What Kind of Growth Reduces Poverty? A Deep Dive into Global Trends

The World Bank study reveals that while economic growth reduces multidimensional poverty, its impact varies significantly based on the source of growth and regional conditions. Growth driven by productivity, consumption, and sustainability proves most effective, while other factors like investment and exports show ambiguous results depending on country-specific conditions.

A recent working paper from the World Bank's Poverty and Equity Global Practice authored by Francis Mulangu, Mokhtar Benlamine, Michael Keller, and Jean-Pascal Nganou, provides a detailed analysis of the relationship between economic growth and multidimensional poverty across more than 80 countries over a 20-year period. The research, produced in collaboration with the International Bank for Reconstruction and Development (IBRD) and other affiliated organizations, uses a first-difference model to examine how changes in gross domestic product (GDP) affect the Multidimensional Poverty Index (MPI) and its subcomponents, such as health, education, and living standards. The study disaggregates GDP growth by various factors to explore which types of growth are most effective in reducing poverty, particularly in different income groups, regions, and resource-dependent economies. This investigation reveals that while economic growth generally reduces the MPI, the impact varies significantly based on the source of growth and the specific context of each country.

Productivity and Consumption Growth as Key Drivers

The findings of the study show that economic growth, on the whole, contributes to poverty reduction, but the magnitude of this effect differs depending on the type of growth and the country's characteristics. Growth driven by factors such as total factor productivity (TFP), consumption, and sustainable practices has a clear, significant impact on reducing the MPI. These types of growth are found to consistently lower multidimensional poverty by improving various deprivations that people experience, such as access to better health care, education, and living standards. However, the study finds that not all dimensions of growth are equally effective. For example, growth stemming from human capital development, capital deepening, government spending, investment, and exports shows a more ambiguous relationship with poverty reduction. In these cases, the impact on the MPI is not statistically significant, indicating that the effectiveness of these factors in reducing poverty depends heavily on specific country-level conditions. This suggests that while these contributors may alleviate poverty in some contexts, they might have limited or even no effect in others, resulting in an overall neutral impact across the dataset.

Regional Variations in the Effectiveness of Growth

A key aspect of the research is its focus on regional and income-level variations. The analysis shows that the poverty-reducing effect of economic growth is less pronounced in low-income countries, especially in regions such as Sub-Saharan Africa and Latin America. In these areas, the impact of growth on reducing MPI components such as health, education, and living standards is delayed and less significant compared to other regions. The study also highlights the challenges faced by resource-dependent countries, where economic growth tends to have a weaker effect on reducing poverty. This finding is particularly important for policymakers in countries rich in natural resources, as it points to the need for targeted strategies to overcome the so-called "resource curse," where economic growth from resource extraction does not translate into substantial poverty reduction. In contrast, regions such as South Asia show a more effective use of economic growth in reducing multidimensional poverty, particularly in areas like nutrition and access to electricity, suggesting that the nature of growth and the way it is managed can make a substantial difference in poverty outcomes.

Sustainable Growth: The Strongest Force for Reducing Poverty

The study emphasizes that while economic growth remains a powerful tool for reducing poverty, its effectiveness is contingent on the nature of the growth and the specific economic context. For instance, growth driven by consumption and TFP consistently lowers poverty by improving living standards and access to basic services. On the other hand, the study finds that sustainable economic growth is far more effective at reducing poverty compared to unsustainable growth, which includes factors like resource depletion and environmental degradation. Sustainable growth, which reflects income generated through environmentally friendly and socially inclusive practices, has a more significant and lasting impact on poverty reduction. The researchers suggest that policymakers should prioritize policies that promote sustainable growth, technological advancements, and efficiency improvements to reduce multidimensional poverty more effectively. By focusing on these areas, countries can ensure that economic growth leads to tangible improvements in people's lives, particularly in regions where traditional growth models have failed to produce meaningful reductions in poverty.

Understanding Growth’s Broader Impact on Poverty

The research also underscores the importance of understanding the broader effects of growth on different dimensions of poverty. For instance, while GDP growth may boost income levels, it may not always lead to improvements in other critical areas such as health and education, which are essential for reducing multidimensional poverty. Therefore, the study calls for a more nuanced approach to poverty reduction, one that takes into account the different drivers of growth and their varied effects on the multiple dimensions of poverty. The findings suggest that in regions where economic growth has not translated into significant poverty reduction, such as Sub-Saharan Africa and Latin America, policymakers should re-evaluate their strategies to focus on more sustainable and inclusive growth models. By doing so, they can better address the root causes of poverty and ensure that economic growth benefits the most vulnerable populations.

Recommendations for Policymakers

Overall, the paper provides valuable insights into the complex relationship between economic growth and multidimensional poverty, offering practical recommendations for improving poverty reduction efforts around the world. The study concludes that policymakers should focus on promoting growth strategies that enhance productivity and sustainable practices, especially in regions and countries where growth has historically had a limited impact on poverty alleviation. Emphasizing consumption-based and productivity-driven growth while taking care to promote environmental sustainability can help countries make more significant strides in reducing poverty across multiple dimensions. This holistic approach to growth ensures that economic development is inclusive and benefits all segments of society, particularly those most in need.