Growth and Poverty Reduction in Developing Countries : Is Growth in Democracies More Pro-Poor than in Non-Democracies?

Abstract: Economists today agree that growth is fundamental in reducing poverty. But the strength of the relationship between the two has been debated, and there is a lack of satisfactory explanations to why the growth elasticity of poverty differs between countries. Solid democratic institutions have been mentioned as a means to ensure that growth is shared by the poor, but this proposition has not been assessed empirically. Using a data set including 157 intervals from 57 developing countries I estimate the elasticity of poverty to growth. I also use two different democracy indices to test the hypothesis that growth in democracies is more poverty-reducing than in non-democracies. Several other macroeconomic variables are also included in the model to analyze the determinants of the growth elasticity of poverty. Using several measures of growth and poverty, I find strong support that poverty is reduced by economic growth, with the elasticity estimated to be around -2. I do not, however, find any robustly significant determinants of the impact of growth on poverty. The results give some indication that the growth elasticity of poverty is higher in partly free countries than in nonfree countries. However, contrary to the hypothesis, there is stronger evidence that growth in fully democratic countries reduces poverty less than it does in partly free countries. None of the other macroeconomic variables are found to have a significant impact on how poverty responds to growth.