rich nations including the United States is quite limited, though some of the most recent studies maintain that a negative correlation exists between economic growth and poverty. On the other hand, studies also confirm that economic growth is beneficial, especially to the poor people, taking into account the fact that this is often considered as one of the most significant approaches that could be applied in reducing the poverty levels. Research studies have highlighted that the poverty levels are increasingly declined within economies that grow rapidly.