200million People are left in Extreme Poverty due to Unequal Growth

Global Development

Worsening inequality is a key challenge of our time. Evidence from Oxfam illustrates that next year, if current trends continue, the richest 1% of humanity will own half of global wealth. Our own computations show that over the MDG period (1990-2015), nearly 4 people in 5 lived in countries where the bottom 40% of the income distribution grew more slowly than the average.

We should be concerned about inequality for many reasons – just one of them is that it is intimately linked to levels of absolute deprivation. Growth can reduce poverty even if offset by rising inequality but it makes the challenge much harder. In light of the global call of the SDGs to ‘leave no one behind’ and the proposed target that the incomes of the bottom 40% within countries should exceed national averages, it becomes pertinent to think about what the poverty reducing effect might be.

One potential approach, featured in a recent World Bank working paper, is to undertake poverty projections over the next 15 years under different inequality scenarios. Another, which we adopt, is to estimate how many people would be poor today according to the $1.25 a day benchmark if countries had experienced more equal growth over the last 30 years.

Using some simplifying assumptions, we explore two scenarios. Under the first, ‘equal growth’, we assume the bottom 40% of the population grew at the same rate as the average of their country. Under another, ‘pro-poor growth’, we assume the bottom 40% grew faster than the average (we considered gaps of 1 to 3 percentage points, in line with the actual experiences of some countries in the past 3 decades). We wanted to keep overall growth constant so that we isolated the impact of inequality – this meant that any increase to the growth of incomes of the bottom 40% had to be subtracted from the incomes of richer people within that country. We considered two possibilities – if this income was subtracted equally from every person in the top 60% of the society, and if it came solely from those fortunate enough to be in the top 10%.

The headline finding: many fewer people could have been left behind in extreme poverty had growth been more equal over the last 30 years.

We first illustrate this claim, then highlight an important caveat.

  • Equal Growth Scenario

If all people within each country had experienced equal income growth, around 200 million more people – about 1 in 5 of those that are currently very poor – would have escaped extreme poverty. Interestingly, the difference is entirely due to unequal growth in many of today’s middle income countries (Chart 1). On average, today’s low income countries experienced relatively equal growth between the bottom 40% and the average.

Total Poverty by Income Category

Under this scenario, China could have effectively eliminated extreme poverty along with countries including Mexico and Peru. In other words, while growth played a key role in reducing extreme poverty in fast growing middle income countries like China, if growth had been equal, the impact on poverty could have been much bigger.

  • Pro-poor growth

Fewer than half as many people would live in extreme poverty today if the incomes of the bottom 40% of people in each country had grown two percentage points faster than the average. For example, extreme poverty could have been eliminated in Indonesia and Philippines and could have fallen to around 5% in India and Vietnam. This level of pro-poor growth is possible as it actually did occur in around a quarter of countries.

Now the key caveat… Initial poverty levels and the type of redistribution matter

In too many countries still, poverty rates over 40% are part of recent history or current reality. In these places, redistributing income bluntly from the top 60% of the population can actually increase poverty levels if it pushes people that were above the poverty line below it. One alternative is that these high-poverty countries redistribute income growth from the top 10% of their population alone – this is likely to reduce poverty in most but not all the countries we examined.

Whether growth is redistributed from the top 60% or the top 10% also has a potentially big impact on the global poverty (Chart 2). If growth is redistributed away from top 60%, then extreme poverty starts to increase when growth is more than 2 percentage points higher for the bottom 40% relative to the average. In contrast, if growth is redistributed away from top 10%, the global poverty rate continues to decline.

Extreme Poverty under different scenarios

So what can we learn from past experience?

This analysis illustrates that significantly more poverty reduction could have occurred if the income growth of the bottom 40% of the population was higher than the average in many MICs. In contrast, in most LICs this would have done very little to eliminate extreme poverty. To move towards the SDG poverty goal – to ‘end poverty in all its forms everywhere’ – growth needs to be more equally distributed in middle income countries. While in LICs, growth needs to be higher while continuing to be relatively equal across the distribution. But we also show that governments need to be very careful in how they redistribute in order to avoid perverse outcomes. ‘Leaving no one behind’ will require a careful mix of global ambition and careful attention to country realities.

 

This post originally featured on the Post-2015 Blog, available here: http://post2015.org/2015/07/30/how-many-people-were-left-behind-by-unequal-growth-during-the-mdg-period/

Is extreme poverty going to end by 2030?

Global Development

The Overseas Development Institute (ODI) has just released a report including a chapter that provides an overview of existing work on projections of extreme poverty to 2030. Ending extreme poverty (defined as living below $1.25 a day 2005 PPP) by 2030 is a central part of the global development agenda. It is at the heart of the United Nations Sustainable Development Goals, the World Bank has made it a key goal, and NGOs, such as the Global Poverty Project, are mobilising hundreds of thousands of people to encourage global leaders to achieve zero poverty by 2030.

But is ending extreme poverty by 2030 achievable?

Before addressing this question directly it is worth highlighting the historical significance of this goal. Extreme poverty was the common experience for most of human history until recent generations. Former World Bank Economist, Martin Ravallion, has estimated the historic reduction in the number of people living in extreme poverty in the developed world using data on income and inequality (see here). While it is difficult to be exact, he provides the best insight available into historical trends in poverty reduction, which is shown in the chart below.

Historical poverty reduction

Note: ACN – Australia, Canada, New Zealand, ACH – Austria-Czechoslovakia-Hungary BSM – Benelux-Switzerland-Micro-European States PS – Portugal, Spain, UKI – United Kingdom and Ireland

Source: http://www.cgdev.org/blog/poverty-rich-world-when-it-was-not-nearly-so-rich

It was not too long ago that developed countries had similar rates of extreme poverty to what developing countries have today. For example, over three-quarters of the populations of Australia, Canada and New Zealand were in extreme poverty 200 years ago, which is on par with the poorest countries in the world today. Only by 1950 had extreme poverty been eliminated in these countries.

In addition to the relatively recent elimination of extreme poverty in developed countries, extreme poverty began falling rapidly in developing countries over the last half century. The first Millennium Development Goal, to halve extreme poverty in the developing world between 1990 and 2015 was met five years ahead of schedule. If these trends continue the world would seem to be on track to be free from extreme poverty in the foreseeable future.

The best available estimates suggest that the world will come close to ending extreme poverty by 2030, but that there will still be more to be done. Most projections show that around 3 – 7% of the developing world population (around 200-600 million people) will remain in extreme poverty in 2030. The projections in the ODI report, shown in the graph below, are based upon a ‘business as usual’ approach whereby strong economic growth in the developing world continues as it has over the last decade or so, inequality remains constant and the potential effects of climate change are ignored. Clearly these assumptions are simplistic. One of the authors of these studies, Lawrence Chandy from Brookings, even highlights that predicting poverty into the future is a ‘fools errand’ (see here). Yet these projections provide a helpful guide as to what the world is on track to achieve.

Projections of Poverty in 2030

Source: Data and links to underlying sources available here

Where will those remaining in extreme poverty live?

A major shift of the geographical concentration of global poverty is expected to continue over the next 15 years. Since the 1990s the vast majority of the reduction in people living in extreme poverty occurred in East Asia, with only slight decreases in South Asia and increases in the number of people living in poverty in Sub-Saharan Africa. As the chart below shows, over the next 15 years, the bulk of the reductions in poverty is expected to occur in South Asia, leaving almost all the world’s extreme poor living in Sub-Saharan Africa.

Regional Breakdown of Poverty Projections

Source: Data and links to underlying sources available here

What role does inequality play?

A major assumption underpinning these projections is that the distribution of economic growth across the income distribution remains constant. A recent World Bank working paper highlights that there will be significantly different outcomes for the proportion of people living in extreme poverty in 2030 depending on the distribution of growth across the income distribution. The paper shows that if the bottom 40% could grow two percentage points faster than the average, the proportion of people living in extreme poverty could fall below 3% of the world’s population by 2030. However if the bottom 40% grows at two percentage points slower than the average, almost 10% of the world would remain in extreme poverty in 2030.

 

While eliminating extreme poverty by 2030 would be an amazing milestone for humanity, it is important to keep in mind that development doesn’t stop there. The extreme poverty definition only provides a very limited snapshot of people’s standard of living, through the lens of changes in consumption. In addition, even though there has been significant progress in reducing the number of people living below $1.25 a day, the majority of the developing world still live below $4 a day. Furthermore, if climate change and other global development challenges are not addressed in the coming decades, progress against reducing extreme poverty could easily be reversed.

 

This blog post was originally featured on the DevPolicy Blog available here: http://devpolicy.org/is-extreme-poverty-going-to-end-by-2030-20150506/

The End of Extreme Poverty in the Developed World

Global Development

Key Points 

  • Extreme Poverty was only eliminated in the developed world relatively recently, around 50 years ago, having only begun falling dramatically from around 1850. This illustrates that progress in the fight against poverty can occur quite rapidly.
  • For the whole of human history prior to 1850, more than four-fifths of the world’s population lived on less than $1.25 a day. Today less than 15% of the world’s population live in extreme poverty and it is projected to potentially fall below 5% by 2030.

Background

Extreme poverty was the common experience for most of human history until recent generations (see here for more information about the Beginning of the End of Extreme Poverty). Former World Bank Economist, Martin Ravallion, has estimated the historic reduction in the number of people living below $1.25 a day in the developed world using data on income and inequality. While it is difficult to be exact, he provides the best insight available into historical trends in poverty reduction, which are shown in the chart below.

mravallion1a

Note: ACN – Australia, Canada, New Zealand, ACH – Austria-Czechoslovakia-Hungary BSM – Benelux-Switzerland-Micro-European States PS – Portugal, Spain, UKI – United Kingdom and Ireland

It was not too long ago that developed countries had similar rates of extreme poverty to what developing countries have today. For example, in the late-19th century, the United States had a similar rate of extreme poverty to what India has today, while at that time the United Kingdom had a similar extreme poverty rate to Ghana today. Another example is that over three-quarters of the populations of Australia, Canada and New Zealand were in extreme poverty 200 years ago, which is on par with the poorest countries in the world today, like the Central African Republic. However extreme poverty reduced to around 5% of their populations by 1915 and was eliminated by around 1950.

Significant progress against extreme poverty began in the 1800s and by the mid 20th century it was completely eliminated. The relatively recent elimination of extreme poverty in the developed world provides hope that rapid progress can occur and that it is feasible that one day soon the world could be free from extreme poverty.

Source:

Centre for Global Development 2014 <http://www.cgdev.org/blog/poverty-rich-world-when-it-was-not-nearly-so-rich>

Are Zero Poverty and Zero Net Emissions Compatible?

Global Development

The eradication of extreme poverty is possible, even taking into account the destabilising force of climate change, according to a recent paper just released by the Overseas Development Institute (ODI):  http://www.developmentprogress.org/sites/developmentprogress.org/files/case-study-report/zero_zero_discussion_paper_-_02_december_2014.pdf

However achieving zero extreme poverty on the pathway to zero net emissions can only be achieved through reducing inequality.

Zero Zero

Ending Extreme Poverty by 2030 requires a reduction in inequality

Global Development

Key Points

  • Extreme Poverty will not be eliminated by 2030 unless there is a historically unprecedented reduction in inequality.
  • The continuation of recent high economic growth rates for the next 15 years will not be enough to reach a 3% global extreme poverty rate by 2030.
  • For extreme poverty to be eliminated, the incomes of the bottom 40% of the income distribution (the poorest people) must grow an extra two percentage points higher than the average economic growth rate for the next 15 years.

Background

The latest estimates from the World Bank show that eliminating extreme poverty by 2030 is beyond humanity’s grasp, unless unparalleled steps are taken to reduce inequality. This is an important finding given that world leaders are set to commit to ‘Zero Poverty’ by 2030 as part of the United Nations Sustainable Development Goals (SDGs) Agenda. Reducing poverty and the SDGs are clearly about more than increasing incomes through economic growth. They are about broader issues such as health, education, gender equality, environmental sustainability, employment etc. However at the heart of SDGs is the notion of eliminating extreme poverty (defined as 3% or less of the world’s population living below $1.25 a day).

The continuation of recent high economic growth rates throughout most parts of the developing world will not be enough to reduce extreme poverty. Figure 1 shows how the global poverty rate is likely to change based upon historical growth patterns. Even in the best-case scenario, extreme poverty is likely to remain above 5% of the world’s population by 2030. While if growth rates are lower than they have recently been, like they were in the 1980s, then the global extreme poverty rate could be as high in 2030 as it is today.

Figure 1 – Changes in Extreme Poverty based upon different growth rates

Figure 1

The above predictions hold inequality constant. However if inequality was also reduced, along with these patterns of economic growth, extreme poverty could be eliminated. Figure 2 shows that if the incomes of those in the bottom 40% of the income distribution grow by an extra two percentage points faster than the average growth rate the target of a 3% global extreme poverty rate can be reached. This relies on growth rates continuing to be as high as they were in the 2000s and that the poorest people benefit the most from economic growth.

Figure 2 – Changes in Extreme Poverty based upon Growth for the Bottom 40%

Figure 2

Reducing inequality alongside growth appears to be a key factor in eliminating poverty. However achieving this will require significant changes to see the poor benefit the most from economic growth. These changes are essential if world leaders are serious about Zero Poverty being reached by 2030.

Source:

World Bank 2014 <http://www.worldbank.org/en/topic/measuringpoverty/publication/a-measured-approach-to-ending-poverty-and-boosting-shared-prosperity>

What does the G20 have to do with the World’s Poor?

Global Development

This week World Leaders are meeting in Brisbane, Australia for the 2014 G20 Summit. To find out more about what this has to do with the World’s Poor, check out the infographic below and this blog.

GuideToG20Infographic_v2

Child Labour: The Facts

Global Development

Author: Rachel Hoy

If you asked a stranger on the street how they felt about child labour, it’s safe to say most people would not offer support for it. Yet evidence about the widespread damaging effects of child labour is overwhelming and we need to do more than hold a moral card against it, especially when we often support the demand for child labour unknowingly through our purchases.

There are 168 million child labourers around the world today. Around half are estimated to be in a hazardous form of labour.

Over 10% of the world’s children over 5 years old are child labourers. That means that one child in every ten is currently working under conditions detrimental to their physical and mental health.

Image 1

This is the same percentage of people who travel to work via public transport in Australia.

More than 2 out of 5 child labourers are aged between 5 and 11 years old. That means nearly half of child labourers are younger than Australian high school age.

Image 2

This is more than the percentage of people in Australia who own one car.

More than 1 in 5 children in Sub-Saharan Africa are engaged in some form of child labour. That means in a group of five friends, one is unable to attend school due to being forced into child labour.

Image 3

This is around the same percentage of people in Melbourne who live in a two-bedroom household.

These are just some of the facts surrounding the pervasiveness of child labour. Child labour is declining due to collective efforts but it is clear there is a long way to go. While these statistics are alarming, behind each statistic lies a personal story – both heartbreaking and mostly preventable.

A good start to preventing demand for child labour is to know the standards of the product that you buy. Try downloading the shopethical! app for your next trip to the supermarket or asking your local café about their coffee and tea suppliers.

Source:

World Vision Australia 2014 <http://www.worldvision.com.au/Libraries/Child_Labour_Myths_report/Child_Labour_Myths_Media_Report_12Jun14.pdf>

Information about the Author: Rachel Hoy is a VGen Youth Campaigner for World Vision Australia who works on the #FreeTo campaign. She just completed a Master of development studies at the University of Sydney.

The Beginning of the End of Extreme Poverty

Global Development

Key Points

  • In 1820, almost everyone in the world lived in extreme poverty. Since this time, incomes in the developed world have increased more than 12 fold, eradicating extreme poverty in these countries. In the UK, income per person was equivalent to Africa today in 1820 and to Latin America today in 1950. While in China income per person was equivalent to Africa today twenty-five years ago and is now similar to Latin America.
  • Income per person only tells part of the story of how living standards have changed over time. For example, due to improvements in medicine, child mortality in Africa is around one quarter of the rate of the UK in the early 1800s, even though they had similar income per person.
  • The eradication of extreme poverty in less than two centuries in some countries provides hope that extreme poverty can be eliminated from all countries.

Background

For most of human history, extreme poverty was the norm. This only began to change in the last couple of centuries as some countries (largely in Western Europe and North America) experienced prolonged periods of economic growth.

The chart below shows the steady increase in income per person over the last two hundred years in the UK. In 1820, income per person was equivalent to Africa today, while by 1950 incomes were similar to Latin America today.

Income per person overtime

Rapid economic growth in China led to the same increase in income per person, which took the UK 130 years, in just 25 years. This has led to hundreds of millions of people escaping from extreme poverty.

To get a more holistic understanding of how living standards have changed over time, it is important to go beyond the income per person measure. Advances in medicine have allowed for higher levels of development for a given income level than what today’s developed countries experienced in the 1800s. For example, in the UK in the early 1800s, every second child died before the age of five. While around one in seven children die before five in Africa today.

Next month, World Leaders will discuss the next Millennium Development Goals and whether to include a timeframe to end extreme poverty by 2030. This is a truly historic moment in human history as it was really only a couple of centuries ago that extreme poverty began to be permanently reduced.

Sources:

World Economics 2014 <http://www.worldeconomics.com/Data/MadisonHistoricalGDP/Madison%20Historical%20GDP%20Data.efp>

Copenhagan Consesus Center 2011 <http://www.copenhagenconsensus.com/sites/default/files/health.pdf>

 

Australian Aid mainly goes to Middle Income Countries

Australian Aid Policy

Key Points

  • Almost 90% of Australia’s country program aid goes to middle-income countries.
  • Middle-income countries have higher average living standards than low-income countries and are typically less reliant on aid. For example, aid accounts for less than 2% of Vietnam’s economy.
  • Almost all low-income countries in the world are in Sub-Saharan Africa. This is the region where Australia provides the lowest level of aid in per person terms.

Background

The World Bank defines a middle-income country as having over US$1045 income per person (2013 GNI Atlas Method). These countries are considered to be rich enough to be able to begin to access forms of finance other than grant aid, such as private sector loans.

Australia provides almost 90% of country program aid to middle-income countries. This is significantly higher than most other aid donors. The chart below shows that almost all of Australia’s top aid recipients are middle-income countries.

Income per person

Aid is typically only a small share of the economy in middle-income countries. The chart below shows how most of Australia’s top aid recipient countries are not very reliant on aid. In the case of Indonesia and Philippines, aid is actually a negative share of GNI because more money is spent paying off aid loans than they receive in new disbursements of aid.

Aid as a share of GNI

High economic growth rates in Asia in recent decades have meant that there are only a few low-income countries in the region. Sub-Saharan Africa is home to almost all low-income countries in the world and the region is the most reliant on aid. However Sub-Saharan Africa receives the lowest level of Australian aid in per person terms.

Should the region with the poorest countries in the world, which rely the most on aid and have the highest proportion of people in extreme poverty, receive the lowest levels of Australian Aid?

 

Sources

 

OECD 2014 <http://www.oecd.org/dac/stats/idsonline.htm>

World Bank 2014 <http://data.worldbank.org/data-catalog/world-development-indicators>

 

Mind the Gap

Global Development

Mind the Gap

Have you ever wondered how large the gap in living standards is between countries? Or how this has changed over time?

An excellent resource to allow you to look at the evidence in a visually engaging and user friendly way is http://www.gapminder.org/

For example, to explore how the Wealth and Health of Nations has changed over time click on the picture below to open Gapminder’s interactive display.

Gap Minder picture

Gapminder also has a series of brief and informative YouTube clips, such as the following video that shows how 200 countries have developed over the last 200 years in just 4 minutes.