**Figure 4: Reductions in poverty are correlated with income growth of the bottom 40 percent** Correlation is stronger for higher poverty line and higher initial poverty rate

<!-- Start of picture text --> 2 2<br>1 1<br>0 0<br>-4 -2 0 2 4 6 8 10 12 14 16 -4 -2 0 2 4 6 8 10 12 14 16<br>-1 -1<br>-2 -2<br>-3 -3<br>-4 -4<br>-5 Annualized Income/Consumption Growth of Bottom 40%(%) -5 Annualized Income/consumption Growth of Bottom 40%(%)<br>Low Initial Poverty Rate ($1.25) High Initial Poverty Rate ($1.25) Low Initial Poverty Rate ($2.50) High Initial Poverty Rate ($2.50)<br>(a) $1.25/day poverty reduction and G40 (b) $2.50/day poverty reduction and G40<br>Note: Darker color indicates higher initial poverty rate (> 30 percent) for either poverty line.<br>Source: PovcalNet as of September 20, 2013 and micro databases from WB regional teams for Latin America and Europe and<br>Central Asia.<br>Annual change in poverty headcount ($1.25 /day)<br>Annual Change in Poverty headcount ($2.50/day)<br><!-- End of picture text --> The correlation between G40 and poverty reduction is stronger (-0.44 versus -0.28) for the higher poverty line ($2.50/person/day versus $1.25/person/day). Thus on the average, the bottom 40 percent of a country has a larger overlap with the population living below $2.50/day, which is closer to national moderate poverty line in middle-income countries. Correlation is also stronger for countries with higher initial poverty rate (for both poverty lines), which is intuitive. But the correlations are imperfect. The lower correlation between reducing _extreme_ poverty and promoting shared prosperity (measured through income changes of the bottom 40 percent) demonstrates that these are distinct development challenges, with only a limited degree of overlap. Interestingly, regardless of which poverty line is used, the correlation between G40 and poverty reduction is higher for countries with higher rates of initial poverty.

# _Shared Prosperity, growth and inequality_

Overall income growth is a necessary condition for rising shared prosperity. Data from _circa_ 2005-2010 shows a positive association between income growth of the bottom 40 percent and growth in average income (Figure 5). A correlation coefficient of 0.77 suggests that the relationship is strong. Several papers by David Dollar and Aart Kraay have provided robust evidence of the impact of growth on poverty reduction. Similarly, Dollar and others (2013) argue that overall income growth is also sufficient for income growth of the bottom 40 percent thereby suggesting “overall prosperity” and “shared prosperity” are closely related. Another forthcoming work, by Skoufias and others (2013), broadly corroborates the close correspondence between growth rate of the mean and the growth rate of the bottom 40 percent across provinces in Thailand, but finds change in inequality to matter as well. Specifically, provinces in Thailand that made progress on reducing inequality were generally also the ones that experienced a faster growth of the bottom 40 percent. This finding appears to resonate, at least at the conceptual level, with the notion that in situations where inequality is high or rising, the growth rate of the average will not accrue proportionately to the bottom segments of the distribution. Economic research has also looked closely at the role of _initial_ inequality in explaining how economic growth translates to poverty reduction, and generally found the effect of growth on poverty reduction to be greater in low-inequality countries.<sup>14</sup> 9