When Does Economic Growth Reduce Poverty and Strengthen the Middle Class? A State‐Level, Sector‐Specific Analysis of Peru

Using novel state‐level data of Peru from 1997 to 2010, we investigate how growth in different sectors affects poverty rates and the middle class. Our results indicate that only the manufacturing sector seems to robustly decrease poverty. Growth in the service sector emerges as a meaningful predictor of a rising middle class. Allowing for regional differences, we find substantial variation across the 25 Peruvian states with large shifts in magnitudes, signs, and statistical importance. Beyond the immediate implications for Peru, these findings highlight the importance of analyzing the link between economic performance and poverty rates on a subnational level. Policy implications are likely to differ substantially, depending on the source of economic growth and regional particularities.