Disaggregated Sectoral Economic Performance and Poverty Reduction in Lesotho

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ABSTRACT: The growth or otherwise of an economy has implications for and on various development outcomes including poverty reduction and improved welfare. Debates and related studies on the links between economic growth from an aggregate perspective and poverty are not new, so is that of impact of sectoral composition of growth on economic development outcomes. However, the extent of their respective impact could differ by regions and economic levels. This paper investigates the impact of economic growth on poverty reduction in Lesotho, with a focus on disaggregated-sectoral economic performance. Using data for a period encompassing 44 years (1977 - 2020), the existence of long-run cointegration relationships and the long-run and short-run dynamics between economic growth of each sector and poverty reduction were established using the Autoregressive Distributed Lag (ARDL) technique. Key variables include per capita household final consumption expenditure, sectoral value added, the proportion of the urban population in the total population, general government final consumption expenditure, and foreign direct investment net inflows (% of GDP). These variables serve as proxies for poverty, sectoral economic performance, urbanization, government expenditure, and foreign direct investment, respectively. The ARDL estimation results suggest that, in the long-run, only agricultural sector performance significantly reduces poverty by increasing consumption expenditure. In contrast, the secondary and tertiary sectors appear to increase poverty for the country under consideration. This finding indicates a complex relationship where growth in industrial and service sectors does not necessarily translate into poverty alleviation in Lesotho. Additionally, urbanization and foreign direct investment contribute to poverty reduction in the long run. Given these findings, promoting agricultural development remains imperative for Lesotho. To reduce the poverty situation in the country, it is recommended that investment be made in programmes and policies that enhance agricultural productivity and efficiency, such as providing farmers with modern agricultural technologies and improved seeds to increase yields. Such initiative not only boost agricultural output but also improve the livelihoods of those dependent on agriculture, thereby contributing to a broader economic stability and poverty reduction. Equally, while agricultural development stands out as a crucial driver for poverty reduction in Lesotho, the role of urbanization and foreign direct investment also emerges as significant. The novelty of this study lies in its focus on the impact of sectoral composition of growth on economic development outcomes of a small landlocked country. Thereby helping its policymakers identify which sectors to prioritize and support for poverty reduction, improved welfare for the population, and achievement of sustainable economic development goals.