While economic growth remains vital for reducing poverty, growth has its limits, according to a new World Bank paper released today. Countries need to complement efforts to enhance growth with policies that allocate more resources to the extreme poor. These resources can be distributed through the growth process itself, by promoting more inclusive growth, or through government programs, such as conditional and direct cash transfers.
In addition, the paper notes, it is imperative not just to lift people out of extreme poverty; it is also important to make sure that, in the long run, they do not get stuck just above the extreme poverty line due to a lack of opportunities that might impede progress toward better livelihoods.
“Economic growth has been vital for reducing extreme poverty and improving the lives of many poor people,” said World Bank Group President Jim Yong Kim. “Yet, even if all countries grow at the same rates as over the past 20 years, and if the income distribution remains unchanged, world poverty will only fall by 10 percent by 2030, from 17.7 percent in 2010. This is simply not enough, and we need a laser like focus on making growth more inclusive and targeting more programs to assist the poor directly if we’re going to end extreme poverty.”
Kim added: “To end extreme poverty, the vast numbers of the poorest – those earning less than $1.25 a day – will have to decrease by 50 million people each year until 2030. This means that 1 million people each week will have to lift themselves out of poverty for the next 16 years. This will be extraordinarily difficult, but I believe we can do it. This can be the generation that ends extreme poverty.”
Growth alone is unlikely to end extreme poverty by 2030, says the paper, because as extreme poverty declines, growth on its own tends to lift fewer people out of poverty. This is because, by this stage, many of the people still in extreme poverty live in situations where improving their lives is extremely difficult.
The paper notes that increased income inequality can dampen the impact of growth on reducing poverty. Inequality is not just a problem in itself: in countries with rising income inequality, the effect of growth on poverty has been dampened or even reversed. In contrast, research indicates that in countries where inequality was falling, the decline in poverty for a given growth rate was greater. Even if there is no change in inequality, the “poverty-reducing power” of economic growth is less in countries that are initially more unequal. Thus, the World Bank Group’s goals of ending extreme poverty and boosting shared prosperity are closely linked—lasting progress in ending extreme poverty also requires continued attention to what is happening to the bottom 40 percent of the population.
“It is a sad commentary on our prosperous world that over one billion people live in extreme poverty. It is a welcome call from the World Bank Group to not just mitigate poverty but bring it to closure and also to strive for a more equitable world. To achieve these ends we will need determination, but also ideas and innovation, for the ways of the economy can be strange,” said Kaushik Basu, Senior Vice President and Chief Economist at the World Bank.
The World Bank’s shared prosperity goal, endorsed by shareholders in 2013, provides a window into understanding inequalities of income and opportunities. While significant progress has been made in lifting people out of extreme poverty, many people remain poor, often due to lack of opportunity. Putting a spotlight on the bottom 40 percent can help ensure that they, too, reap the full benefits of a country’s economic progress.
To assist the bottom 40 percent, it is vital to know their characteristics, which differ from country to country.
For example, in Rwanda, 63 percent of the population lives in extreme poverty; that is, the entire bottom 40 percent and more live in extreme poverty. In Colombia, by contrast, 8 percent of the population lives in extreme poverty, and in Turkey extreme poverty has become frictional; that is, only 1.3 percent of the population is estimated to be extremely poor by global standards.
In Bangladesh, two-thirds of the bottom 40 percent live in rural areas, compared with Brazil, where 23 percent of the bottom 40 percent reside in rural areas. In Rwanda, 11 percent of the bottom 40 percent have secondary education, while in Turkey, 55 percent have attained secondary education. In terms of employment, 63 percent of the bottom 40 percent in the Philippines work in agriculture, while in Jordan agriculture employs only 11 percent of the bottom 40 percent.
“The complexities of identifying who the bottom 40 percent are in each country underscores the challenges of crafting country-specific policies to effectively reach them,” said Jos Verbeek, lead author of the paper and lead economist in the World Bank’s Development Prospects Group.
Tackling poverty requires understanding where the greatest number of poor live, while at the same time also concentrating on where hardship is most pervasive. This entails concerted efforts in countries where large numbers of the world’s 1.2 billion poor live. The top five countries, in terms of numbers of poor, are India (with 33 percent of the world’s poor), China (13 percent), Nigeria (7 percent), Bangladesh (6 percent) and the Democratic Republic of Congo (5 percent), which together are home to nearly 760 million of the world’s poor. Adding another five countries – Indonesia, Pakistan, Tanzania, Ethiopia, and Kenya – would encompass almost 80 percent of the extreme poor. Hence, a sharp emphasis on these countries will be central to ending extreme poverty, says the paper.
However, many smaller countries have far higher shares of their people living below the poverty line. In 16 countries, more than half the population is living in extreme poverty. The top five countries, in terms of poverty density, are the Democratic Republic of Congo (where 88 percent of the population is below the poverty line), Liberia (84 percent), Burundi and Madagascar (81 percent each), and Zambia (75 percent). Reducing poverty in these places is as important as making progress in countries where the absolute number of poor people is much bigger.
To reach the twin goals, the World Bank Group will need to tailor its support depending on the level of each nation's urbanization, the extent of its energy needs, the levels of basic services, the human capabilities of every citizen and capacities of their governments. Success will require taking transformational solutions to scale, whether in terms of programs to improve sanitation in burgeoning cities, projects to ensure more efficient use of water for farming and other uses, expansion of health coverage for lower-income people, or the extension of welfare-to-work programs in places with high youth unemployment.
Equally, progress in improving poor people’s lives will not be sustainable if the environmental consequences of economic development are not taken into account. Making growth processes resource-efficient, cleaner and more resilient without necessarily slowing them is important to sustaining economic development.