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Poverty, Income Inequality and Economic Growth in U.S. Counties: - page 9 / 33





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income distribution. Similarly, imports can affect income distribution depending on the

extent of domestic competition and composition of imported goods. In effect, the policy

environment in each country has a significant role in determining the link between

economic growth and income inequality.

Early studies on the relationship between growth and poverty believed in the ‘big-

push’ approach, which contends that benefits of economic growth automatically trickle

down to the poor. In recent years, most economists concur on the view that income

distribution largely determines how much the poor benefit from economic growth.

However, McKay (1996) provides evidence that sustained growth in household income

reduces the absolute poverty level (number people living below a specified income or

expenditure level) irrespective of the level of initial income inequality. Some studies on

the contrary argue that an increase in income levels alone is not sufficient to reduce

poverty (Lipton and Ravallion 1995).

In sum, holding population and income distribution constant, economic growth

tends to increase per capita income and thus lower the absolute poverty level. In addition,

multiplier and accelerator effects (in income and investment) will also complement the

increase in per capita income associated with economic growth. Higher tax revenues

associated with higher household income contribute to better provision of social capital,

which can improve the non-income dimension of poverty as well. On the other hand, the

absolute level of poverty will not fall with economic growth, if the poor do not participate

in the growth process. The theoretical links among poverty, inequality and economic

growth can be complementing or offsetting each other. Thus, an empirical investigation

on such a relationship can help understand how these variables interact.


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