Does institutional quality matter for poverty and inequality reduction? Evidence in Upper middle-income countries

The role of institutional quality in the process of poverty and inequality reduction has been subject to several debates in the social economic literature. This paper studies the relationship between poverty, inequality and economic growth by introducing six institutional variables (control of corruption, Government Effectiveness, Political Stability, Regulatory Quality, Rule of Law, Voice and Accountability) of 14 Upper middle-income countries over the 1996–2010 period using GMM system method. The results indicate that economic growth appears to have an impact on poverty and inequality alleviation, however, the latter, does not seem to be affect by the control of corruption variable. Although, improvements in the quality of Voice and Accountability, Government Effectiveness, Regulatory Quality, Rule of Law increase the income of the 20% poorest and decrease inequality of income distribution. Similarly, improvements in political stability, Government Effectiveness and Rule of Law are associated with a deterioration of proportion of people below 1.9 $ per day. This paper recommends to Strengthening institutional quality.