Revisiting Growth-Poverty Relationship: A Medium-Term Causality Approach

This article examines the potential medium-term causal relationship between changes in Gross Domestic Product (GDP) per capita and poverty in developing countries during the 1970s-1990s. For this purpose, we use panel data model evaluation techniques to test the out-of-sample forecasting performance of competing models. We conclude that the evidence supports the hypothesis that increases in GDP per capita cause unidirectional poverty reduction, measured by the $1/day poverty rate, in the period 1970s-1980s. The results are similar when analysing low- and middle-income countries and mid-high- and very high-inequality countries separately. However, in the period 1980s-1990s, it is only statistically significant for low-income countries.