The Effect of the Sectoral Composition of Economic Growth on Rural and Urban Poverty

Abstract

This paper analyses the channels through which growth reduces poverty by evaluating the relationship between the sectoral composition of economic growth and the rural-urban composition of poverty.

Unlike previous studies, that use single country or multi-country cross-sectional data, the analysis pioneers the use of cross-country panel data to address this issue. Findings show that rural (urban) poverty is highly responsive to agricultural (non-agricultural) productivity growth.

The effect of agricultural productivity growth on rural poverty is particularly strong for countries with little dependence on natural resources. The effects of non-agricultural productivity on urban poverty are not sensitive to initial conditions.

Moreover, results suggests that growth in the share of employment in the non-agricultural sector (i.e., structural transformation) seems to reduce rural poverty, most notably for countries at a low initial level of development.