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Poverty will only End by 2030 if Growth is Shared

Espen Beer Prydz's picture
Also available in: Español

Migrant workers cook a meal While the world has seen a rapid reduction in extreme poverty in recent decades, the goal of ‘ending poverty’ by 2030 remains ambitious. The latest estimates show that 1 billion people (14.5% of the world’s population) lived below the $1.25 threshold in 2011. Projections until 2030 suggest that even under optimistic growth scenarios, the global poverty target may not be reached. The latest World Bank estimates show that if developing countries were to grow at the (rather unprecedentedly high) rates they achieved during the 2000’s the global poverty headcount could decline from 14.5% in 2011 to 4.9% in 2030 – short of ‘ending poverty’. These projections assume distribution-neutral growth – that every individual’s income within each country grows at the same rate, essentially keeping inequality unchanged. As in the past, overall growth will be an important driver of future poverty reduction, but the inclusiveness of growth will also matter.

In a new paper, we explore this topic from the perspective of the World Bank goals of promoting shared prosperity and ending global extreme poverty by 2030. The poverty goal is defined as “reducing to no more than 3 percent the fraction of the world's population living on less than $1.25 per day” by 2030. The shared prosperity goal is defined as “fostering income growth of the bottom 40 percent of the population in every country” and is, as such, an articulation of inclusive growth. Our question is how this goal of boosting the growth of the poorest 40% in every country can help to reduce global extreme poverty by 2030?

To understand the potential effect of boosting shared prosperity on global extreme poverty, we  conducted simulations where the bottom 40% grows at a different rate from the mean, while maintaining overall growth rates consistent with the most recent poverty projections. Our simulations show that if the bottom 40% grows 2 percentage points faster than the average, the World Bank’s poverty goal will be achieved, as the global poverty headcount would fall below 3% by 2030. While such a ‘shared prosperity premium’ is not unprecedented in recent growth spells, maintaining it over 20 years in every country would require a systematic change in the distributional nature of growth relative to what we have seen in past decades.

The chart below shows the simulated poverty trajectories resulting from three scenarios for shared prosperity until 2030. All three scenarios are based on each country’s historic growth rate from 2001 to 2011, but the bottom 40%’s share in this growth varies. Under scenario A, everyone within each country grows at the same rate. In scenario B, everyone in the bottom 40% is assumed to grow 2 percentage points faster than the mean, approximately the situation achieved in Brazil between 2006 and 2011. In scenario C, the bottom 40% grows 2 percentage points slower than the mean, similar to Ethiopia’s experience between 2005 and 2011. These simulations show that the degree to which the bottom 40% takes part in future growth (from 2 percentage points below to 2 percentage points above the mean), could result in global poverty rates in 2030 ranging from as low as 2.7% to as high as 9%.
 

 
These simulations generate three additional insights:  First, not surprisingly, the scenarios in which the bottom 40 percent grows faster than the mean dramatically reduce inequality within countries. Second, even under the most optimistic growth and shared prosperity scenarios, the population share in Sub-Saharan Africa living in poverty in 2030 remains above 15% in all our simulations, showing that extreme poverty is unlikely to end in this region even when boosting growth of the bottom 40%. Third, if per capita incomes are held constant, distributional changes have an even starker effect on the trajectory of global poverty. Under such a ‘zero growth’ scenario, if incomes of the bottom 40% decline at a rate of 2% annually, the global headcount would increase to 25%, while the headcount falls to 8% if the bottom 40% grows at 2%.

Importantly, it turns out that the ‘cost’ of boosting  growth of the bottom 40% in terms of reduced growth for the top 60% (due to our assumption of maintaining the mean growth rate) is relatively low. For example, in the case of China under our baseline growth assumption, a growth incidence such that the bottom 40% grows 2 percentage points above the mean (8.1% vs 6.1%), requires that the top 60% grows just 0.4 percentage points below the growth in the mean (5.7%), or what would have been the case with distribution-neutral growth.

Although we recognize that our findings are based on a number of assumptions, our simulations show how inclusive growth and pursuing the World Bank’s goal of boosting shared prosperity can be an important factor in reducing poverty towards 2030. These findings are also relevant beyond the World Bank goals, and in particular to the discussions about whether inequality and inclusive growth should be part of the post-2015 development agenda. If global extreme poverty is to be eradicated by 2030, it will be important to ensure that the poorest in every society benefit disproportionally from future growth.
 

Comments

Submitted by Ganesh on

Good, simple straight forward analysis. Hitting on top of the nail..
Great going.. Can you share knowledge on statistical technique used for extrapolation?

Submitted by Jonathon on

Excellent piece on a solution to ending poverty. A pity that we live in a world where the rich would rather get richer than share their wealth with those who are more deserving. Poverty should not be a part of our lives, it should be history.

Submitted by SURESH SHARMA on

i would like to share my own problem to all poverty area or poor people to,,,
i am also the part of poor but in my opinion work hard and reach your destination and success your life own... not depend on other

Submitted by solomon mengesha on

very nice analysis on poverty reduction. we need more effort that poverty should not to be our agenda.

Submitted by Chris Hoy on

Thank you for this fantastic piece of analysis. One thing I wanted to highlight was that the projections above are based on national accounts growth. A more realistic scenario would be using household survey growth. Do you have modelling publically available that includes changes in the distribution of household survey growth (ie. Bottom 40% grows 2% faster or slower)?

Thanks for your comment, we're glad you like our analysis. In the paper, we use the same mean growth rates as were used for the scenarios in Table 1.3 and 1.4 of the Policy Research Report: A Measured Approach to Ending Poverty and Boosting Shared Prosperity: Concepts, Data, and the Twin Goals. While it is true that the those growth rates are derived from national accounts growth rates, they are adjusted by a set of factors to better reflect survey growth rates. The adjustments are explained in in footnote 13 of our paper and in greater detail on p. 68 (endnote 14) of the Policy Research Report. We are working on some adjustments to a forthcoming version of the paper, after which we plan to make the data and modelling files available. 

Submitted by Chris Hoy on

Thank you very much for your response. I look forward to reading the forthcoming version of the paper

Submitted by Ryan on

This is interesting, but I also think that the US should be doing much more to help those in global poverty by giving more aid. Less than 1% of our federal budget goes towards foreign aid, and we could be doing so much more. Check out the following to learn more info!http://www.borgenproject.org

Submitted by Espen B Prydz on

Thanks for your comment, Ryan. Shared growth and poverty alleviation can happen in many ways. Official Development Assistance can contribute to this. In this paper, we wanted to show how adjusting growth incidence within countries would affect global poverty reduction, but we do not discuss how to achieve different growth incidences. That is an important (and difficult) question, but not one we try to address in this paper. Good luck with your project.

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