Introduction

Around the world, the general experience is for economic growth to be accompanied by falling poverty.¹ And nowhere has this been truer than in Asia, where data clearly indicate that poverty reduction associated with economic growth has actually been stronger than elsewhere in the world. Some put the association more strongly and assert that economic growth leads to or even causes reduction in poverty, on which basis it is argued that the best way to reduce poverty in the long run is to pursue economic growth.

This research was motivated by the widely differing patterns of economic growth and accompanying poverty reduction observed across Asia and between Asia and the rest of the world, especially given the perverse experience in certain countries where poverty incidence has risen with economic growth—as seen recently in the Philippines, for example. The primary objective is to identify key factors that explain this wide variation in patterns of the inclusiveness of economic growth (including lack thereof). Inclusive growth is defined in the context of this research as gross domestic product (GDP) growth that leads to significant poverty reduction. In exploring this relationship, this study goes beyond defining poverty by the income or expenditure yardstick alone, but examines a more holistic measure of poverty that considers its multidimensional nature.

Factors that influence the degree of poverty reduction that accompanies economic growth— or what has been referred to as the poverty elasticity of growth (PEG),² the term we will use in this paper—may include the sectoral composition of the economy and its growth (and thus the economic policy environment that leads to it); the nature, size, and pattern of public investments (including on social services and rural infrastructure); and nature of governance, including voice and accountability, rule of law, control of corruption, etc.).

In exploring the growth-poverty reduction relationship in Asia, this study set out to undertake the following:

1. Explore practical multidimensional indicators of poverty to account for its nonincome dimensions in analyzing the experience of Asian countries;
2. Determine similarities and differences in the pattern of economic growth and poverty reduction (measured multidimensionally as above) in Asian countries;
3. Identify groups of Asian economies that have exhibited strong, weak, and negative correlation between economic growth and poverty reduction;
4. Determine common factors within each of these groups and differences across them that may explain differences in the growth-poverty outcomes, with particular focus on:
   • sectoral composition of growth
   • nature of governance
   • nature, size, and pattern of public investments
5. Explore systematic relationships between the above explanatory factors and growth-poverty outcomes; and
6. Derive lessons to guide directions for policy and public investments in Asian countries, particularly in the face of the ongoing global financial crisis and economic downturn.

Section 2 examines the state of knowledge on both the growth-poverty linkage in Asia and measurement of multidimensional poverty. Section 3 presents calculated PEGs for Asian countries and examines differences in results across the two decades (1990s and 2000s) and between alternative measures of the poverty variable. Graphical and quantitative analysis is done in Section 4 on the available data to determine systematic relationships between plausible explanatory factors and the size of PEG. Section 5 summarizes the key observations and implications emerging out of the graphical and numerical analysis. The paper ends with conclusions and directions for policy and further research.

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