Shocks and vulnerability to poverty in middle-income countries

The COVID-19 pandemic has pushed about 120 million people into extreme poverty over the last year in mostly low- and middle-income countries, according to estimates by World Bank researchers. While the rollout of vaccines is underway in some countries, the economic implications of the pandemic are deep and far-reaching. It is ushering in a “new poor” profile that is more urban, better educated, and reliant on informal sector work such as construction, relative to the existing global poor (those living on less than $1.90/day) who are more rural and heavily reliant on agriculture.

The new poor are much more likely to reside in middle-income countries (MICs) compared to the existing global poor.  According to the latest data, 82 percent (or 72 million people) of the total new global extreme poor (those pushed below the $1.90/day threshold by the pandemic) will be in MICs, as compared to 60 percent of the existing global extreme poor. If instead we consider the higher poverty threshold of $3.20/day, typical to lower middle income countries (LMICs), then the share of MICs in the population of new poor due to COVID-19 becomes even larger, reaching 90 percent of the total, compared to less than three-quarters before the pandemic.

While we do not have the data to observe the characteristics of the new extreme poor on a global scale, it is likely that the new households falling into poverty would be those with incomes not far above the $1.90/day International Poverty Line.  To get some insights into this group, we could compare the profile of the people with incomes below the $1.90 threshold with those who have incomes below the $3.20/day threshold. When we do that, we see, for instance, that among those below the LMIC line the share of adults with no education is 6 percentage points lower and the share of those with at least a secondary education is 4 percentage points higher than in the global poor group. At the same time, in the overall world population, the share of those with at least a secondary education is 20 percentage points higher than among people below the LMIC line (Figure 1). Similarly, more than three-quarters of people below the LMIC line are rural, compared to less than half of the overall population.

Figure 1: Educational distribution of adults by income group

In other words, while the pandemic is driving into the ranks of the global poor a relatively more urban and better-educated population drawing its livelihood from the services sector , the characteristics of the new poor are more similar to the profile of the global extreme poor than to the profile of the non-poor.  These patterns highlight the vulnerability of people falling back into poverty after their recent escape, on account of negative shocks affecting people’s health or livelihoods. It is also difficult to reach the new poor with existing social safety nets which may be targeted to different population groups. 

And while the COVID-19 pandemic is throwing into sharp relief the fact that many non-poor households may be just one shock away from falling into poverty , other factors are also contributing to increasing poverty, including conflict and climate change, according to the Poverty and Shared Prosperity Report 2020. As with the COVID-19 pandemic, many of these people affected by conflict and climate risks are in MICs. 

Among the 1.47 billion people exposed to significant flood risk, 4 out of every five (or 1.2 billion) are in MICs. It is true that many of these people may not be poor, but if we examine the exposure to significant flood risk among the poor, it is still the case that the majority of those who are both poor and exposed are in MICs, and the relative share of MICs in the population of poor and exposed increases for higher, LMIC and Upper-middle income (UMIC) poverty thresholds of $3.20/day or $5.50/day poverty thresholds (Figure 1).

Figure 2: Total number of poor exposed to significant flood risk, by country income type

Meanwhile, the accumulated history of conflict is also increasingly associated with poverty. While the countries classified as Fragile and Conflict-Affected Situations (FCS) account for 10 percent of the world’s population, these countries account for a remarkable 40 percent of the global poor. The share of the poor who reside in areas with history of conflict is typically highest in low-income Countries (LICs), but in a number of LMICs -- such as West Bank and Gaza, Nepal, Cameroon, Sri Lanka, and the Republic of Congo, a significant share of the population reside in sub-national areas with either current conflict or a history of past conflict.

Climate change and conflict are poised to be among the defining challenges of tackling global poverty over the next decade. Natural hazard disruptions already cost households and firms in low- and middle-income countries $390 billion annually, and climate change could drive an additional 100 million people into poverty by 2030. There are similarly long-term impacts of conflict on economic growth and poverty. UNHCR and World Bank data shows that 9 in 10 refugees are hosted by low- and middle-income countries, more than double the number of refugees hosted by high-income countries.

This reminds us that while tackling the pandemic and the associated economic crisis is a policy priority in the short term, it is important to maintain our focus on addressing the enduring development challenges faced by poor people; indeed, they are only likely to intensify. In a recent review of the World Bank’s systematic country diagnostics (SCDs), which highlight the most important challenges and opportunities that a country faces in advancing towards poverty reduction and shared prosperity, two out of three SCDs identify governance as a key constraint. Education and skills, infrastructure and connectivity, private sector development/business environment, and macroeconomic management are similarly flagged as top constraints in more than half of SCDs. Addressing poverty in MICs will thus require confronting not only the urgent crisis of the pandemic, but also the unfinished development agenda.  To do so effectively, timely and good data will be critical in informing national and global coordination on these challenges and in designing preventive and protective measures.