To make growth reduce poverty, industrialize: Using manufacturing to mediate the effect of growth on poverty

Abstract

Motivation: While economic growth is usually necessary to reduce poverty, it is often not sufficient. Industrialization, especially manufacturing, tends to create jobs that are more productive than in other sectors, and which pay more, thereby reducing poverty. Structure of production therefore matters as well as growth of production. Purpose: How much does industrialization mediate the relation of economic growth to poverty reduction?. Methods and approach: We deploy Causal Mediation Analysis, with industrialization as the mediator. The mechanism decomposes the impact of economic growth into direct effects on poverty, and those that apply indirectly through the mediator of industry. Data comes from the Groningen Growth and Development Centre and UNU-WIDER Economic Transformation Database (ETD) which covers 51 countries in the global South from 1990 to 2018. Findings: Economic growth directly reduces poverty, but the full impact arises from the mediating role of industrialization. Almost 50% of the impact on poverty occurs through employment in manufacturing. Policy implications: Social policies to reduce poverty will be incomplete if the production structure of economy is disregarded. Economic policy must consider the importance of industrial economic activities to amplify the impact of economic progress. On the contrary, policies promoting economic growth without creating industrial jobs will fail to offer accurate solutions to the poverty problem.