Growth Elasticity of Poverty
Encyclopedia
Growth elasticity of poverty (GEP) is the percentage reduction in poverty
rates associated with a percentage change in mean (per capita) income
.
Mathematically;
where PR is a poverty measure and y is per capita income. Generally, increases in per capita income tend to decrease the poverty rate, hence the elasticity is positive.
Standard estimates of GEP for developing countries range from 1.5 to 5, with an average estimate of around 3. This implies that a 1% increase in per capita income is associated with a 3% decrease in the poverty rate (proportion of people living on less than $1 per day). This implies that economic growth is fundamental to reducing poverty rates, particularly in low income countries.
However, the GEP also depends on other variables, among them the initial level of income inequality. Countries with a more equal distribution of income (as measured for example by the Gini
index) experience a greater reduction in the poverty rate for a given increase in per capita income. The GEP ranges from slightly less than 1 for very unequal countries, to as high as 6 for very equal countries. This suggests that in poor countries that also have a very unequal distribution of income, economic reforms aimed at reducing inequality may be a prerequisite for pro-growth policies to make a substantial impact on poverty levels. On the other hand, for poor countries which already have an equitable distribution of income, pro growth policies should be the main poverty fighting tools (even if they increase inequality).
Poverty
Poverty is the lack of a certain amount of material possessions or money. Absolute poverty or destitution is inability to afford basic human needs, which commonly includes clean and fresh water, nutrition, health care, education, clothing and shelter. About 1.7 billion people are estimated to live...
rates associated with a percentage change in mean (per capita) income
Per capita income
Per capita income or income per person is a measure of mean income within an economic aggregate, such as a country or city. It is calculated by taking a measure of all sources of income in the aggregate and dividing it by the total population...
.
Mathematically;
where PR is a poverty measure and y is per capita income. Generally, increases in per capita income tend to decrease the poverty rate, hence the elasticity is positive.
Standard estimates of GEP for developing countries range from 1.5 to 5, with an average estimate of around 3. This implies that a 1% increase in per capita income is associated with a 3% decrease in the poverty rate (proportion of people living on less than $1 per day). This implies that economic growth is fundamental to reducing poverty rates, particularly in low income countries.
However, the GEP also depends on other variables, among them the initial level of income inequality. Countries with a more equal distribution of income (as measured for example by the Gini
Gini coefficient
The Gini coefficient is a measure of statistical dispersion developed by the Italian statistician and sociologist Corrado Gini and published in his 1912 paper "Variability and Mutability" ....
index) experience a greater reduction in the poverty rate for a given increase in per capita income. The GEP ranges from slightly less than 1 for very unequal countries, to as high as 6 for very equal countries. This suggests that in poor countries that also have a very unequal distribution of income, economic reforms aimed at reducing inequality may be a prerequisite for pro-growth policies to make a substantial impact on poverty levels. On the other hand, for poor countries which already have an equitable distribution of income, pro growth policies should be the main poverty fighting tools (even if they increase inequality).