Why growth must be inclusive to eliminate poverty

While the world has seen a rapid reduction in extreme poverty in recent decades, the goal of‘ending poverty’ by 2030 remains ambitious. The latest estimates show that 1 billion people (14.5% of the world’s population) lived below the $1.25 threshold in 2011. Projections until 2030 suggest that even under optimistic growth scenarios, the global poverty target may not be reached. The latest World Bank estimates show that if developing countries were to grow at the (rather unprecedentedly high) rates they achieved during the 2000’s the global poverty headcount could decline from 14.5% in 2011 to 4.9% in 2030 – short of ‘ending poverty’. These projections assume distribution-neutral growth – that every individual’s income within each country grows at the same rate, essentially keeping inequality unchanged. As in the past, overall growth will be an important driver of future poverty reduction, but the inclusiveness of growth will also matter.

In a new paper, we explore this topic from the perspective of the World Bank goals of promoting shared prosperity and ending global extreme poverty by 2030. The poverty goal is defined as “reducing to no more than 3 percent the fraction of the world’s population living on less than $1.25 per day” by 2030. The shared prosperity goal is defined as “fostering income growth of the bottom 40 percent of the population in every country” and is, as such, an articulation of inclusive growth. Our question is how this goal of boosting the growth of the poorest 40% in every country can help to reduce global extreme poverty by 2030?

To understand the potential effect of boosting shared prosperity on global extreme poverty, we  conducted simulations where the bottom 40% grows at a different rate from the mean, while maintaining overall growth rates consistent with the most recent poverty projections. Our simulations show that if the bottom 40% grows 2 percentage points faster than the average, the World Bank’s poverty goal will be achieved, as the global poverty headcount would fall below 3% by 2030. While such a ‘shared prosperity premium’ is not unprecedented in recent growth spells, maintaining it over 20 years in every country would require a systematic change in the distributional nature of growth relative to what we have seen in past decades.

The chart below shows the simulated poverty trajectories resulting from three scenarios for shared prosperity until 2030. All three scenarios are based on each country’s historic growth rate from 2001 to 2011, but the bottom 40%’s share in this growth varies. Under scenario A, everyone within each country grows at the same rate. In scenario B, everyone in the bottom 40% is assumed to grow 2 percentage points faster than the mean, approximately the situation achieved in Brazil between 2006 and 2011. In scenario C, the bottom 40% grows 2 percentage points slower than the mean, similar to Ethiopia’s experience between 2005 and 2011. These simulations show that the degree to which the bottom 40% takes part in future growth (from 2 percentage points below to 2 percentage points above the mean), could result in global poverty rates in 2030 ranging from as low as 2.7% to as high as 9%.

These simulations generate three additional insights: First, not surprisingly, the scenarios in which the bottom 40 percent grows faster than the mean dramatically reduce inequality within countries. Second, even under the most optimistic growth and shared prosperity scenarios, the population share in Sub-Saharan Africa living in poverty in 2030 remains above 15% in all our simulations, showing that extreme poverty is unlikely to end in this region even when boosting growth of the bottom 40%. Third, if per capita incomes are held constant, distributional changes have an even starker effect on the trajectory of global poverty. Under such a ‘zero growth’ scenario, if incomes of the bottom 40% decline at a rate of 2% annually, the global headcount would increase to 25%, while the headcount falls to 8% if the bottom 40% grows at 2%.

Importantly, it turns out that the ‘cost’ of boosting  growth of the bottom 40% in terms of reduced growth for the top 60% (due to our assumption of maintaining the mean growth rate) is relatively low. For example, in the case of China under our baseline growth assumption, a growth incidence such that the bottom 40% grows 2 percentage points above the mean (8.1% vs 6.1%), requires that the top 60% grows just 0.4 percentage points below the growth in the mean (5.7%), or what would have been the case with distribution-neutral growth.

Although we recognize that our findings are based on a number of assumptions, our simulations show how inclusive growth and pursuing the World Bank’s goal of boosting shared prosperity can be an important factor in reducing poverty towards 2030. These findings are also relevant beyond the World Bank goals, and in particular to the discussions about whether inequality and inclusive growth should be part of the post-2015 development agenda. If global extreme poverty is to be eradicated by 2030, it will be important to ensure that the poorest in every society benefit disproportionally from future growth.

This post first appeared on The World Bank’s Future Development Blog

Authors: Espen Beer Prydz is an Economist working on issues of poverty, inequality and survey methods in the World Bank’s Development Research Group. Christoph Lakner is an Extended Term Consultant in the Development Research Group (Poverty & Inequality team) at the World Bank since September 2013. Mario Negre is a senior economist in the World Bank Development Economics Research Group seconded by the German Development Institute.

Image: A Nigerian child squats by an open sewer in the neighbourhood of Isale-Eko in central Lagos, April 14, 2007. REUTERS/Finbarr O’Reilly.