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We are not seeing faster progress against poverty amongst the poorest developing countries. Yet this is implied by widely accepted "stylized facts" about the development process. The paper tries to explain what is missing from those stylized facts. Consistently with models of economic growth incorporating borrowing constraints, the analysis of a new data set for 100 developing countries reveals an adverse effect on consumption growth of high initial poverty incidence at a given initial mean. A high incidence of poverty also entails a lower subsequent rate of progress against poverty at any given growth rate (and poor countries tend to experience less steep increases in poverty during recessions). Thus, for many poor countries, the growth advantage of starting out with a low mean ("conditional convergence") is lost due to their high poverty rates. The size of the middle class - measured by developing-country, not Western, standards - appears to be an important channel linking current poverty to subsequent growth and poverty reduction. However, high current inequality is only a handicap if it entails a high incidence of poverty relative to mean consumption.

Absolute poverty --- Consumption growth --- Country regressions --- Developing countries --- Developing world --- Development research --- Economic growth --- Growth model --- Growth process --- Growth rate --- Growth rates --- High poverty --- Inequality --- Mean income --- Policy research --- Poor countries --- Poverty --- Poverty rate --- Poverty rates --- Poverty Reduction --- Pro-Poor Growth --- Reducing poverty --- Regional Economic Development --- Rural Development --- Rural Poverty Reduction --- Services and Transfers to Poor

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• Reference Manager
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Recent theoretical literature has suggested a variety of mechanisms through which poverty may deter growth and become self-perpetuating. A few papers have searched for empirical regularities consistent with those mechanisms - such as aggregate non-convexities and convergence clubs. However, a seemingly basic implication of the theoretical models, namely that countries suffering from higher levels of poverty should grow less rapidly, has remained untested. This paper attempts to fill that gap and provide a direct empirical assessment of the impact of poverty on growth. The paper's strategy involves including poverty indicators among the explanatory variables in an otherwise standard empirical growth equation. Using a large panel dataset, the authors find that poverty has a negative impact on growth that is significant both statistically and economically. This result is robust to a variety of specification changes, including (i) different poverty lines; (ii) different poverty measures; (iii) different sets of control variables; (iv) different estimation methods; (v) adding inequality as a control variable; and (vi) allowing for nonlinear effects of inequality on growth. The paper also finds evidence that the adverse effect of poverty on growth works through investment: high poverty deters investment, which in turn lowers growth. Further, the data suggest that this mechanism only operates at low levels of financial development, consistent with the predictions of theoretical models that underscore financial market imperfections as a key ingredient of poverty traps.

Capital investment --- Country case --- Credit constraints --- Debt Markets --- Development research --- Economic opportunities --- Economic Theory and Research --- Empirical estimates --- Empirical regularities --- Empirical studies --- Explanatory variables --- Finance and Financial Sector Development --- Financial development --- Growth equation --- Growth process --- Growth rates --- High poverty --- Human capital --- Inequality --- Macroeconomics and Economic Growth --- Negative impact --- Persistent poverty --- Policy research --- Poverty lines --- Poverty Monitoring and Analysis --- Poverty Reduction --- Poverty traps --- Pro-Poor Growth --- Rural Development --- Rural Poverty Reduction --- Services and Transfers to Poor