Convergence is the process of levelling living standards, economic as well as social, across multiple countries or regions. It implies that, over time, differences in given development outcomes shrink. Hence, “backward” countries could  improve a certain development outcome faster than “advanced” countries, so as to close the gap between the two groups. What does this imply for the dynamics of poverty rates across countries? A study by FEB-researcher Konstantin M. Wacker, Jesus Crespo Cuaresma (Vienna University of Economics and Business) and the late Stephan Klasen (University of Göttingen) explains why countries starting out with high poverty rates often do not achieve a higher proportionate reduction in poverty.

“We would expect such ‘poverty convergence’ because economic growth reduces poverty and lower-income countries usually grow faster. Yet, the empirical evidence about poverty convergence is mixed”, Konstantin M. Wacker, an assistant professor with comprehensive policy experience, explains. The research by Wacker and his colleagues highlights why this is the case: the link from growth to poverty reduction is positive but complex and highly non-linear, which previous studies have not accounted for. “We manage to model this properly, in such way that nothing puzzling remains in poverty dynamics,” the assistant professor states.

Forecasting poverty rates

The most important implication of Wacker, Crespo Cuaresma and Klasen’s research is that it improves our understanding on how to model poverty dynamics in a macroeconomic cross-country context. This is important to be able to forecast poverty rates and essential for future research that aims to understand the macroeconomic drivers of poverty rates. “Due to our findings, the previously conflicting evidence on poverty convergence also makes a lot of sense now: we can show that the selection of sample countries, particularly their inequality levels, matters a lot for whether we should expect poverty convergence or not”, Wacker explains.

Ending poverty is a key sustainable development goal (SDG). Thus, it is very important to monitor progress in poverty reduction. “This is facilitated with our research.” Based on their research, one of Wacker’s co-authors developed and implemented the ‘World Poverty Clock’ together with his team. Wacker himself has started a follow-up project together with colleague Vanessa Hartmann from the German development bank KfW where the researchers use the developed poverty convergence framework to benchmark countries' progress in poverty reduction.

Understanding the bigger picture

In their research, Wacker and his colleagues discovered some data problems in the seminal contribution on poverty convergence. There was an erroneous observation for one country, where the year of observation was confused with the income level. “Given that this research was published in a leading economics journal, the American Economic Review, this may be quite surprising. But it also shows how important open data and replicability of results are”, the FEB-researcher states.

Wacker always had a passion to understand the ‘big picture’ of global poverty developments. “My former PhD supervisor Stephan Klasen was an expert on poverty issues and pointed me to the literature on poverty convergence when it was just starting to emerge.” He finds that, despite the progress he and his colleagues have made, it is still difficult to understand global poverty dynamics from a very aggregate perspective. “Countries have very particular experiences concerning growth, inequality, and poverty dynamics. For example, countries like Vietnam or Bhutan grew much faster over substantial periods of the last decades than standard convergence models suggest. Countries like Belize, Bhutan, or Timor-Leste managed to reduce inequality much more than one would expect. We are currently developing statistical tools to understand those heterogeneities in more detail.”

More information

The research paper by Konstantin M. Wacker, Jesus Crespo Cuaresma and Stephan Klasen was recently published in the Oxford Bulletin of Economics and Statistics. For more information, please contact Konstantin M. Wacker.