Update on Global Poverty

Stephen DeAngelis

February 14, 2011

Some truths are not self-evident. For example, the belief that “poor people — the destitute, disease ridden and malnourished ‘bottom billion’ — live in poor countries” seems self-evident (i.e., “that has been the central operating assumption of the aid business for a decade).” [“Whose problem now?The Economist, 30 September 2010]. But The Economist reports that what once might have been true is no longer. It explains:

“The thesis was true in 1990: then, over 90% of the world’s poor lived in the world’s poorest places. But it looks out of date now. Andy Sumner of Britain’s Institute of Development Studies reckons that almost three-quarters of the 1.3 billion-odd people existing below the $1.25 a day poverty line now live in middle-income countries. Only a quarter live in the poorest states (mostly in Africa). This change reflects the success of developing countries in hauling themselves out of misery.”

Investment analysts have noted this “success” and they no longer divide the world into two camps — developed and developing countries. Instead, analysts now talk about developed countries, growth market countries, emerging market countries, frontier market countries, and developing countries. Each group has its own opportunities and risks. Most middle income countries are now considered either growth or emerging market countries. The poorest countries remain classified as “developing.” The article continues:

“In 1998 the World Bank classified 61 countries (out of 203) as low-income (meaning an annual income per head of less than $760, in money of that era). In 2009 the number had shrunk to 39 out of 220. India, Pakistan, Indonesia and Nigeria all moved to middle-income status during that time (China passed the threshold earlier). But even excluding China and India, the share of global poverty accounted for by other middle-income countries tripled between 1990 and 2008, to 22%. Other figures support Mr Sumner’s finding. Of the world’s undersized children (a good indicator of malnutrition), 70% live in middle-income countries.”

Frankly, if you are poor, do you really care in which category someone places your country? Probably not. As the article states, “In one sense it hardly matters to a destitute Nigerian or Indian that his country has been reclassified by some distant development bank.” In subtler ways, however, it does matter. The chances of someone climbing out of poverty is surely better in a country with a growing economy than in one whose economy remains stagnant. On the other hand, being poor in a middle income country could mean that access to outside aid is limited. The article explains:

“[Should] foreign aid should be for poor people or poor countries[?] Britain, for example, has a rule that 90% of aid is supposed to go to the poorest countries. Aid charities strongly support that focus. The result, as taxpayers’ money runs scarce, is that donors have consigned programmes in middle-income countries to a ‘bonfire’ says Alex Evans, a former adviser at Britain’s Department for International Development. Yet these are the countries where the vast majority of the poor live.”

A rethink about how aid is used and to whom it is given is probably overdue. The article concludes:

“Mr Sumner’s data make that look overdue. Poverty, he says, may be turning from being an international distribution problem into a national one. Most middle-income countries, through national conditional-cash-transfer schemes such as Brazil’s Bolsa Família, have proved better at helping their own poor than anything invented and financed by the international aid industry. Giving is easy. Thinking can be a lot harder.”

In an earlier article, The Economist examines how three of the “growth countries” — China, India, and Brazil — have been doing in their efforts to reduce poverty [“The gloves go on,” 26 November 2009]. It reports:

“A … rigorous assessment of poverty-reduction in Brazil, China and India by Martin Ravallion, the director of the World Bank’s Development Research Group … suggests that hunger is not simply something that growth will take care of. Mr Ravallion shows that the performance of the giants varies a lot more than their growth.”

When it comes to reducing hunger, Ravallion indicates that “Brazil’s performance [has been] exceptional.” Confirming what the article cited above reported, the earlier article notes that “between them, Brazil, China and India account for half the world’s poorest people.” More importantly, however, they also account for “an even bigger share of those who have escaped poverty.” The article explains:

“In 1981, 84% of China’s population was below the poverty line of $1.25 a day (in 2005 prices); in 2005 the share was just 16%. This amounted to a 6.6% proportionate annual rate of poverty reduction—the difference between the growth rates of the number of poor and the total population. Nobody did as well as China. Brazil’s share of those in poverty fell by half from 17% to 8%, an annual reduction of 3.2%. India did least well, cutting the share below the poverty line from 60% to 42% between 1981 and 2005. This implies an annual reduction of 1.5% a year, though there are problems with Indian statistics; using different consumption figures yields an annual reduction of 3%, comparable to Brazil’s.”

The most interesting results from Ravallion’s study reveal that poverty reduction rates “do not mirror growth rates.” The article explains:

“Brazil cut poverty by more than India despite much lower growth, just over 1% a year in 1993-2005, compared with India’s 5%. If you calculate the rate of poverty reduction for each unit of GDP growth per person, Brazil did even better than China: the ratio is 4.3 for Brazil, 0.8 for China and 0.4 for India (0.8 if you use the adjusted consumption figures). Per unit of growth, Brazil reduced its proportional poverty rate five times more than China or India did.”

That good news should draw the same kind of “Ahh!” from observers as the “tall and tan and young and lovely girl from Ipanema.” The article rhetorically asks, “How did [Brazil] do so well?” The answer:

“The main explanation has to do with inequality. This (as measured by the Gini index) has fallen sharply in Brazil since 1993, while it has soared in China and risen in India. Greater inequality dampens the poverty-reducing effect of growth. Government policy played a big role in reducing inequality. Brazil’s main cash-transfer programme, called Bolsa Familia, provides help to 11m families, or 60% of all those in the poorest tenth. In contrast, social security in China is still provided largely through the enterprise system (ie, companies), so it tends to bypass those not in work. And government interventions in India are extraordinarily perverse. People in the poorest fifth are the least likely to have any kind of ration card (the key to public handouts), whereas the richest fifth are the most likely to.”

For those unfamiliar with the Gini Index, here is a definition:

“[The Gini Index is a] standard economic measure of income inequality, based on a Lorenz Curve. A society that scores 0.0 on the Gini scale has perfect equality in income distribution. [The] higher the number over 0 [the] higher the inequality, and the score of 1.0 (or 100) indicates total inequality where only one person corners all the income. It is used also as a measure of other distributional inequalities such as market share. Named after its inventor, the Italian statistician Corrado Gini (1884-1965). Also called Gini coefficient or index of concentration.” [BusinessDictionary.com]

The fact that Brazil has done exceptionally well with its efforts to reduce poverty using a cash-transfer program is both good news and bad. The good news is that is has worked. The bad news is that such programs are unlikely to catch on elsewhere as governments become more fiscally conservative. Although poverty reduction is universally recognized as a laudable goal, the means to that end remain controversial. To learn more about programs like the Bolsa Família (i.e., Family Fund) read my posts entitled Programs that Fight Poverty, Oportunidades At Home and Abroad, and The Globalization of Happiness. The article concludes:

“In all three countries, economic stability made a big difference for the better. China cut poverty the most, but did best early on, when agriculture was growing fastest. As growth shifted towards the cities and manufacturing, inequality rose. It might have done even better with Brazilian-style ‘progressive’ policies. India had both growth and social policies, yet did worst because its policies in fact did rather little to help the poor. With its caste system, and bad state schools, India may be a more unequal society than the numbers alone suggest. Both Asian countries could learn some lessons from Brazil. But Brazil, in turn, will not be able to match China’s record in reducing the number of poor people without higher growth.”

Laurence Chandy, a fellow in the Brookings Institution’s Global Economy and Development program, and Geoffrey Gertz, a research analyst with the same program, point out that “our sense of this topic remains firmly rooted in the year 2005 – the last year for which the World Bank has produced data on the number of people living on less than $1.25 a day.” [“Missing poverty’s new reality: There’s a lot less of it,” Washington Post, 25 January 2011]. They continue:

“We are routinely told that ‘today,’ 1.37 billion people around the world are poor, including 456 million in India and 208 million in China, but such figures are six years out of date. A lot has changed in the past six years. The economies of the developing world have expanded 50 percent in real terms, despite the Great Recession. Moreover, growth has been particularly high in countries with large numbers of poor people. India and China, of course, but also Bangladesh, Tanzania, Ethiopia, Vietnam, Uganda, Mozambique and Uzbekistan – nine countries that were collectively home to nearly two-thirds of the world’s poor in 2005 – are all experiencing phenomenal economic advances. In the new Brookings Institution report ‘Poverty in Numbers: The Changing State of Global Poverty from 2005 to 2015,’ we updated the World Bank’s official $1.25-a-day figures to reveal how the global poverty landscape has changed with the emergence of developing countries. We estimate that between 2005 and 2010, nearly half a billion people escaped extreme hardship, as the total number of the world’s poor fell to 878 million people. Never before in history have so many people been lifted out of poverty in such a short period.”

Except for the 878 million people still living below the poverty line, that’s great news. And the news just keeps getting better. Chandy and Gertz continue:

“Using forecasts of per capita consumption growth, we predict that by 2015, fewer than 600 million people will remain poor. At that point, the 1990 poverty rate will have been halved and then halved again. The decline in poverty is happening in all the world’s regions and most of its countries, though at varying speeds. The emerging markets of Asia are recording the greatest successes; the two regional giants, China and India, are likely to account for three-quarters of the global reduction between 2005 and 2015. Over this period, Asia’s share of the world’s poor is anticipated to fall from two-thirds to one-third, while Africa’s share is expected to rise to nearly 60 percent. Yet Africa, too, is making advances; we estimate that in 2008 its poverty rate dropped below the 50 percent mark for the first time. By 2015, African poverty is projected to fall below 40 percent, a feat China did not achieve until the mid-1990s.”

Chandy and Gertz understand that these findings may “surprise many,” but they assert that they shouldn’t. They continue:

“We know that growth lies at the heart of poverty reduction. As the growth of developing countries took off in the new millennium, epitomized by the rise of emerging markets, a massive drop in poverty was only to be expected. With few exceptions, however, those who care about global development have been slow to catch on to this story. We hear far more about the 64 million people held back in poverty because of the Great Recession than we do about the hundreds of millions who escaped impoverishment over the past six years. While there is good reason to focus public attention on the need to support those still stuck below the poverty line, there is also reason to celebrate successes and to ensure that policy debates are grounded in reality. … It is time to break our collective cognitive dissonance, by which we exalt the remarkable growth of developing countries while simultaneously bemoaning the intractability of global poverty.”

I would have been interested to read Chandy’s and Gertz’ views on the observation made by The Economist that as emerging market economies grow inequality also increases. It appears that economic growth is not the only measure that needs to be looked at. We’re all aware that national prosperity and personal prosperity are measured very differently. Even the topic of national prosperity can bring on debate. Peter Mandelson, a former U.K. business secretary and former EU trade commissioner, insists that we should take a new look at what it means to be “prosperous.” He claims that “democracy, freedom, and entrepreneurial opportunity” are just as important as money [“Prosperity Is More Than Just Money,” Wall Street Journal, 26 October 2010]. He writes:

“For generations we have struggled to find an adequate measurement of national success. We have wrestled with the questions of global superiority and, on occasion, nations have stood face to face in an attempt to prove their supremacy—usually with disastrous consequences. History is filled with evidence of national one-upmanship, not least when it comes to matters of economic performance. Just two months ago, China overtook Japan as the world’s second largest economy. And today you can’t open a financial newspaper without reading about the ongoing economic ‘battle’ between the two most populous nations in the world, India and China, and whether either of them will one day overtake the U.S. as the leading global economy. Today I am launching the 2010 Legatum Prosperity Index because it is my firm belief—and history has shown it to be true—that wealth alone does not make for a happy and successful society. Happy citizens are produced as much by democracy, freedom, and entrepreneurial opportunity as they are by a growing economy.”

I hate to quibble with a British lord, but happiness, success, and prosperity may be related terms but they are not interchangeable. To learn more about national and personal happiness, read my posts entitled In the Pursuit of Happiness — Part 1: National Happiness and In the Pursuit of Happiness — Part 2: Personal Happiness. Lord Mandelson continues:

“To use economic measurements alone to gauge the success of a nation would be equivalent to assessing the entire condition of a man simply by looking at his bank balance. True enough we may discover whether the man is rich or poor but we learn nothing about his character, his enjoyment of life, the state of his health, the quality of his education or his attitude toward the people around him. The limitations of measuring a country’s prosperity using economic indicators alone were explained by Senator Robert F. Kennedy in 1968, during a speech at the University of Kansas. He said this:

‘… Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage…It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl … Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials … it measures everything, in short, except that which makes life worthwhile.’

“The inadequacy of money as the lone transformative power for lasting national prosperity has been affirmed over the last 30 years by the failure significantly to reduce poverty in the poorest nations of Africa, despite record levels of financial aid. The message is simple: Financial aid on its own is not enough. A country needs more than just wealth to be prosperous. It needs to endow its citizens with basic human freedoms, for example those that come from a safe water supply, a roof over your head and the ability to hold politicians to account for these and other essentials of life. It needs to educate its children and take care of its elderly. It needs to develop a society in which people trust one another. It needs to foster a climate of entrepreneurship and innovation. None of these are achievable without the rule of law and strong, democratic governments.”

I believe that most would agree that money can’t buy happiness (or, according the Beatles, love ). Mandelson goes on to explain a little more about his Index. He writes:

“The Legatum Prosperity Index … identifies eight ‘foundations’ for national development, which range from the strength of the economy to the effectiveness of government and the quality of health-care and education. By considering such a wide range of different, but crucial, factors for prosperity, the Index paints a clear picture of global prosperity. In many ways, the findings of the 2010 Prosperity Index are unsurprising: smaller northern European countries rank highest while the bottom two places are occupied by Zimbabwe and Pakistan. The U.K. ranks 13th (same as last year) while the U.S. ranks 10th. What is most interesting about the findings is not the individual country rankings, but the reasons that lay behind why they are ranked as they are. For example, while it may not be surprising that many countries in sub-Saharan Africa sit in the bottom 15, there are some reasons for optimism. The index shows that the most successful African countries owe their success to radical improvements in the quality of their governance, particularly in establishing confidence in the military and in the judicial system. The three best-performing sub-Saharan countries are Botswana, South Africa and Namibia, which rank 57th, 66th, and 71st respectively. The common factor is that they all score highly on Legatum’s governance sub-index. Another important finding is the degree to which entrepreneurship and appetite for risk correlate more closely to a nation’s overall prosperity than any other factor. This implies that while other foundations such as health, education, or even the economic stability, are critical, levels of entrepreneurship and ability to develop new businesses actually provide the best proxy for understanding how prosperous a society can be.”

It should be clear that no magical yellow brick road exists that if followed leads a country to prosperity and greatness. All roads to success, however, do have some common features; among them: economic growth, good infrastructure, sound education, and adequate healthcare. More and more I also believe that one key factor is the rise of entrepreneurs. Give a smart, motivated entrepreneur the chance to succeed and he or she will pull others along on the coattails of opportunity. Do that and I believe that an encouraging picture of poverty reduction can be made even brighter.