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What Is the Relationship between Economic Growth and Poverty?

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  • Written By: Peter Hann
  • Edited By: Angela B.
  • Last Modified Date: 02 September 2016
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The perceived relationship between economic growth and poverty reduction has led governments to pursue economic growth to increase the standard of living of the population. Experience suggests that economic growth has the effect of reducing poverty levels, but this effect can vary greatly, depending on other economic factors such as the distribution and ownership of assets. Concentration on economic growth alone to solve the problem of poverty, without giving attention to the type of growth strategy required, has sometimes led to large-scale showcase infrastructure projects that have not benefited most people. This negative experience has given rise to pro-poor growth strategies that aim to increase incomes in the poorest sections of society. These involve strategies such as diversifying rural industry or making cash transfers to the poor that are dependent on their participation in health and education projects.

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Conventional measures to promote economic growth, favored in the past by institutions such as the International Monetary Fund, involved deregulation of industry, privatization of business and trade liberalization. This type of strategy, often instituted by governments as a condition of obtaining relevant funds, could lead to problems for inefficient local businesses and an increase in the gap between rich and poor. The strongest companies and people survived economically and the weakest were driven out of business by national and international competition. The relationship between economic growth and poverty depends on the country's social and economic situation at the start of the growth strategy, and on how economic power is distributed. Where most of a country’s assets are concentrated in a few hands and only a small number of businesses can compete on an international level, economic growth may improve incomes for the economic elite without making a difference for those close to the poverty line.

The relationship between economic growth and poverty leads to difficult issues in rural areas, where most of a developing country's population may live. In the rural areas, population pressure often leads to rural unemployment and a reduction of incomes because a large number of people occupy the land. Economic growth strategies may be more effective in eliminating poverty if they aim to diversify industry in rural areas and increase productivity by raising levels of education and improving rural infrastructure. This strategy can raise incomes in rural areas and halt the drift of people from the countryside into cities, which often results in high urban poverty. A pro-poor growth strategy must actively manage the relationship between economic growth and poverty, empowering the poor and enabling them to obtain the necessary levels of health, training and skills.

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SarahGen
Post 3

Economic growth reduces poverty because it creates jobs and increases people's spending power. People have more money and can invest it in different ways, which in turn supports the economy further.

ysmina
Post 2

@discographer-- The article already sort of answered this actually. It all depends on how wealth is distributed. If wealth is not distributed fairly, then it doesn't matter how much economic growth a nation has, poverty will continue to be a problem.

It's actually difficult because our system prizes free market capitalism and the right to private ownership of wealth. There is no re-allocation of wealth such as in socialism. In America, we like a small government that doesn't intervene much in the economy or the private lives of its citizens. The last I checked, 70% of the wealth in the US was owned by 10% of the population.

The reason that poverty levels are not very high is because we have social welfare programs (social security, food stamps, etc.).

discographer
Post 1

Of course, as the economy grows, poverty decreases. And developed nations with good economic growth have low poverty levels.

What I don't understand though, is that regardless of how rapidly the economy grows, poverty is never completely eliminated. Even in the US, there is some poverty. I live in Chicago and I see it. I also see that it tends to affect certain demographic groups.

Does this mean that economic growth by itself is not enough to eliminate poverty?

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