Poverty Traps and Economic Growth: Evidence from Pakistan

Abstract

The research on economic growth and poverty has largely considered poverty as an outcome of lower growth performance. In contrary to this commonly held belief that growth is necessary to reduce poverty, in this study we argue that poverty traps create self-perpetuating mechanisms that impede long-run economic growth. Poverty results in forgone growth opportunities because of higher transaction cost. Moreover, the poor people who are financially distress and also are distrustful are likely to be excluded from the active and efficient participation in economic activities. This study investigates the impact of poverty on economic growth in Pakistan using annual data for the period 1975 to 2016. The empirical analysis for the effect of poverty on economic growth is based on ARDL approach to cointegration, generalized method of moments, fully modified OLS, and dynamic ordinary least square estimation techniques. The main finding suggests that poverty inhibits economic growth performance of Pakistan and this finding is robust to diverse estimation methods. Therefore, growth policies should be designed not only to enhance economic growth but also should exert an independent influence on poverty reduction, thereby reducing the drag of poverty on growth.