To Eliminate Poverty, We Need To Reduce Inequality

Author: Ricardo Fuentes-Nieva (@rivefuentes)

A simple idea can be quite powerful. There is an interesting new paper from the World Bank titled “Twinning the Goals: How Can Promoting Shared Prosperity Help to Reduce Global Poverty?” that is both elegantly simple and very illuminating on the relationship between income growth, poverty and inequality.

The authors, Christoph Lakner, Mario Negre and Espen Beer Prydz,  take the most current global data on poverty and then distribute the proceeds from growth in different ways. The main trick in their analysis is to keep the overall growth rate for different countries constant (based on historical trends). The increase in income can then be either distributed evenly (in other words, keeping inequality constant), be regressive (in which income of the richer parts of society grows faster and where inequality increases), or be progressive (where income of the poorest grows faster than the rest of society and thus inequality decreases).  Some of the results using the bottom 40% of the population as threshold (given the World Bank’s “shared prosperity goal”) are shown in this graph (kindly shared by the authors).

Poverty trends under different distributional scenariosGraph 1Graph 1

In the three scenarios poverty is falling, but, unsurprisingly, it falls at a faster rate if the distribution of growth favours the bottom 40%. The difference between the progressive scenario (bottom 40% growing faster than the average) and the regressive one is a large 6.3 percentage points. If we consider that in 2030 there will be an estimated 8.4 billion people in the world, this means an extra 528 million people living in poverty (about the current number of people living in Brazil, Indonesia and Turkey).

Graph 1There is a flip side to this story, which has so far been about growth and poverty. A couple of weeks ago, when I explained why we are working on inequality I mentioned that:  “There is an obvious, arithmetic answer. For the same increase in income, poverty will fall faster if inequality also decreases”. On Twitter, some people asked me what was the empirical evidence supporting this statement. This paper provides a simple, numerical explanation of this (in some ways rather obvious) relationship between poverty, inequality and growth. In other words, these simulations also show how falling inequality implies, for a given overall growth rate, lower poverty rates.

The goal of “shared prosperity”, as defined in the paper, means a decline in inequality – in fact, a sharp decline. This is the trend in the Gini coefficient under their different scenarios.

Graph 2 (v2)

Brazil has experienced a decline in inequality of this sort recently. The authors explain that under the most pro-poor scenario: “The mean Gini in our sample of 124 countries falls 10 points, from 40.8 to 31.2 (around the level of inequality experienced in Albania and Pakistan in the most recent available data). A 10 point fall in the within-country Gini over a 20 year period represents a fast decline in inequality when compared to historical data, however it is not unprecedented. For example, Brazil’s Gini fell from a peak of 63.3 percent in 1989 to 53.9 in 2009.

Many years ago I did a similar, at least in spirit, exercise (that’s not the only reason why I like this new paper) for the Human Development Report 2005. I used national data for Brazil, Kenya and Mexico instead of global numbers. My threshold was the national poverty line and my progressive scenario much more redistributive (in my scenario the income of the poor grew at twice the average observed rate between 1990 and 2002). These were the results:  “For all three countries the pro-poor growth scenario reduces the time horizon for lifting the median household above the poverty line. For Brazil the time horizon falls by 19 years, for Mexico by 15 years and for Kenya by 17 years.” In other words, the reduction in inequality associated with progressive growth patterns would reduce the amount of time that millions of people live under extreme poverty.

The results of this paper are rather important in the context of the discussion on post-2015. The current draft of the Sustainable Development Goals includes a target on income inequality: “By 2030, progressively achieve and sustain income growth of the bottom 40 percent of the population at a rate higher than the national average”. This target is rather important if we are serious about eradication of income poverty.

Graph 3

Now, I have been critical of the World Bank’s timid approach to make inequality reduction a priority. A few weeks ago the IMF and the World Bank released a major joint report (the Global Monitoring Report) where they suggest in the summary for policy makers that business-as-usual growth as experienced recently would deliver the shared prosperity agenda – Deborah Hardoon picked up the limitations of the analysis and data in this blog. To be fair, though, they explore in detail the caveats in the main body of the report but the highlights in the summary are about more of the same. But this paper provides a different message: If we don’t include inequality reduction as a policy priority, the poverty-elimination goal becomes unattainable.

(and here’s a video illustrating some of these dynamics)

 

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