This thesis tests the hypothesis that the volatility of economic growth affects the extent to which that growth reduces poverty. The relationship between economic growth and volatility has been well documented in the literature, but the link between volatility and the growth elasticity of poverty is yet to be fully explored.
While the expansive literature in the field of economic development concurs that economic growth is necessary for poverty reduction, it is becoming increasingly apparent that growth alone is insufficient. Evidence from cross-country studies suggests that the elasticity of poverty with respect to economic growth exhibits a high degree of international variation. As a result, research into the conditions facilitating ‘pro-poor growth’ is itself growing. Recent studies suggest that the reduction in poverty associated with a given rate of economic growth is stronger if the concomitant decrease in inequality is larger. While this may suggest that the redistributive effects of growth could explain the cross-country variation in elasticity, there is evidence that a large proportion of the variation remains unexplained even after accounting for redistribution. The aim of this paper is to explain this variation through the connection between volatility and poverty.
The concepts of hysteresis and idiosyncratic risk are utilised to help forge this connection. Hysteresis describes how those who lose their jobs in a recession stay unemployed even after a recession ends, while a lack of complete markets and no access to insurance against idiosyncratic risk draws out the link to the vulnerability of the asset poor. It is proposes that hysteresis in this context is characterised by a movement of the newly unemployed into the informal sector during a recession and their inability to return to formal employment thereafter. Thus, this thesis tackles a fascinating question at the frontier of the pro-poor growth literature. This question will be addressed through the use of a system of equations, which allow for mutual interdependence between the variables of interest: poverty, volatility and economic growth.
Results indicate that the volatility of growth with respect to poverty is an important determinant of the elasticity of poverty with respect to growth, and suggest that stabilising growth has a significant impact on pro-poor component of that growth. The implication is that if economic growth is to truly be ‘pro-poor’, then it must be sufficiently stable.