Does Economic Growth Help or Hinder Poverty Alleviation? A Case Study From Mexico

The uneven distribution of globalization-driven economic growth has led researchers to question whether growth actually decreases poverty and inequality. They have tried to answer questions such as: Does growth affect poverty at all? Is growth sufficient to reduce poverty? What conditions must exist for the growth of a country to be pro-poor? Which policies reduce inequality while sustaining growth?

In search of answers, Campos and Monroy-Gómez-Franco analyzed the relationship between economic growth and poverty for all 32 Mexican states to see if a state’s economic growth is associated with decreased levels of poverty. The authors estimated the sensitivity of poverty to changes in economic growth for each state in the period between 2005 and 2014, calculating poverty as the percentage of people with incomes below the minimum welfare line (Índice de la Tendencia Laboral de la Pobreza) and economic growth based on the quarterly indicator of state economic activity (Indicador Trimestral de la Actividad Económica Estatal).

The authors found a negative relationship between growth and poverty in the short-term: an increase in growth was associated with a decrease in the number of people earning an income below the minimum welfare line. However, the elasticities of poverty with respect to economic growth varied significantly by state. In nine states, researchers observed an elasticity factor greater than one. That is, an increase of one percentage point in economic growth was associated with a decrease in poverty greater than one percentage point. In twelve states, this relationship was one-to-one, in four states it was less than one, and in six states there is no relationship between poverty and growth.

Furthermore, the northern states showed a greater sensitivity of poverty to changes in economic growth than the southern states; in the northern states, economic growth is more likely to be reflected in poverty reduction. In southern Mexico, infrastructure and basic services are unstable or nonexistent (i.e. roads, formal jobs, high quality schools), making it difficult for residents to participate in the market economy and take advantage of growth. Additionally, states that are more developed or already have better access to basic services tend to have a greater capacity to reduce poverty via economic growth.

Campos and Monroy-Gómez-Franco find reductions in poverty proportionately larger than increases in economic growth in nine out of the 32 states, while observing negative or no relationship between growth and poverty in all other states. Although further research is needed to determine the specific characteristics these states have in common, public policies targeting pro-poor growth could be used in tandem with efforts to grow state economies to ensure the benefits of growth are experienced more uniformly.

For example, early-childhood interventions for low-income children and income transfers to new parents can reduce differences between rich and poor children. Additionally, investments in infrastructure, such as roads, bridges, and railroads, enable low-income families to participate in the market economy, increasing their likelihood of receiving the benefits of economic growth. Finally, expanding access to technology can also spread the benefits of growth: agricultural technologies increase productivity, mobile phones increase price information and consumer and producer surplus, and cable television enhances communication with urban areas and augments exposure to new aspirations. By addressing disparities between market participants, pro-poor policies can help amplify the results of economic growth.

Article source: Campos Vázqueza, Raymundo M., and Luis A. Monroy-Gómez-Franco. “The Relationship between Economic Growth and Poverty in Mexico.” (La relación entre crecimiento económico y pobreza en México) Investigación Económica, Vol. 75, No. 298 (2016): 77-113.

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