Priceonomics

Photo credit: Dornicke via Wikimedia Commons

Since 1990, the percentage of the world’s population living in extreme poverty, defined as living on less than $1.25 per day, has dropped from 36% in 1990 to 18% in 2010. This achieved the United Nations millennium development goal of halving extreme poverty 5 years before its target date of 2015; the reduction has been drastic enough that despite rapid growth in the global population, the number of people living in extreme poverty has declined in absolute terms as well. 

Monetary indicators do not necessarily capture quality of life, the development goal of halving the undernourished population by 2015 has not yet been met, and a dollar can go farther in some places than others. But income is highly correlated with positive things like better health and well-being, a fact that seems particularly obvious when looking at extreme poverty. So why aren’t we celebrating the good news?

Well, for starters, it depends on who is included as “we.” For Americans, huge achievements in poverty reduction seem at odds with trends in the United States. In a sense, this is a misperception. Columbia University researchers found that poverty has decreased from 26% to 16% since 1967, when the policies of Lyndon Johnson’s “war on poverty” began to take effect. 

On the other hand, that reduction relied solely on the introduction of a safety net. Official metrics, which do not account for benefits like nutritional assistance, find that the incidence of poverty in the U.S. has not budged since 1967. In addition, the average wage of the American worker has stagnated, and the share of income earned by the top one percent of earners doubled over the same time frame. This has almost nothing to do with extreme poverty, but to an American audience, a context in which the rich seem to be getting richer and the poor poorer is at odds with this optimistic global narrative. One paradox of recent economic trends is that inequality has increased nationally in the West, but decreased globally as poor countries like China, India, and Indonesia catch up with the wealth of the U.S. and Europe. 

There is also the fact that while the United Nations set the millenium development goals, reports on their progress and formulations of plans to meet them are mainly written by Westerners for a western audience. And while the reduction in global poverty is a success story, the development community does not have ownership over the trend. By far the main driver of progress has been the economic engines of a few countries; China’s economic growth alone accounted for half of the reduction in extreme poverty over the last two decades. And those countries did it by ignoring the West’s advice. 

Some of the policies that development organizations like the World Bank have recommended -- particularly to Latin America after its debt crisis in the early 1980s, Russia after the Cold War, and much of East Asia after the 1997 financial crisis -- are known by the moniker of the Washington Consensus. Many of the countries with strong economic growth that powered recent poverty reduction completely ignored its tenets. China, for example, favored state-owned enterprises over privatization, heavily manipulated its exchange rate, and often required foreign companies to sign partnerships with Chinese companies to enter the market. And, of course, like the admired model of Singapore, China is not a democracy.

This is not to say that Asia’s experience discredited the power of markets or proved that autocrats would deliver growth better than democrats -- although many have made that conclusion. Rather, it prevents western organizations from trumpeting the outcomes in poverty reduction as a roadmap for the days ahead.

A more substantial reason that no one is celebrating, however, is that the easiest gains may have already been made against extreme poverty. In a recent report, the World Bank targets a 3% rate of extreme poverty by 2030. The bank calls this achievable -- but difficult and not inevitable.

One reason why is that the reduction against extreme poverty has been extremely uneven. In broad strokes, Asia has made great strides, while Africa has made little progress by the numbers.

Regional Changes in the Extreme Poverty Population

Source: The World Bank. "Ending Extreme Poverty" (2013)

If the extreme poverty rate is to keep declining, much of the progress will need to take place in countries, many in Sub-Saharan Africa, where poverty reduction may be very difficult to achieve. Economist Paul Collier characterizes the share of the world’s population living in extreme poverty as the “bottom billion.” In his book, Bottom Billion, he argues that the majority of them live in “trapped countries,” with about 70% in Africa but many also in countries like Haiti, Myanmar, and Yemen.  

Why trapped? Collier points to several factors that make economic growth difficult. Many of the countries recently experienced civil war, an event that is made more likely by poverty, raising the possibility of an unvirtuous cycle. Many are also landlocked, which handicaps trade and makes them reliant on neighbors who often struggle with the same “development traps.” The majority also suffer from poor governance -- not in the Congress is crazy sense but in in the dictator plundering the country sense -- and may have resources like oil or diamonds that fuel civil wars and predatory governance. 

The reduction in extreme poverty over the last 20 years is a great success story. Global economic growth has changed the world from “one-sixth rich and five-sixths poor,” as one commentator notes, to a world “that is more like one-sixth rich, two-thirds O.K. and one-sixth poor.” The hope is that the countries that are home to the world’s bottom billion will make progress on poverty despite the perceived challenges -- after all, China had just endured the famine and purges of the Great Leap Forward and Cultural Revolution when its economic miracle began. The worry is that those countries will remain mired in development traps, and that the achievements of the last 20 plus years represents the easiest progress -- China’s growth represents a return to the historical norm in terms of China’s share of the world economy. And if that’s the case, this time development agencies will need something to offer countries struggling to bring down poverty on their own. 

This post was written by Alex Mayyasi. Follow him on Twitter here or Google PlusTo get occasional notifications when we write blog posts, sign up for our email list.


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