Can We Lower Poverty Levels in the World?

Poverty is an interesting concept because of its relativity. For most of human history, most people lived in what we would now consider to be poverty. Even kings and queens of hundreds of years had levels of living that people in rich countries now would consider abominable. But, as economies have grown over the past two hundred years and standards of living have risen in much of the world, many people have been left behind. This week, world leaders meet to prioritize a new set of Millennium Development Goals (MDGs) and The Economist has pushed the idea that continuing to reduce poverty should be a very high priority.

In 1990, 43% of the population of developing countries lived in extreme poverty (then defined as subsisting on $1 a day); the absolute number was 1.9 billion people. By 2000 the proportion was down to a third. By 2010 it was 21% (or 1.2 billion; the poverty line was then $1.25, the average of the 15 poorest countries’ own poverty lines in 2005 prices, adjusted for differences in purchasing power). The global poverty rate had been cut in half in 20 years.

That raised an obvious question. If extreme poverty could be halved in the past two decades, why should the other half not be got rid of in the next two? If 21% was possible in 2010, why not 1% in 2030?

It turns out that much of the poverty reduction has taken place in China, fueled in part by its demographic dividend. To get rid of poverty, at least as defined by a level of consumption of $1.25/day per person, things have to happen in India and most of Africa.

The world now knows how to reduce poverty. A lot of targeted policies—basic social safety nets and cash-transfer schemes, such as Brazil’s Bolsa Família—help. So does binning policies like fuel subsidies to Indonesia’s middle class and China’s hukou household-registration system that boost inequality. But the biggest poverty-reduction measure of all is liberalising markets to let poor people get richer. That means freeing trade between countries (Africa is still cruelly punished by tariffs) and within them (China’s real great leap forward occurred because it allowed private business to grow). Both India and Africa are crowded with monopolies and restrictive practices.

And, we should remind the Economist, dramatically reducing fertility is part of the package. This has happened in China, but also in Brazil (and recently in Mexico). India and most of sub-Saharan Africa are lagging behind on reducing population growth, which is an important reason why they are lagging behind on poverty reduction.