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Poverty and Shared Prosperity 2016: Part 1


For at least part of this week, I plan to discuss the World Bank’s recently released report on Poverty and Shared Prosperty.

To read the World Bank’s 2016 report on Poverty and Shared Prosperity, feel free to look here. This post will cover the highlights I found up to the end of the Overview section.

Consider this a high-level view of the high-level view. What is there to report? Some good news, believe it or not. Since 1990, 1.1 billion people have emerged from extreme poverty worldwide. Today, the global extreme poor are 10.7% of the population, and the World Bank’s goal is to reduce this to 3% by 2030. The World Bank has adopted two complementary strategies for this: direct poverty reduction through increases in income, and overall reduction of income inequality both within and between countries.

Despite the good news, this is no time for complacency. There are still 767 million people living on less than $1.90 US per day. Progress in poverty reduction has been stymied in some countries since the global financial crisis of 2008 began. The report also makes clear that its focus is on income only, not asset ownership, so any discussion of wealth inequality is not in the cards. Personally, I think this is an obnoxious oversight, perhaps one that best suits the agenda of the World Bank.

Extreme poverty is at its worst in Sub-Saharan Africa, where 41% of the population lives in extreme poverty. Eastern Europe and Central Asia have the lowest share, at 2.3%. Most reductions have been in the East Asia and Pacific region, along with South Asia. Most of that progress is attributable to income improvements and inequality reductions in China, Indonesia and India. In 1990, the East Asia and Pacific region had half the world’s extreme poor. Now, Sub-Saharan Africa has more poor people than the rest of the world combined. This is mainly due to dramatic reductions in poverty in the East Asia and Pacific region, while progress in Sub-Saharan Africa was slow.

The global poor are predominantly rural, young, poorly educated, mostly employed in agriculture, and live in large households with many children. The education factor is extremely important: high school education is correlated with reduced poverty risk, and such risk is dramatically reduced with a university education. Children under 18 are also overrepresented among the global poor, making up over half.

The report notes that the current goal of 3% extreme poverty by 2030 is unattainable at current rates. Direct interventions in countries with significant rates of extreme poverty are necessary. It is typically expected that regular economic growth cycles will produce enough average growth to lift people out of poverty, but this is not the case. Instead, growth strategies targeted at the bottom 40% of incomes in each country will be required. In other words, the bottom 40% need to see their incomes grow faster than the top 60%.

One significant trend change since 1990 is the picture of inequality. Twenty-five years ago, inequality between countries in a given region was the main problem. Over time, this reduced such that individual countries more or less equalized against one another. Now, inequality is mainly a problem within a given country. This within-country inequality presents one of the greatest obstacles remaining for global poverty reduction.

Different countries have had different trajectories and results. Haiti and South Africa are the most unequal countries. Meanwhile, the share of income among the top 1% has increased dramatically in Argentina, India, South Korea, South Africa, Taiwan, China, and the United States. Much of this is a sign of labor’s share of income falling, instead seeing the capital share of income grow. (This is another way of saying that capitalists eat up more and more income at the expense of workers.)

Which countries have performed best in reducing inequality, then? The report calls out five: Brazil, Cambodia, Mali, Peru, and Tanzania. Regarding what they have in common:

The five countries exercised judicious macroeconomic management, appropriately dealt with external shocks, and implemented more or less protracted and coherent economic and social sector reforms. They also benefited from favorable external conditions in the form of cheap and abundant international credit, high commodity prices, and booming trade. Decision making and the context allowed rapid, sustainable, and inclusive growth. The countries also highlight the importance of labor markets in translating economic growth into inequality reduction by increasing job opportunities and earnings, reintegrating individuals who have been excluded from economic opportunities, and narrowing gaps across workers because of gender, residence, or sector of employment.

It appears that policy and economic development choices are crucial. Minimum wage laws and directed expansion of industries that employ poor workers at decent wages are a major piece of the puzzle.

Regarding Brazil:

The 1988 Constitution laid the foundations for tackling historical inequalities by guaranteeing basic social rights such as free public education, free universal health care, pensions, and social assistance. A macroeconomic framework established in the 1990s allowed inflation to be curbed, promoted the prudent management of fiscal balances, and created an enabling environment for policies to address inequality. During the 2000s, the boom in commodity prices generated positive terms of trade. Macroeconomic stability, combined with this favorable external context, propelled economic growth. Labor market dynamics—including increasing wage premiums for the less skilled, more formal jobs, and a rising minimum wage—and the expansion of social policies helped boost the incomes of the poor. These two factors accounted for approximately 80 percent of the decline in inequality in 2003–13: 41 percent of the Gini decline in these years stemmed from labor incomes, and 39 percent from nonlabor income sources such as government transfers.

Reading between the lines of Cambodia’s growth, it appears to be due largely to investment in various labor-intensive industries and services, which attracted poor workers and gave them economic opportunities they previously lacked.

Prior to the outbreak of armed conflict in Mali, expansion in agriculture fueled significant inequality reductions.

On Peru:

In the early 2000s, prudent macroeconomic policies and high commodity prices attracted foreign direct investment into the economy, particularly in the mining sector. Capital accumulation became the main driver of growth, accounting for more than two-thirds of total growth after 2001. The labor market was the main pathway for the translation of the country’s impressive growth into less inequality and poverty, explaining about 80 percent of the reduction in the Gini and three-quarters of the reduction in extreme poverty during the last decade. Critical to this success were a closing wage gap between formal and informal workers, high labor force participation rates, and low unemployment.

And finally, Tanzania:

Since the early 2000s, the country’s economic expansion has been driven primarily by rapidly growing sectors, especially communications, financial services, and construction. However, the growth in these sectors has not been translated into substantive improvements in the living conditions of the poor, the less well educated, or rural residents. After 2007, there was a surge in retail trade and manufacturing, particularly agroprocessing in products such as food, beverages, and tobacco, which has allowed the inclusion of less highly skilled workers in the economy. Among policies explicitly aimed at rendering the income distribution more equitable, the Tanzania Social Action Fund stands out. It encompasses a CCT [conditional cash transfer] program, public works, and a community savings component that is expected to enable the poorest segments of the population to increase their savings and their investments in livestock and to become more resilient.

The common building blocks between countries which successfully reduced income inequality were good macroeconomic/monetary policy, strong growth, functioning labor markets, and domestic policies that expanded safety nets, improved human capital, and investments in infrastructure. Diverse job opportunities are also essential. The World Bank notes, too, that redistributive tax policies are helpful for reducing inequality in middle-to-high-income countries. Equalizers such as good quality education, healthcare, and access to basic infrastructure such as electricity also correspond to higher incomes and lower inequality.

Perhaps most importantly, there is no one-size-fits-all solution. Each country will have different needs and will require unique policy constellations to achieve the necessary efficiencies in reducing poverty and inequality. For instance, questions of which segment of the population will bear the costs for safety net and redistribution programs are highly dependent on the local political context in which the policy will be designed, debated, and implemented.

One thing that’s clear, though, is that policy interventions are unquestionably crucial. The invisible hand of the free market cannot and will not solve these problems. These issues will be examined in more detail as I make my way through the report over the rest of the week, and possibly beyond.