A decomposition of poverty trends across regions: The role of variation in the income and inequality elasticities of poverty

The impact of globalization on global and local inequality is hotly debated in the recent literature. This study considers the separate issue of the impact of globalization on poverty through quantifying explicitly the responsiveness of poverty to aggregate changes in income distribution. We illustrate the quantitative importance of such an approach through decomposing poverty trends observed in the six major developing regions over the period 1980-98 under the assumption of a log-normal income distribution. We find that differential income growth accounts for most of the diversity in poverty trends, both across regions and over time, but leaves a substantial amount of variation unexplained. The impact of changes in inequality is relatively small, except in Eastern Europe and Central Asia. Income and inequality elasticities of poverty change over time in most regions, but more importantly, vary considerably across regions. We show that this cross-regional variation in elasticities can account for the bulk of the regional diversity in poverty trends that income growth does not account for. The relevance of these findings for policymakers concerned with the impact of globalization on the world’s poor is that globalization-induced average income and inequality changes will vary greatly in their impact on poverty depending on poverty’s responsiveness to these changes, which in turn depends on the current distribution of income. – globalization ; poverty ; income growth ; inequality