Should extreme poverty in poor countries be the only measure of global poverty?

A previous blog post revisited the issue of global poverty and argued that a multidimensional approach to poverty yields much higher estimates relative to prevailing ones released by the World Bank. Even if one did not take account of a multidimensional poverty index, the current international poverty line of US$ 1.90 a day is simply too penurious to capture the incidence of poverty even in middle income countries. Indeed, global poverty – as Lant Pritchett has so eloquently  argued – is a misnomer if the World Bank criterion, embedded in the recently expired MDGs framework and likely to persist under the current SDGs, is used.[1] While it might yield reasonable estimates for Swaziland, poverty under this standard would be non-existent in Switzerland. Why should one discount the existence of poor people in rich countries while focusing only on extreme poverty in poor countries? Why set the bar so low and ‘define development down’ as Lant Pritchett and Charles Kenny have argued?[2] Global poverty should take account of all the poor in all countries, which suggests a poverty line that is a reasonable approximation of an OECD standard. Using this capacious approach, there are around 5 billion poor people in the world at large or approximately 68 per cent of the global population – and not the 700 million that recent estimates from the World Bank suggests. Tackling global poverty is indeed a monumental task.

 

[1] http://www.cgdev.org/blog/extreme-poverty-too-extreme

 

[2] http://www.cgdev.org/publication/promoting-millennium-development-ideals-risks-defining-development-down-working-paper

 

Revisiting global poverty

The ‘one dollar a day’ poverty line was popularized by the World Bank in estimating the incidence and evolution of extreme poverty across the world. Today, this international poverty line has become US$ 1.90 a day below which a person is considered to be poor.

How has the world fared in terms of the battle against extreme poverty? The recently released ‘Global Monitoring Report’ (GMR), jointly authored by the IMF and the World Bank, has offered an upbeat estimate.[1] Given that the GMR is primarily intended to be a report card on the Millennium Development Goals (MDGs) which formally expired at the end of 2015 and became the ‘Sustainable Development Goals’ (SDGs) from 2016 onwards, the World Bank assesses trends in extreme poverty between 1990 (the initial year of the MDGs) and 2015 (the terminal year of the MDGs).

GMR argues that

‘…the world has made rapid strides in poverty reduction since 1990…The proportion of global population living on less than $1.90 a day was about a third of what it was in 1990. This finding confirms that the first (MDG) – cutting extreme poverty to half of its 1990 level – was met well before its 2015 target date.’

Based on ‘tentative projections’, GMR notes that by 2015 global poverty ‘…may have reached 700 million’ or a poverty rate of 9.6 per cent. At this rate of progress, extreme poverty would be negligible by 2030 – the terminal year of the SDGs – thus enabling the World Bank to argue that we will reach a ‘world free of poverty’.

But … will we? What is true for the world at large is not necessarily true for parts of the world. One of the world’s poorest regions, Sub-Saharan Africa, has not really attained the first of the MDGs. According to statistics reported in GMR, extreme poverty in Sub Saharan Africa was 56.8 per cent and was projected to decline to 35.2 per cent by 2015. This is certainly a commendable achievement, but does not mirror the rate of poverty reduction at the global level. This reflects the well-known feature that global trends in extreme poverty have been influenced by rather rapid progress in Asia – home to some of the world’s most populous nations.

There is another aspect to global poverty that induces one to adopt a more circumspect perspective. The international poverty line measures income poverty but ignores its non-income dimensions – such as lack of access to health, nutrition, education, employment, housing and so forth. Of course, both income and non-dimensions are significantly correlated, but there can be marked divergences. One estimate of a generic ‘multidimensional poverty index’ or MPI (which is now available for 101 countries) suggests that in 2015 1.6 billion people or 30 per cent of the population in 101 countries were ‘multidimensionally’ poor.[2] This is more than twice the incidence of income poverty at the global level. Another example of the discrepancy between income poverty and MPI can be captured by country-specific cases. Thus, in Chad and Ethiopia, the incidence of MPI is about 87% whereas for income poverty based on the international poverty line it is only 37%.

It is perhaps not surprising that a principal goal of the SDGs is ‘ending poverty in all of its forms everywhere’. That is indeed a long way off and by 2030 we may not inhabit a ‘world free of poverty’.

 

[1] http://www.worldbank.org/en/publication/global-monitoring-report

 

[2] http://www.ophi.org.uk/multidimensional-poverty-index/mpi-2015/

 

Growth slowdown in the BRICS and it implications

The BRICS (Brazil, Russia, India, China, South Africa) were collectively seen as drivers of global economic growth and its saviour following the global recession that afflicted the international community in 2008-2009. This optimism was justified as the BRICS rebounded vigorously from the global recession by 2010. Since then growth, with some exceptions, has faltered in the BRICS. As Table 1 shows, Russia and South Africa are in recession that is likely to persist until 2017. Growth in China has dipped below the near double-digit growth that it experienced in the 1998 to 2007 period and this is expected to prevail over the medium-term. South Africa’s growth has moderated in the last three to four years. Projections suggest that this sombre outcome is likely to persist. Only India is growing in excess of 7 per cent, based on estimates of the revised national accounts system. Medium-term projections suggest that this salutary performance is likely to continue.

 Table 1: BRICS, GDP growth rates, 1998 to 2017

Country Growth of GDP 1998-2007 2008-2014 2015 2016 2017[1]
Brazil 3 3.2 -3.8 -3.8 0
Russia 5.8 1.7 -3.7 -1.8 0.8
India 7.1 7 7.3 7.5 7.5
China 9.9 8.8 6.9 7 7
S Africa 3.7 1.7 0.6 1.7 2.4
Average 5.9 4.5 1.4 2.1 3.6
 

 

             

 

Recent evaluations suggest external factors have largely been responsible for the synchronous growth slowdown in the BRICS.  Weak global trade, which is about 20 per cent below trend growth, have had a negative impact on the BRICS. Tumbling commodity prices have hit commodity exporters like Brazil, Russia and South Africa. In the case of Russia, the adverse consequences flowing from the imposition of sanctions and the conflict with Ukraine cannot be discounted. Tightened financial conditions and the volatility of short-term capital flows have exacerbated the inhospitable external conditions facing the BRICS community. There is also evidence of a reduced pace of total factor productivity growth juxtaposed with substantially reduced investment growth. These might be attributed to domestic policy uncertainty as governments in the BRICS seek to navigate their way through a turbulent external economic environment after the boom of 1998 to 2007.[2]

Concerns have been expressed about the negative spillover effects of the growth slowdown in the BRICS on emerging economies and the global economy. Some estimates suggest that the reduced pace of growth in the BRICS is likely to shave off 0.8 per cent from GDP growth for emerging economies as a whole and about half that for global growth.[3]

Under normal circumstances, governments in the BRICS would have reacted with vigorous counter-cyclical fiscal and monetary policies to respond to recession and slow growth as they did during the last global downturn. Now, there are continuing concerns about lack of fiscal space, at least in some of the BRICS. For example, in South Africa public debt to GDP ratio has increased 19 percentage points since the last global recession. In other commodity exporting BRICS, there are also concerns about debt to GDP ratio being in excess of OECD guidelines which suggests that emerging economies should aim for a debt to GDP debt target of 30 to 50 per cent.[4] While there is no robust evidence that there will be an imminent growth collapse if these guidelines are breached,[5] governments are wary of perceived financial market pressures in the wake of evidence of lax fiscal policies.

In the case of monetary policy, there is also evidence of cautious manoeuvres. Inflation targeting central banks in BRICS are hesitant to reduce rates as long as the prevailing and projected inflation rate is above the target rate as is the case in Brazil and South Africa. Russia has only very recently decided to reduce the policy rate by 50 basis points even though the prevailing inflation rate is significantly above the target rate. India and China have been more forthcoming in reducing policy rates.[6]

It is also possible that the growth slowdown is part of a secular phenomenon. This stems from studies which claim that ‘regression to the mean’ is a strong empirical regularity. In other words, an economy might grow rapidly for some time, but eventually growth regresses to the historical mean of 2 to 4 per cent. Estimates suggest that even if partial regression to the mean takes place, China’s and India’s growth in the 21st century are unlikely to exceed 4 per cent.[7] Closely linked to the phenomenon of ‘regression to the mean’ are studies that claim a secular decline in the pace of ‘catch up growth’ and hence the ability of emerging economies to converge to living standards of the rich nations within a reasonable period of time.[8]

What are the implications of these studies? One important observation that one can make is that the boom of the 1998-2007 period that preceded the global recession of 2009 was probably exceptional. They were driven at least partially by a global commodity price boom and plentiful supply of cheap credit. These conditions that can enable a boom are unlikely to be replicated for prolonged periods. Hence, the emphasis should be on the quality and inclusiveness of growth rather than its quantitative dimensions. Certainly, a growing economy is necessary for enhancing labour and social indicators, but as endogenous growth theory suggests, improvements in labour and social indicators are important because they signal positive changes in human capabilities that promote growth.

[1] All estimates are derived from IMF (2016) World Economic Outlook, April. 2016 and 2017 are projections.

[2] World Bank (2016), ‘Sources of the growth slowdown in the BRICS’, January 11, available at http://blogs.worldbank.org/prospects/global-weekly-sources-growth-slowdown-brics

[3] Huidrom, R, Kose, M.A, and Ohnsorg, F (2016) ‘Painful spillovers from slowing BRICS growth’, February 17, available at http://voxeu.org/article/painful-spillovers-slowing-brics-growth

[4] OECD (2015) ‘Achieving prudent debt targets using fiscal rules’, Economics Department Policy Note No.28, July, www.oecd.org/eco/Achieving-prudent-debt-targets-using-fiscal-rules-OECD-policy-note-28.pdf

[5] Islam, R and Islam, I (2015) Employment and inclusive development, London and New York: Routledge, https://www.amazon.com/Employment-Inclusive-Development-Routledge-Economics/dp/0415825989

[6] The latest monetary policy developments can be downloaded from central bank websites of the BRICS available at https://www.bis.org/central_bank_hub_overview.htm

[7] Pritchett, L and Summers, L (2014) ‘Asiaphoria meets regression to the mean’, NBER Working Paper No.20573, http://www.nber.org/papers/w20573

[8] The Economist (2014) ‘Economic convergence: the headwinds return’, September 13, http://www.economist.com/news/briefing/21616891-ten-years-ago-developing-economies-were-catching-up-developed-ones-remarkably-quickly-itsummarizes the findings of a growth slowdown in the emerging economies as a whole and highlights the dramatic fact that, if one excludes China, convergence of emerging economies to rich country living standards at the current and projected pace will take place in 300 years!