Productivity Growth, Poverty Reduction and Income Inequality: New Empirical Evidence

There is a long-standing view that economic growth is the most powerful instrument for reducing poverty. In dynamic economies most economic growth comes from productivity growth, and yet the literature concerning the relationship between productivity changes and poverty is sparse. Against this backdrop, this paper examines the impact of productivity growth on income and human poverty, and assesses the role played by the income distribution in that relationship. Using cross-country data to conduct a regional comparative analysis, we find that productivity growth is more relevant for poverty reduction than the more commonly used indicator economic growth – a finding that is robust across regions. We also find that the poverty-reducing impact of productivity growth is stronger in countries with relatively low income inequality. These findings suggest that countries attempting to reach their objectives of eradicating poverty should pursue policies that foster productivity growth; and that productivity growth that is accompanied by progressive distributional change is even better for alleviating poverty.