The economies that are home to the poorest billions of people need to grow if we want global poverty to decline

The huge majority of the world today is very poor. About 85% of the world live on less than $30 per day and 63% live on less than $10 per day.

I believe, for reasons I’ll explain below, that if this should change it will require very substantial economic growth of the economies that are home to the poorest billions of people in the world.

The reason I wrote this text is that there are some commentators on global poverty who are not making it central to their public communications that very substantial growth is needed if people in poor countries should have a chance to leave poverty behind. I believe that if we are not very clear about the fact that economic growth is needed we are damaging the prospects of the poorest people in the world to leave poverty behind.

I am therefore asking that everyone who finds global poverty unacceptable should be very clear that most people live in poor economies and that economic growth is needed to increase their income.

Any person’s income depends on two factors, the average income in the country they live in and the position that particular person has in that country’s income distribution.

Both aspects can change so that fewer people are poor:

Reducing inequality within countries

One possibility to reduce poverty is to redistribute income within that country so that the income of the poor rises. There are a number of ways this can be done: one way is that the government taxes the incomes of richer people and pays it out to the poor.

The largest poverty reduction that is possible via a reduction in inequality would be achieved by a country that achieves perfect equality so that no one is poorer than anyone else.

To understand by how much the incomes of the poorest people can possibly increase via reduced inequality it is therefore important to see data on average incomes across countries.

There are two ways of measuring average income in a country:

The two income concepts differ: GDP per capita is typically higher – it is a more comprehensive measure of income and includes, for example, government expenditure and also the imputed rental value of owner-occupied housing. Angus Deaton (2005) gives a helpful overview of these differences.

Because they differ and because both are relevant data points for understanding a country’s average income I’m showing both income measures so that you can study how much it matters to use one or the other.

All measures in this chart are given in international-$, which means that it is adjusted for the price differences between countries. This adjustment is done in a way such that one international-dollar is equivalent to the purchasing power of one US-$ in the US. The $13.91 average income of people in Peru for example means that the average Peruvian can purchase goods and services that would cost $13.91 in the US.

Many poorer people rely on subsistence farming and do not have a monetary income. To take this into account and make a fair comparison of their living standards, the statisticians that produce these figures estimate the monetary value of their home production and add it to their income/expenditure. That is true of both measures shown in the chart.

As you can see, the majority of people in the world live in countries that are very poor. Even perfect equality in those countries would mean that billions of people around the world would live on extremely low incomes: $15 a day, $10 a day, even less than $5 a day.

When the average of people’s income in a country is that low then the only way the majority of people can possibly leave poverty behind is when that country’s economy grows so that average incomes increase.

Reducing global inequality

Another possibility to reduce global poverty is to redistribute between countries. Money can be transferred from rich people in the rich countries to poorer people in poor countries.

I am personally very much in favour of that:

But I have two problems with the idea that we should reduce global poverty by global redistribution:

I think it is extremely optimistic to believe that large-scale global redistribution would be supported by those who live on more than the global average income. You would need to convince (or force) the richest hundreds of million people in the world to give up large shares of their income and I think only few people would be willing to do that. One concrete datapoint that makes me skeptical: most rich countries in the world are not willing to achieve the UN goal of spending even only 0.7% of their GDP on aid.

If it is hard to find political support for the goal of spending 0.7% of people’s incomes on aid I very much do not believe that the majority of people who live on more than the average income would agree to give up much larger shares of their income.

There are only two ways to increase the incomes of the poor: lower global inequality or economic growth for the poorest billions of the world. If someone is not in favour of economic growth for the poorer billions in the world they are left with the option to reduce global inequality. I am in favour of reducing global inequality, but I find it extremely wrong to suggest that the only acceptable way to end global poverty is to reduce global inequality.

It is wrong to make the chance of poor people leaving poverty behind conditional on an extremely optimistic scenario of the future of inequality.

Economic growth

Economic growth in today’s rich countries over the last two hundred years is the reason that people in those countries are much less poor than people in the same places in the past or people in poor countries today.

The chart on the top compares estimates of the income distribution in Madagascar (in green) and the UK (in blue) in 2018. The income differences between people in these two countries are extremely large. The current average income in Madagascar today is $1.60 per day (source). This means that even the richer half of Madagascar’s population live on incomes between only $2 to $5 per day, much less than even poor people in the UK.

The chart at the bottom shows that back in 1800 the incomes in the UK were similarly low than in Madagascar today. Since then the UK economy grew 80-fold and the income distribution moved to the right so that the majority of British people left the poverty of the past behind.

Average incomes in Madagascar did not grow – GDP per capita is not higher than three generations ago – and poverty therefore remains extremely severe in Madagascar.

This needs to change if poor countries are to leave poverty behind. People in Madagascar only have a chance to leave poverty behind if their average incomes grow the way they did in the UK.

Economic growth is not enough to get people out of poverty. If the inequality of incomes increases the poorest can be left behind. Fighting inequality matters too. But without economic growth there is no chance at all to leave poverty behind. To make it possible that poverty can decline in Madagascar the average income must increase, without economic growth there is no chance that the people in Madagascar – and other poor countries – can possibly leave poverty behind.

The income differences between rich and poor countries today are vast as we have just seen. The country where a person lives explains two-thirds of the variation of income differences between all people in the world – this is what inequality researcher Branko Milanovic documents. Where a person lives is more important for how high their income is – or how poor they are – than everything else put together.

Understanding how much the size of the economy matters for our own income is important for our own self-understanding and for our judgement of why it is that some people are poor and others are not. A person’s knowledge, their skills, and how hard they work all matter for whether they are poor or not – but all these personal factors together matter much less than the factor that is entirely outside of a person’s control: whether the place they happen to be born into has a large, productive economy or not.

Both the history of economic growth and the differences across the global income distribution today make this very clear: people are not poor because of who they are, poor people are poor because of the economy they happen to live in.

This is true over time: The fact that a particular person in the Middle Ages was poor was not his or her failure, it was due to the fact that almost all were very poor. They happened to be born at a time when the economy was not very productive and living standards were much lower than today.

And it is true for places across the world today: The poorest billions of people live in very poor economies and as a consequence are very poor.

Conclusion

Lowering inequality is an important goal and it can help to reduce poverty, but it can not be the only way in which the world fights global poverty. The poorest people live in places where average incomes are very low, as we have seen in the chart above. I am in favour of lower inequality, but I also believe that anyone who is concerned about global poverty should be in favour of strong economic growth in the economies that are home to the poorest billions in the world.

For me personally my income is not a major limiting factor on my freedom or well-being and I am not concerned here with the question of whether rich countries today should make it their goal to grow their economies. But I am concerned about the very low incomes of the majority of the world and believe that those economies that they are part of need to grow very substantially if there should be a chance that the poorest billions can leave poverty behind in the decades to come.

One important reason why the people in some places are poor is because they were exploited by colonial powers that did not allow those economies to grow and instead impoverished them. The injustice of an extremely unequal world needs to end. While some places in the world have left the worst poverty behind, the huge majority of the world still lives in countries where the average income is extremely low. To increase average incomes is economic growth.

That is why I think that everyone who is also concerned about global poverty should be clear and say without any hesitation that they are in favour of economic growth for the poorest billions in the world.