TAILIEUCHUNG - DOES ECONOMIC GROWTH REDUCE POVERTY? Technical Paper

The simple relationships between the private saving ratio and the top tax rates are displayed in the top two charts in Figure 3. 22 Each point represents the private saving ratio and top tax rate for each year since 1945. The nature of the relationship is illustrated by the straight line in the figure, which graphically represents the correlation (fitted relationship or fitted values) between the two variables. 23 The slope of the fitted values line indicates how one variable changes when the other variable changes. For both the top statutory marginal tax rate and the top statutory capital gains tax rate. | DOES ECONOMIC GROWTH REDUCE POVERTY Technical Paper Michael Roemer and Mary Kay Gugerty Harvard Institute for International Development March 1997 This paper was supported by USAID under the Consulting Assistance on Economic Reform CAER II project contract PCE-0405-Q-00-5016-00. The USAID sponsor was the Office of Economic and Institutional Reform Economic Growth Center Bureau for Global Programs Field Support and Research. The views and interpretations presented in this paper are those of the authors and should not be attributed to USAID. DOES ECONOMIC GROWTH REDUCE POVERTY ABSTRACT The study examines the question of whether economic growth tends to reduce poverty where poverty is measured by the incomes of the poorest 20 and 40 of a population. Using the most recent data available the paper shows that an increase in the rate of GDP growth translates into a direct one-for-one increase in the rate of growth of average incomes of the poorest 40 . GDP growth of ten percent per year is associated with income growth of ten percent for the poorest 40 of the population. For the poorest 20 the elasticity of response is GDP growth of 10 is associated with income growth of . These results give strong support to the proposition that growth in per capita GDP can be and usually is a powerful force in reducing poverty. In addition the paper indicates that sound macroeconomic policies and openness to the world economy may be important in reducing poverty. These policies operate mainly through the effect on economic growth countries with better macroeconomic policies grow faster and this growth alleviates poverty. I. THE RELATIONSHIP BETWEEN GROWTH AND POVERTY ALLEVIATION Introduction The persistent problem of poverty in the developing world has led many to question the efficacy of economic growth and development as a means of poverty alleviation. Indeed the lack of convergence in standards of living across countries is one of the great unresolved issues in development

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