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/

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The Retreat of Australia’s Aid Program

Australian Aid Policy

Key Points

  • In 2015-16, Australia’s Aid Program will be around A$4 billion, which is less than half the size of what it would have been if the bipartisan promise to reach 0.5% of GNI in 2015 was kept.
  • The cuts to the aid program over the last three years have disproportionally affected the world’s poorest countries, with aid to Sub-Saharan Africa to fall to less than 10% of the level it was promised to be.
  • Only the Pacific and countries that Australia has a refugee processing deal with have been spared the bulk of the cuts, as aid to the Pacific is still set to be almost 60% of the level originally promised. 

Background

Three years ago the Australian Government released a blueprint for the bilateral aid program in 2015-16 disaggregated by region. The plan was for a geographically diverse aid program that had a presence in the world’s poorest countries, while still clearly prioritising Australia’s immediate neighbourhood. However these spending promises have failed to be fulfilled. Instead, Australia’s aid program almost exclusively focuses on the Pacific and some nearby countries in East Asia. The chart below shows that Africa and the Middle East as well as Latin America and the Caribbean have disproportionally suffered from the aid cuts since 2012.

Australian 2015-16 Aid Budget

Potentially one of the most concerning aspects of the retreat of Australia’s Aid Program from its trajectory three years ago is the shift away from the world’s poorest countries. As discussed in this blog, Australia’s aid program was already dramatically disproportionally skewed away from the world’s poor. The latest round of aid cuts is set to exaggerate this imbalance even further.

Source:

DFAT 2015 <http://dfat.gov.au/aid/Pages/australias-aid-program.aspx>

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/

Poor Countries can’t afford the SDGs without more Aid

Global Development

The latest update from the OECD shows that donors are continuing to slash aid to least developed countries, falling by 16% in 2014 alone. If this trend continues, how will this impact the achievement of the Sustainable Development Goals (SDGs)? What will happen if world leaders fail to redirect this pattern at the Financing for Development Summit in July?

An ODI report released this week tackles these questions head on. The costs of achieving three central elements of the SDGs, ending extreme poverty, ensuring every child receives a basic education and providing universal health care are compared to the financial resources available in low income countries. The best available estimates of the costs involved in reaching these SDGs, from sources such as UNESCO, show that the annual amount required for low income countries is $148 billion. This is significantly higher than the finance available in these countries that is estimated to be $75 billion a year. This figure is a combination of half of these countries revenue capacity and existing aid flows. Revenue capacity is estimated by using World Bank and IMF estimates of the optimal level of revenue that could be collected given a country’s stage of development. Only 50% of revenue capacity and aid flows are used because countries face many costs outside the social sectors, such as infrastructure, and on average OECD governments only spend around half of their revenue on social protection, education and health.

Low income countries collectively face a financing gap of $73 billion to be able to meet these SDGs. However some countries are much closer to the amount required than others. The graph below shows the size of the finance gap on a country by country basis for low income countries, ordered in terms of GNI per capita. The richest low income countries, like Kenya, are over three-quarters of the way towards covering the costs. While the poorest countries, like Burundi, are not even able to cover a quarter of the costs of the SDGs.

Financing the Future

The global financing summit planned in July provides an opportunity to tackle these huge financing gaps required for the achievement of the poverty, health and education SDGs. This analysis identifies that relying on more taxes in low income countries will not be enough to ensure a global minimum standard of living for all. In addition to current levels, more aid will be required to pay for the shortfall.

But is it affordable? There are at least three reasons to believe that it is entirely affordable for the world to provide the additional finance required for low income countries to reach the SDGs:

  • Within existing commitments – The extra finance required to meet these goals are well within the bounds of existing international aid commitments. Furthermore if current levels of international support was better targeted towards low income countries than most of the additional finance needed could be found.
  • Small relative to other expenditure – The additional finance required to close the gap in low income countries only amounts to 4% of what the UK government spent on the 2008 financial crisis bank bail-out or less than 1% of global healthcare spending.
  • It has never been as affordable as it is now. Take ending extreme poverty for example, less than 15% of the world’s population live in extreme poverty today compared to around half three decades ago and if current trends continue it is expected to reduce to around 5% by 2030. As the number of people in extreme poverty has reduced so has the cost, as only a fraction of one percent of world GDP would be required to bring everyone above the extreme poverty line.

To find out more check out the report available at: http://www.odi.org/financing-future

The Cricket World Cup is an Unequal Contest

Global Development

Have you ever thought to yourself how unequal the playing field is in the Cricket World Cup? Some of the world’s richest countries, like Australia and the United Kingdom, compete against some of the world’s poorest countries, like Zimbabwe and Afghanistan. To indicate the upper hand some countries have over others, the graph below ranks countries by income per person and the size of their middle class population (measured by developed country standards).

 Cricket World Cup Chart copy

The richest country, Australia, has 100 times more income per person than the poorest country, Afghanistan. Surely this unparalleled high standard of living partly explains why Australia has won more World Cup titles than any other country.

The United Kingdom has around 1000 times more people in the middle class than Zimbabwe. The size of the middle class is a better measure than just population alone because despite some countries like India having large populations, many live in extreme poverty. Defining middle class by developed country standards (living over $US13 a day) ensures a fair comparison of the same standard of living can be made across both developed and developing countries. Ultimately this measure illustrates the point that countries are not competing on a level playing field.

So this World Cup, are you going to go for a rich and highly populated country or a country that despite being relatively poor is punching above its weight?

For other blogs that illustrate how uneven many global sporting contests are, check out these popular posts in relation to the Football World Cup and the Commonwealth Games

Sources:

World Bank 2015 <http://data.worldbank.org/data-catalog/world-development-indicators>

World Bank 2015 <http://iresearch.worldbank.org/povcalnet/index.htm>

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>

Can Poor Countries Afford to Eliminate Extreme Poverty on their own?

Global Development

Key Points

  • Most poor countries do not have enough money in their economies to bring everyone out of extreme poverty through redistributing taxes alone.
  • Only once countries tend to have reached upper middle-income country status does it become theoretically feasible for them to be able to eliminate extreme poverty on their own.

Background

Most low and lower middle-income countries can’t afford to eliminate extreme poverty by redistributing taxes on their non-poor population to those in extreme poverty. Former World Bank economist, Martin Ravallion, illustrates this. He defines being non-poor by a developed country standard, living above the US poverty line of $13 a day (or an annual income of around US$5,000). Ravallion calculates what the additional (marginal) tax rate would need to be in a developing country on the non-poor population to be able to raise enough tax revenue to be able to theoretically bring everyone out of extreme poverty (see chart below). For example a country with an average income of around US$1000 a year would need to raise the tax rate on their non-poor (or ‘rich’) population by 60 percentage points to generate enough tax revenue to give to the poor to lift them out of extreme poverty. This is quite unrealistic politically.

Ravallion Chart

As incomes in poor countries rise, through economic growth and other measures, the additional tax rate required to raise enough revenue to eliminate extreme poverty becomes more politically feasible. However in the meantime, external funding sources such as aid, are needed in most low and lower middle-income countries to be able to eliminate extreme poverty. Relying on redistributing taxes alone would push the non-poor back into poverty (by developed country standards). This seems to suggest that the rush by some aid donors to abandon providing aid to some middle-income countries is premature. Assistance is still needed to end extreme poverty in many of these countries.

Source:

World Bank 2012 <http://blogs.worldbank.org/developmenttalk/should-we-care-equally-about-poor-people-wherever-they-may-live>