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Short-run and Long-run Dynamics of Growth,Inequality and Poverty in the Developing World

Thomas Gries and Margarete Redlin ()
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Margarete Redlin: University of Paderborn

No 29, Working Papers CIE from Paderborn University, CIE Center for International Economics

Abstract: Growth, inequality, and poverty are central elements of the development process. However the mutual effects and directions of causality have been, and remain, one of the most controversial issues. After introducing a simple theoretical framework we derive some fundamental relations between growth, inequality and poverty. In the empirical part we test for unit roots and coin- tegration and apply GMM techniques on an error correction model (ECM) to estimate the pairwise short-run and long-run dynamics for income growth and changes in inequality and poverty in a panel of 114 developing countries and six regional subpanels for 1981 to 2005. The results confirm the relations of the theoretical framework; the evidence shows that in nearly all cases the vari- ables exhibit a short-run and long-run relationship. The findings reveal positive bidirectional causality between growth and inequality as well as between in- equality and poverty, and negative bidirectional causality between growth and poverty. Furthermore, the evidence shows that the level of development affects the poverty-reducing effect of growth, and that growth has benefited the poor regions far less. In summary, we show that growth, income distribution and poverty reduction are strongly inter-related, so a sucessful development strat- egy requires effective, country-specific combinations of growth and distribution policies.

Keywords: poverty; inequality; growth and development; panel cointegration; panel causality (search for similar items in EconPapers)
JEL-codes: I32 O10 O15 (search for similar items in EconPapers)
Date: 2010-09
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