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Jun 1st 2013 | HONG KONG AND WASHINGTON, DC |From the print edition
IN SEPTEMBER 2000 the heads of 147 governments pledged that they would halve
the proportion of people on the Earth living in the direst poverty by 2015,
using the poverty rate in 1990 as a baseline. It was the first of a litany of
worthy aims enshrined in the United Nations millennium development goals
(MDGs). Many of these aims such as cutting maternal mortality by three quarters
and child mortality by two thirds have not been met. But the goal of halving
poverty has been. Indeed, it was achieved five years early.
In 1990, 43% of the population of developing countries lived in extreme poverty
(then defined as subsisting on $1 a day); the absolute number was 1.9 billion
people. By 2000 the proportion was down to a third. By 2010 it was 21% (or 1.2
billion; the poverty line was then $1.25, the average of the 15 poorest
countries own poverty lines in 2005 prices, adjusted for differences in
purchasing power). The global poverty rate had been cut in half in 20 years.
That raised an obvious question. If extreme poverty could be halved in the past
two decades, why should the other half not be got rid of in the next two? If
21% was possible in 2010, why not 1% in 2030?
Why not indeed? In April at a press conference during the spring meeting of the
international financial institutions in Washington, DC, the president of the
World Bank, Jim Yong Kim, scrawled the figure 2030 on a sheet of paper, held
it up and announced, This is it. This is the global target to end poverty. He
was echoing Barack Obama who, in February, promised that the United States
will join with our allies to eradicate such extreme poverty in the next two
decades.
This week, that target takes its first step towards formal endorsement as an
aim of policy round the world. The leaders of Britain, Indonesia and Liberia
are due to recommend to the UN a list of post-2015 MDGs. It will be headed by a
promise to end extreme poverty by 2030.
There is a lot of debate about what exactly counts as poverty and how best to
measure it. But by any measure, the eradication of $1.25-a-day poverty would be
an astonishing achievement. Throughout history, dire poverty has been a basic
condition of the mass of mankind. Thomas Malthus, a British clergyman who
founded the science of demography, wrote in 1798 that it was impossible for
people to feel no anxiety about providing the means of subsistence for
themselves and [their] families and that no possible form of society could
prevent the almost constant action of misery upon a great part of mankind. For
most countries, poverty was not even a problem; it was a plain, unchangeable
fact.
To eradicate extreme poverty would also be remarkable given the number of
occasions when politicians have promised to achieve the goal and failed. We do
have an historic opportunity this year to make poverty history, said Tony
Blair, Britain s prime minister in 2005. Three years before that, Thabo Mbeki,
South Africa s president said that for the first time in human history,
society has the capacity, the knowledge and the resources to eradicate poverty.
Going further back: For the first time in our history, said Lyndon Johnson,
it is possible to conquer poverty. That was in 1964. Much will have to change
if Mr Kim s piece of paper is not to become one more empty promise.
So how realistic is it to think the world can end extreme poverty in a
generation? To meet its target would mean maintaining the annual
one-percentage-point cut in the poverty rate achieved in 1990-2010 for another
20 years. That would be hard. It will be more difficult to rescue the second
billion from poverty than it was the first. Yet it can be done. The world has
not only cut poverty a lot but also learned much about how to do it. Poverty
can be reduced, albeit not to zero. But a lot will have to go right if that is
to happen.
Growth Decreases Poverty
In 1990-2010 the driving force behind the reduction of worldwide poverty was
growth. Over the past decade, developing countries have boosted their GDP about
6% a year 1.5 points more than in 1960-90. This happened despite the worst
worldwide economic crisis since the 1930s. The three regions with the largest
numbers of poor people all registered strong gains in GDP after the recession:
at 8% a year in East Asia; 7% in South Asia; 5% in Africa. As a rough guide,
every 1% increase in GDP per head reduces poverty by around 1.7%.
GDP, though, is not necessarily the best measure of living standards and
poverty reduction. It is usually better to look at household consumption based
on surveys. Martin Ravallion, until recently the World Bank s head of research,
took 900 such surveys in 125 developing countries. These show, he calculates,
that consumption in developing countries has grown by just under 2% a year
since 1980. But there has been a sharp increase since 2000. Before that, annual
growth was 0.9%; after it, the rate leapt to 4.3%.
Growth alone does not guarantee less poverty. Income distribution matters, too.
One estimate found that two thirds of the fall in poverty was the result of
growth; one-third came from greater equality. More equal countries cut poverty
further and faster than unequal ones. Mr Ravallion reckons that a 1% increase
in incomes cut poverty by 0.6% in the most unequal countries but by 4.3% in the
most equal ones.
The country that cut poverty the most was China, which in 1980 had the largest
number of poor people anywhere. China saw a huge increase in income inequality
but even more growth. Between 1981 and 2010 it lifted a stunning 680m people
out poverty more than the entire current population of Latin America. This cut
its poverty rate from 84% in 1980 to about 10% now. China alone accounts for
around three quarters of the world s total decline in extreme poverty over the
past 30 years.
What is less often realised is that the recent story of poverty reduction has
not been all about China. Between 1980 and 2000 growth in developing countries
outside the Middle Kingdom was 0.6% a year. From 2000 to 2010 the rate rose to
3.8% similar to the pattern if you include China. Mr Ravallion calculates that
the acceleration in growth outside China since 2000 has cut the number of
people in extreme poverty by 280m.
Can this continue? And if it does, will it eradicate extreme poverty by 2030?
To keep poverty reduction going, growth would have to be maintained at
something like its current rate. Most forecasters do expect that to happen,
though problems in Europe could spill over and damage the global economy. Such
long-range forecasts are inevitably unreliable but two broad trends make an
optimistic account somewhat plausible. One is that fast-growing developing
countries are trading more with each other, making them more resilient than
they used to be to shocks from the rich world. The other trend is that the two
parts of the world with the largest numbers of poor people, India and Africa,
are seeing an expansion of their working-age populations relative to the
numbers of dependent children and old people. Even so, countries potentially
face a problem of diminishing returns which could make progress at the second
stage slower than at the first.
There is no sign so far that returns are in fact diminishing. The poverty rate
has fallen at a robust one percentage point a year over the past 30 years and
there has been no tailing off since 2005. But diminishing returns could occur
for two reasons. When poverty within a country falls to very low levels, the
few remaining poor are the hardest to reach. And, globally, as more people in
countries such as China become middle class, poverty will become concentrated
in fragile or failing states which have seen little poverty reduction to date.
The sweetest spot
In a study for the Brookings Institution, a think-tank in Washington, DC,
Laurence Chandy, Natasha Ledlie and Veronika Penciakova look at the
distribution of consumption (how many people consume $1 a day, $2 a day and so
on) in developing countries. They show how it has changed over time, and how it
might change in future. Plotted on a chart, the distribution looks like a
fireman s helmet, with a peak in front and a long tail behind. In 1990 there
were hardly any people with no income at all, then a peak just below the
poverty line and then a long tail of richer folk extending off to the right
(see chart 2).
As countries get richer, the helmet moves to the right, reflecting the growth
in household consumption. The faster the rate, the farther to the right the
line moves, so the strong 4.3% annual growth in consumption since 2000 has
pushed the line a good distance rightward.
But the shape of the line also matters. The chart shows that in 1990 and 2000,
the peak was positioned slightly to the left of the poverty line. As the shape
moved to the right, it took a section of the peak to the other side of the
poverty mark. This represents the surge of people who escaped poverty in
1990-2010.
At the moment the world is at a unique sweet spot. More people are living at
$1.25 than at any other level of consumption. This means growth will result in
more people moving across the international poverty line than across any other
level of consumption. This is a big reason why growth is still producing big
falls in poverty.
But as countries continue to grow, and as the line continues to be pulled to
the right, things start to change. Now, the peak begins to flatten. In 2010,
according to Mr Chandy, there were 85m people living at or just below the
poverty line (at a consumption level between $1.20 and $1.25 a day). If poverty
falls at its trend rate, the number of people living at $1.20-1.25 a day will
also fall: to 56m in 2020 and 28m in 2030.
This is good news, of course: there will be fewer poor people. But it means the
rate of poverty reduction must slow down, even if consumption continues to grow
fast. As Mr Chandy says, unless growth goes through the roof, it is not
possible to maintain the trend rate of poverty reduction with so many fewer
individuals ready to cross the line.
So what impact, in practice, might diminishing returns have? Messrs Chandy and
Ravallion try to answer that by calculating what different rates of household
consumption mean for poverty reduction and how much household income would have
to grow to eradicate extreme poverty.
Mr Ravallion provides an optimistic projection. If developing countries were to
maintain their post-2000 performance, he says, then the number of extremely
poor people in the world would fall from 1.2 billion in 2010 to just 200m in
2027.
This would be a remarkable achievement. It took 20 years to reduce the number
of absolutely poor people from 1.9 billion in 1990 to 1.2 billion in 2010 (a
fall of less than half). Mr Ravallion s projection would lift a billion people
out of poverty in 17 years and implies almost halving the number in just ten
(from 2012 to 2022).
But even this projection does not get to zero poverty. The figure of 200m poor
implies a poverty rate of just over 3%. To get to zero would require something
even more impressive. Mr Ravallion estimates that to reach a 1% poverty rate by
2027 would require a surge in household consumption of 7.6% a year an
unrealistically high level.
Drops of good cheer
Mr Chandy and his co-authors get similar results. They take a projection of
falling poverty based on forecasts of consumption by the Economist Intelligence
Unit, our sister company. If growth were two points better than forecast, then
the poverty rate would be just over 3%; if two points worse, it would be almost
10% a big disappointment. If income distribution within countries gets
progressively better or worse (ie, if the poorest 40% do better or worse than
the top 10%), then the range of outcomes would be the same as if growth were
higher or lower. And if you combine all these variables, then the range is wide
indeed, from a miserable 15% poverty rate (lower growth, more inequality) to a
stunning 1.4% (higher growth, less inequality).
Two conclusions emerge from these exercises. First, the range of outcomes is
wide, implying that prospects for eradicating poverty are uncertain. The range
is also not symmetrical, suggesting the risk of failure is greater than the
hope of success. It is also noticeable that no one is forecasting zero poverty.
If that were taken as the post-2015 target, then it would be missed. However,
reducing the rate to 3% would lift a billion people out of poverty and that
would be remarkable enough. In the best case, the global poverty rate falls to
a little over 1%, or just 70m people. That would be astonishing. To get to
these levels, the studies suggest, you cannot rely on boosting growth or
improving income inequality alone. You need both.
Second, the geography of poverty will be transformed. China passed the point
years ago where it had more citizens above the poverty line than below it. By
2020 there will be hardly any Chinese left consuming less than $1.25 a day:
everyone will have escaped poverty. China wrote the first chapter of the book
of poverty reduction but that chapter is all but finished.
The next will be about India. India mirrors the developing world as a whole:
growth will push a wave of Indians through the $1.25 barrier over the next
decade (see chart 3). The subcontinent could generate the largest gains in
poverty reduction in the next decade (which is why the current Indian slowdown
is worrying). After that, though, continued growth will benefit relatively
comfortable Indians more than poor ones.
The last chapter will be about Africa. Only in sub-Saharan Africa will there be
large numbers of people below the poverty line. Unfortunately they are
currently too far below it. The average consumption of Africa s poorest people
is only about 70 cents a day barely more than it was 20 years ago. In the six
poorest countries it falls to only 50 cents a day. The continent has made big
strides during the past decade. But even 20 more years of such progress will
not move the remaining millions out of poverty. At current growth rates, a
quarter of Africans will still be consuming less than $1.25 a day in 2030. The
disproportionate falls in Africa s poverty rate will not happen until after
that date.
Make Bono history
Deng wrote chapter one
The record of poverty reduction has profound implications for aid. One of the
main purposes of setting development goals was to give donors a wish list and
persuade them to put more resources into the items on the list. This may have
helped in some areas but it is hard to argue that aid had much to do with
halving poverty. Much of the fall occurred in China, which ignored the MDGs. At
best, aid and the MDGs were marginal.
The changing geography of poverty will pose different aid problems over the
next 20 years. According to Mr Chandy, by 2030 nearly two-thirds of the world s
poor will be living in states now deemed fragile (like the Congo and
Somalia). Much of the rest will be in middle-income countries. This poses a
double dilemma for donors: middle-income countries do not really need aid,
while fragile states cannot use it properly. A dramatic fall in poverty
requires rethinking official assistance.
Yet all the problems of aid, Africa and the intractability of the final billion
do not mask the big point about poverty reduction: it has been a hugely
positive story and could become even more so. As a social problem, poverty has
been transformed. Thanks partly to new technology, the poor are no longer an
undifferentiated mass. Identification schemes are becoming large enough India
has issued hundreds of millions of biometric smart cards that countries are
coming to know their poor literally by name. That in turn enables social
programmes to be better targeted, studied and improved. Conditional
cash-transfer schemes like Mexico s Oportunidades and Brazil s Bolsa Fam lia
have all but eradicated extreme poverty in those countries.
As the numbers of poor fall further, not only will the targets become fewer,
but the cost of helping them will fall to almost trivial levels; it would cost
perhaps $50m a day* to bring 200m people up above the poverty line. Of course,
there will be other forms of poverty; the problems of some countries and places
will remain intractable and may well require different policies; and $1.26 a
day is still a tiny amount.
But something fundamental will have shifted. Poverty used to be a reflection of
scarcity. Now it is a problem of identification, targeting and distribution.
And that is a problem that can be solved.
Correction: The original version of this article said that it would cost $50m a
year to bring 200m people above the poverty line. $50m is in fact the daily
figure. The annual figure is $18.3 billion. This was corrected on May 31st
2013.