Combating Climate Change is necessary to End Extreme Poverty

Global Development

This weekend hundreds of thousands of people marched in cities across the world to show world leaders that serious action needs to be taken to combat climate change. This is required not only to preserve the environment, but also because of the impact of climate change on the most poor and marginalised people. A recent ODI report shows that over 700 million people are set to re-enter extreme poverty between 2030 and 2050 if business as usual continues. The figure below shows this will be caused due to drought, reduced agricultural productivity, increased food prices and malnutrition.

Zero Poverty and Zero Emissions

The report also shows that many of the actions required to combat climate change are actually ‘growth enhancing’. In other words, they are likely to boost GDP growth. For example, increasing energy efficiency is set to not only help combat climate change, but also reduce losses to the economy.

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/

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>

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

Lets be clear on what the “middle class” is

Global Development

Key Points

  • A number of world leaders, including the Australian Prime Minister, have claimed that millions of people have been lifted out of extreme poverty and are now living in the “middle class”.
  • However, there is no universally accepted definition of “middle class” and the use of this term is often very misleading. The “middle class” in developed countries, such as Australia, have substantially higher living standards than the vast majority of people in developing countries.
  • While there have been large reductions in extreme poverty over the last twenty years, 93% of people in the developing world still live below the United States’ national poverty line of less than US$13 a day.

Background

Earlier this year, the Australian Prime Minister claimed that hundreds of millions of people have been lifted from extreme poverty to “middle class” and there are now almost two billion people in the global “middle class”. Statements such as this do not represent how the notion of “middle class” is typically understood in the developed world.

The lowest possible standard of middle class in a developed country is living above the United States’ national poverty line (defined as $13 a day (2005 US PPP)). According to the latest World Bank data, 93% of the developing world’s population live below this line. As the chart below shows the huge decline in people living in extreme poverty has not been matched by a decline in the share of people living below the United States’ national poverty line.

From Poverty to Middle Class

The incredible reduction in the population living below the extreme poverty line (shown in the chart above) should be celebrated. However this should not be misrepresented to suggest most of these people live in “middle class” by any developed country standard.

Sources:

World Bank 2014 <http://iresearch.worldbank.org/povcalnet/index.htm>

Australian Government 2014 <https://www.pm.gov.au/media/2014-01-23/address-world-economic-forum-davos-switzerland-0>

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>

 

Revised Commonwealth Games Medal Tally

Global Development

As the 2014 Commonwealth Games come to end have you ever wondered how fair the playing field is?

Most members of the Commonwealth are developing countries and many are small islands. Only a few countries, like the United Kingdom, Australia and Canada, are rich enough and have sufficiently large populations to have well nourished populations that have time to hone their skills in competitive sports. This significantly reduces the competition at the top of the medal tally. For example, to illustrate the inequality between Commonwealth countries compare the richest and poorest countries. The richest country, Australia, has over 125 times more income per person than the poorest country, Uganda.

Countries rankings would change dramatically if the medal tally were revised to adjust for differences in income per person and population size, as has been done for the table below. This removes disparities in wealth and population and allows for a fairer comparison of how countries have performed.

 

Rank Country Revised Medal Tally Change in Ranks
1 Nauru 1482 24
2 Samoa 459 15
3 Kiribati 373 23
4 Grenada 253 16
5 Jamaica 148 4
6 Saint Lucia 77 21
7 Kenya 61 1
8 Bahamas 39 10
9 Trinidad and Tobago 38 4
10 New Zealand 27 -5
11 Cyprus 27 1
12 Uganda 26 3
13 Fiji 26 15
14 Cameroon 25 0
15 Isle of Man 24 14
16 Barbados 23 14
17 Namibia 22 2
18 Papua New Guinea 14 3
19 Mozambique 13 3
20 United Kingdom 11 -19
21 South Africa 10 -15
22 Zambia 9 1
23 Australia 9 -21
24 Mauritius 8 7
25 Nigeria 8 -18
26 Botswana 6 6
27 Malaysia 6 -17
28 Singapore 5 -17
29 Canada 4 -26
30 Ghana 4 -6
31 India 3 -27
32 Pakistan 2 -16
33 Sri Lanka 2 0
34 Bangladesh 1 0

Small islands countries and some African countries perform substantially better when the medal tally is revised to take into account income per person and population size. Nauru, Samoa and Kiribati take the top three places because they are middle-income countries with tiny populations and still managed to get five medals between them (including a gold and three silver). While Australia, the United Kingdom and Canada fall to the bottom third of the rankings.

Sources

Commonwealth Games 2014 <http://results.glasgow2014.com/medals.html>

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

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>