1. Introduction
For several decades one of the most important issues of the field of economic development has been whether economic growth necessarily leads to the reduction of poverty. Since the 1970s,
Seers (
1969) postulated that if poverty has not decreased in a given country we cannot say that that country has experienced economic development at all. Also, the hypothesis of the trickle-down effect or, expressed in another way, the hypothesis that “a rising tide lifts all boats” has been widely used since the early 1960s (
Kakwani and Pernia 2000).
However, after much research carried out in the last two decades, the generally accepted view among economists is that economic growth bears an inverse relationship with poverty (
Dollar and Kraay 2002;
Alvaredo and Gasparini 2015;
Ravallion and Datt 2002, among others) and currently the discussion focuses only on determining how strong the effect of growth on poverty is, that is, the magnitude of the elasticity of poverty with respect to growth. There is also much discussion in research on this subject about the effect that the pattern and structure of growth have on poverty (
Thorbecke 2013). On the other hand,
Adams (
2004) points out that the effect of economic growth on poverty depends very much on how it is measured, finding that if it is measured by household income surveys, the effect is much greater than if measured through national accounts.
Another factor widely discussed in the literature is the effect of income distribution on poverty. Including this effect with the economic growth factor,
Bourguignon (
2004) proposed the existence of a poverty-growth-inequality triangle, by virtue of which these three variables are indissolubly related. Although prior to the publication of this article it was already known that poverty depended on growth and changes in the distribution of income, Bourguignon’s contribution lies in pointing out that growth can be influenced by the degree of inequality and vice versa and that both factors affect poverty.
In one of the most recent studies,
Fosu (
2017) conducts an analysis for 123 countries, finding that there is much variability in the response of poverty to both economic growth and inequality. In line with the findings of the consensus (e.g.,
Dollar and Kraay 2002), this author finds that economic growth has been the main factor that explains both increases and decreases in poverty for this large group of countries. However, interestingly, the author finds that there are strong regional differences and among countries in this regard. Although for most countries and regions income is the fundamental variable to explain changes in poverty, inequality plays a very important role in many countries. Another important finding of this study is that the poverty-inequality elasticity tends to be greater than the poverty-income elasticity, which indicates that changes in inequality can have very important effects on poverty.
Most research on the link between growth and poverty has been based on cross-sectional country data, which naturally makes it difficult to generalize the findings found to a particular country. Thus, the broad policy implications of these studies are hardly directly applicable to any given country (
Besley and Burgess 2003). Another problem with cross-sectional-based research is that it is generally based on poverty lines appropriate for each country, which are not readily comparable across countries due to differences in household surveys on which they are based, the living standards indicators used and in the real values of the poverty lines (
Ravallion 1995). Thus, there is very little research on this topic based on time-series data for a single country, such as
Odhiambo (
2009);
Mulok et al. (
2012);
Abosedra et al. (
2016) and
Nyasha et al. (
2017), who use modern time-series techniques to analyze this problem in different countries.
The results obtained in the paper indicate that, in the Mexican case, there is a positive and statistically significant effect of economic growth on the reduction of poverty, both in the long run as in the short run. According to the results obtained in the econometric model developed in the paper, a 1 per cent increase in economic growth leads to a 2.4% increase in per capita consumption. The Granger causality tests undertaken in the analysis showed that there is a bidirectional relationship of causality between economic growth and the reduction of poverty. These results are similar to the findings obtained in other studies.
The rest of the paper is organized as follows: in
Section 2 a literature review is carried out, section three briefly explains the database used in the research, the fourth section explains the econometric methodology used, while section five shows and analyzes the econometric results obtained in the paper and the last section concludes.
2. Literature Review
As noted in the introductory section, the consensus among economists today is that economic growth has a positive effect on poverty reduction, so nowadays research focuses mostly on estimating the magnitude of this effect, that is to say, in estimating the elasticity of poverty with respect to growth. The literature on the estimation of this elasticity is quite broad. In a comprehensive study,
Alvaredo and Gasparini (
2015), using information for 76 developing countries for the period 1981–2010 find a growth elasticity of poverty equal to −1.53 when they use per capita consumption to measure growth and a growth elasticity of poverty of −1.46 when they use per capita income. These elasticities are much lower than those reported by
Ravallion and Chen (
1997), who estimated a poverty-growth elasticity of −3.1 for a sample of 67 countries for the period 1981–1994. However, the values estimated by
Alvaredo and Gasparini (
2015) are in line with the values estimated by other authors, such as
Bourguignon (
2003), who estimates it at −1.6,
Ferreira and Ravallion (
2011), who estimate it at −1.8 and
Ravallion (
2012) who estimates it at −1.4.
In a recent study for a sample of 123 developing countries
Fosu (
2017) finds that, for the period 1981–2007, the growth elasticity of poverty was −2.3, but with a large variation between regions, from −1.3 for Sub-Saharan Africa, down to −3.7 for the Europe and Central Asia region.
Another important conclusion of the literature is that the higher the inequality, the lower the poverty-growth elasticity. For example, for a sample of 47 developing countries in the 1980s and 1990s,
Ravallion (
2001) finds that, for countries that grew but that whose inequality also increased, the poverty rate dropped by an average of 1.3% per year, while for those which grew but their inequality decreased their poverty rate dropped seven times more, 9.6% per year. Perhaps more dramatic, this same author finds that for countries whose economies contracted during the period and whose inequality increased, their poverty rate increased by 14 percent per year, while if inequality decreased, poverty increased less than 2 percent per year.
Bourguignon (
2003) finds similar evidence for a sample of 114 growth spells in the 1980s and 1990s in 26 developing countries, finding that the growth elasticity of poverty increases (in absolute value) from 1.6 to 2 when he controlled for changes in the Gini index.
In addition to the fact that the growth elasticity of poverty decreases when the distribution of income worsens, it also decreases when initial poverty is greater. Thus,
Ravallion (
2012) finds that the growth elasticity of poverty decreases (in absolute terms) of about 2.1 when the poverty rate is 10 percent to 0.5 when the poverty rate is 80 percent.
Adams (
2004), for a sample of 60 developing countries, finds that when economic growth is measured through the income reported in household surveys the growth elasticity of poverty (for the whole sample but excluding Eastern Europe and Central Asia) is −2.8, while when income is measured by national accounts (Gross Domestic Product (GDP) per capita) the growth elasticity of poverty is not statistically significant.
As discussed in the introduction, most of the literature on this topic has been based on cross-sectional studies for groups of countries, while research on time series by country has been very limited. One of the first studies of this type was that of
Odhiambo (
2009), who finds that, for the case of South Africa in the period 1960–2006, economic growth Granger-causes a decrease in poverty, in such a way that a 1% increase in the rate of economic growth reduces poverty between 0.6 and 0.9 percent.
Mulok et al. (
2012), using an Autoregressive Distributed Lags (ARDL) model for the case of Malaysia, find that there is an inverse correlation between poverty and economic growth.
Stevans and Sessions (
2008), using a VECM for the case of the United States, also find that there is an inverse relationship between the rate of economic growth and the poverty rate.
In the case of
Swaziland, Nindi and Odhiambo (
2015) find that economic growth does not Granger-causes poverty reduction, neither in the short nor in the long term. The authors point out that this lack of effect of economic growth on the reduction of poverty can be explained by the highly unequal distribution of income prevailing in the country.
Nyasha et al. (
2017) find that, in the case of Ethiopia, there is a bidirectional causal relationship between economic growth and poverty reduction, but that this relation is valid only for the short term, since in the long term no causality of any kind is found.
Abosedra et al. (
2016) also find, for the case of Egypt, a bidirectional causal relationship between both variables, such as
Rehman and Shahbaz (
2014) did for the case of Pakistan for the period 1972–2011.
The literature on the topic of the relationship between economic growth and poverty in the case of Mexico is quite scarce. We were able to find only three studies that analyze exclusively the case of Mexico and another one (
Fosu 2017) which estimates elasticities for many countries, among them Mexico. The first of these studies was carried out by
Hernández-Laos (
2010), who analyzes the effects of economic growth and the distribution of income over poverty in the period 1992–2006, finding an inverse relationship between these two variables. The second study was conducted by
Esquivel (
2015), who finds that economic growth in Mexico from 1992 onwards did not reduce poverty.
A third study, by
Campos Vázquez and Monroy-Gómez-Franco (
2016) analyzes the relationship between economic growth in Mexico and poverty at the state level. In the long run (2000–2012 period), the authors find that economic growth did not translate into significant poverty decreases. However, in the short run (2005–2014 period) the authors find that there is an inverse relationship between economic growth and poverty, although only for some states. At the national level, the authors find a unitary elasticity between poverty and growth.
In the most recent study,
Fosu (
2017) estimates that the poverty-growth elasticity for Mexico is −3.7 with the poverty line of
$1.25 per person per day and −2.2 for a poverty line of
$2.5 per person per day.
4. Econometric Model
The main objective of this study is to investigate the possible correlation and causality between the variables economic growth and poverty reduction in Mexico for the period 1960–2016. For this, we will first check the stationarity properties of the series through the Banerjee, Lumsdaine, and Stock test (
Banerjee et al. 1992) in order to consider the possibility of a structural change in the variables during this long period. Subsequently, we will use the cointegration test proposed by
Gregory and Hansen (
1996) to determine if the series are cointegrated even in the possible presence of structural change in any of the variables considered in the model. Then, with a dummy variable to represent the possible structural change after a given year, we will estimate a VECM to estimate the short- and long-term elasticities of growth over poverty and vice versa. Finally, we will carry out a Granger causality test to determine if there is a relation of causality between these variables.
Thus, the econometric model to be developed in the paper is a VECM, which can be described as follows:
where:
LGDPPC = Natural logarithm of real gross domestic product per capita
LPOV = Natural logarithm of household consumption expenditure
D = Dummy variable
µ = Disturbance term
6. Conclusions
The relationship between poverty and economic growth has been widely discussed in the economic development literature during the past few decades. Since the consensus of that literature is that there exists an inverse relationship between economic growth and poverty, in the last two decades the discussion has centered on measuring the effect of economic growth on the reduction of poverty. However, most of this literature has been based on cross-sectional studies. Only in recent years some literature making use of modern time-series techniques has emerged and has been applied to several countries but not for Mexico. To our knowledge, this is the first paper that applies these techniques to the Mexican case.
In the period under analysis in this study (1960–2016) per capita household consumption in Mexico grew at an average annual rate of 2.5 percent, while GDP per capita grew at an average annual rate of 1.8 percent. At the same time, in the period for which there is poverty headcount data (1984–2016), the poverty rate decreased 11.3 percentage points, from 22.5 per cent of the population in 1984 to 11.2 per cent in 2016. This information, coupled with the fact that the Gini coefficient fell from 0.49 in 1984 to 0.43 in 2016, could be indicative of the existence of an inverse relationship between economic growth and poverty in Mexico.
Thus, the objective of this study was to analyze the relationship between poverty and economic growth in Mexico, through a cointegration analysis for the period 1960–2016. The Gregory-Hansen cointegration test confirmed the existence of a long-run equilibrium relationship between the reduction of poverty and economic growth, both in the short run as is in the long-run. In the long run, it was found that a 1% increase in economic growth leads to a 2.4% increase in per capita consumption (and therefore to poverty reduction). These results are very similar to the estimates obtained by
Fosu (
2017) and
Adams (
2004). In addition, using the Granger causality test it was found that there is a bidirectional causality relationship between the reduction of poverty and economic growth in Mexico. These findings add to the empirical literature on the relationship between these important variables, particularly to the literature for single countries and based on the use of time-series analysis.
The results found in this article indicating that there exists an inverse relationship between economic growth and poverty in Mexico suggest that the country should continue to deepen its efforts to increase the rate of economic growth to reduce poverty. In this direction, the structural reforms carried out in recent years could contribute to increase the rate of economic growth and, consequently, to reduce poverty in the country.
For future research it is recommended to analyze the effects of economic growth by economic sectors, as well as to determine how much of the poverty reduction has been due to economic growth and how much to the social policies to decrease poverty established by the Mexican government since the 1980s.