Why Don't We See Poverty Rates Converging?

Sub-Saharan Africa now has the highest incidence of extreme poverty, such as judged by the World Bank’s $1.25 a day poverty line. Granted, Africa has shown encouraging signs since the mid 1990s of reversing its past record of relatively poor performance against poverty. (The crisis has probably brought that progress to a halt this year, but the continent will hopefully be back on track in due course.) But the problem is that developing countries which start out with a high incidence of poverty, including many of those in Africa, typically do not enjoy a higher subsequent pace of poverty reduction. The overall incidence of poverty is falling in the developing world, but no faster in its poorest countries. We do not see “poverty convergence.”

That is puzzling if we accept two widely-held “stylized facts” about economic development, namely that there is an “advantage of backwardness”—higher growth rates in poorer countries—and that there is an “advantage of growth,” whereby a higher mean income tends to come with a lower incidence of absolute poverty. There is empirical support for both views, though with qualifications. The advantage of backwardness should mean that countries starting out with a high incidence of poverty and lower average incomes should see a higher subsequent growth rate and (hence) higher pace of poverty reduction.

In a new paper, “Why Don’t We See Poverty Convergence?,” I suggest a solution to this puzzle. When households face borrowing constraints, I find that a high initial level of poverty slows consumption growth for a given level of mean consumption.  A high incidence of poverty also entails a lower subsequent rate of progress against poverty at any given growth rate (and poor countries tend to experience less steep increases in poverty during recessions).

Thus, for many poor countries, the growth advantage of starting out with a low mean income is lost due to a handicap associated with the high initial incidence of poverty. However, the same study finds that high current inequality (as found in many African countries) is only a handicap to growth and poverty reduction if it entails a high incidence of poverty relative to mean consumption.

This dynamic “disadvantage of poverty” appears to sit side-by-side with other factors impeding poverty reduction, such as human underdevelopment and policy distortions. Future research needs to better understand this important handicap faced by poor countries in their efforts to become less poor.