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.