Growth is good for the poor

Forthcoming: Journal of Economic Growth

Growth Is Good for the Poor
David Dollar Aart Kraay Development Research Group The World Bank First Draft: March 2000 This Draft: March 2002 Abstract: Average incomes of the poorest fifth of society rise proportionately with average incomes. This is a consequence of the strong empirical regularity that the share of income accruing to the bottom quintiledoes not vary systematically with average income. In this paper we document this empirical regularity in a large sample of 92 countries spanning the past four decades, and show that it holds across regions, time periods, income levels, and growth rates. We next ask whether the factors that explain cross-country differences in growth rates of average incomes have differential effects on thepoorest fifth of society. We find that several determinants of growth -- such as good rule of law, openness to international trade, and developed financial markets -- have little systematic effect on the share of income that accrues to the bottom quintile. Consequently these factors benefit the poorest fifth of society as much as everyone else. There is some weak evidence that stabilization from highinflation as well as reductions in the overall size of government not only raise growth but also increase the income share of the poorest fifth in society. Finally we examine several factors commonly thought to disproportionately benefit the poorest in society, but find little evidence of their effects. The absence of robust findings emphasizes that we know relatively little empirically about thebroad forces that account for the cross-country and intertemporal variation in the share of income accruing to the poorest fifth of society. JEL Classification Numbers: D3, I3, O1 Keywords: Income inequality, poverty, growth. _________________________ 1818 H Street N.W., Washington, DC, 20433 (ddollar@worldbank.org (202 473-7458), akraay@worldbank.org (202 473-5756)). We are grateful Dennis Tao forexcellent research assistance, and to two anonymous referees and the editor of this journal for helpful comments. This paper and the accompanying dataset are available at www.worldbank.org/research/growth. The opinions expressed here are the authors’ and do not necessarily reflect those of the World Bank, its Executive Directors, or the countries they represent.

Globalization has dramaticallyincreased inequality between and within nations… --Jay Mazur “Labor’s New Internationalism,” Foreign Affairs (Jan/Feb 2000) We have to reaffirm unambiguously that open markets are the best engine we know of to lift living standards and build shared prosperity. --Bill Clinton Speech at World Economic Forum (2000)

1. Introduction
The world economy has grown well during the 1990s, despite thefinancial crisis in East Asia. However, there is intense debate over the extent to which the poor benefit from this growth. The two quotes above exemplify the extremes in this debate. At one end of the spectrum are those who argue that the potential benefits of economic growth for the poor are undermined or even offset entirely by sharp increases in inequality that accompany growth. At the other endof the spectrum is the argument that liberal economic policies such as monetary and fiscal stability and open markets raise incomes of the poor and everyone else in society proportionately. In light of the heated popular debate over this issue, as well as its obvious policy relevance, it is surprising how little systematic cross-country empirical evidence is available on the extent to which thepoorest in society benefit from economic growth. In this paper, we define the poor as those in the bottom fifth of the income distribution of a country, and empirically examine the relationship between growth in average incomes of the poor and growth in overall incomes, using a large sample of developed and developing countries spanning the last four decades. Since average incomes of the poor are...