WHAT WILL IT TAKE TO ERADICATE EXTREME POVERTY AND PROMOTE SHARED PROSPERITY? Pathways to poverty reduction and inclusive growth Ana Revenga Senior Director Poverty and Equity Global Practice February 27, 2015
Defining the challenge
The World Bank Group recently set two strategic goals, to be achieved in a sustainable way GOAL 1: End extreme poverty The percentage of people living with less than $1.25 a day to fall to no more than 3 percent globally by 2030 GOAL 2: Promote shared prosperity Foster income/consumption growth of the bottom 40 percent of the population in every country Sustainability, an overarching theme A sustainable path of development and poverty reduction would be one that: (i) manages the resources of our planet for future generations, (ii) ensures social inclusion, and (iii) adopts fiscally responsible policies that limit future debt burden 2
Reaching the poverty reduction goal requires focusing on Sub-Saharan Africa and South Asia 3 Source: 2011 Povcal estimates (9/25/2014)
But reaching the 3% goal by 2030 is far from assured: Business as usual will not get us there Global Poverty in 2030 at $1.25 per day (2005 PPP), assuming unchanged inequality Scenario Headcount (percent) Number of poor (million) Average income growth of 4% p.a. in each country 3 252 Each country sustains average per capita growth during past 20 years Each country sustains average per capita growth during past 10 years Each country sustains average per capita growth during past 10 years (survey-based growth) 6.8 573 4.8 405.4 6.7 564.8 4
Boosting shared prosperity can help achieve the poverty goal What if the bottom 40 were to grow faster than average country growth? Global Poverty in 2030 at $1.25 per day (2005 PPP), decreasing inequality scenarios Scenario Each country sustains average per capita growth during past 10 years 10-year growth rate, combined with bottom 40 growth 1 percent point greater than growth in mean 10-year growth rate, combined with bottom 40 growth 2 percent points greater than growth in mean Headcount (percent) 4.8 3.7 3 by 2028 5
Progress in promoting shared prosperity is uneven across countries 6
What works for poverty reduction and shared prosperity?
Growth translates into increased welfare of the poor mainly through increased labor incomes and opportunities (with some role for transfers) Welfare of the Poor Labor incomes of the Poor Transfers Assets of the Poor Government Policies and Institutions 8
Annual Poverty Reduction (percentage points) Increased labor income of the poor was the main factor behind poverty reduction over the last decade 4.0 0.2 0.5 3.0 0.9 2.0 1.0 2.9 1.9 0.4 0.3 0.6 1.0 1.0 0.1 1.4 0.6 0.8 0.0 0.4 0.4 0.5 0.3-0.2 0.6-0.4 0.4-0.2-1.0 Peru (2005-2009) Nepal (1996-2003) Ghana (1998-2005) Brazil (2001-2009) Bangladesh (2000-2010) Thailand (2000-2009) Demographic Change Labor Income Non-Labor Income Other Source: Inchauste, Gabriela & Olivieri, Sergio & Saavedra, Jaime & Winkler, Hernan, 2012. What is behind the decline in poverty since 2000? evidence from Bangladesh, Peru and Thailand," Policy Research Working Paper Series 6199, The World Bank. J.P. Azevedo, G. Inchauste, S. Olivieri, J. Saavedra and H. Winkler "Is labor income responsible for poverty reduction? A decomposition approach". Background paper for the WDR 2013. Forthcoming. 9
In low income countries where agriculture employs most of the poor, enhancing agricultural productivity is key 32.1 40.8 16.4 5.4 21.8 8.7 18.5 24.1 78.2 59.2 59.7 35.0 Sub-Saharan Africa Total working Other developing countries Agriculture Industry Services Sub-Saharan Africa Working poor Other developing countries Agriculture Industry Services Source: World Bank, Africa s Pulse vol. 10. International Income Distribution Database. Notes: The numbers correspond to working age (15-65) population weighted averages of the most recent survey between 2002 and 2012. Average of 33 (20) SSA countries and 66 (41) other developing countries for total working (working poor). 10
Agricultural growth was main driver of poverty reduction in Cambodia and Rwanda since 2000 Non-farm business, 19% CAMBODIA Drivers of poverty reduction, 2004-2011 Urban salaries, 4% Rice production, 23% Other Factors and Unexplained Part 30% RWANDA Drivers of poverty reduction, 2001-2011 Increased Agricultural Production 35% Other factors, 14% Non-Farm Wage Employment 3% Farm wage, 16% Rice price, 24% Non-Farm Self Employment 13% Decreased Dependency Ratio 9% Increased Agricultural Commercialization 10% Source: Cambodia Poverty Assessment 2013 Source: Rwanda Poverty Assessment 2013 11
In Ethiopia as well, where modern inputs reduced poverty when weather and prices were good 40 Contribution to poverty reduction (%), 1996-2011 2.5 Poverty reduction from inputs, prices, and weather (% per year) 30 2 20 1.5 1 10 0.5 0-10 Agricultural growth Safety PSNPnet transfers Improved access to services 1996 to 2000 2000 to 2005 2005 to 2011 0-0.5-1 Seeds Fertilizer Prices Weather Poor conditions Good conditions (good rain, high prices) Sources: World Bank, Africa s Pulse vol. 10 (adapted from Ferreira et al. (2010), Ravallion and Chen (2007), and Ravallion and Datt (1996). On the right: Ethiopia Poverty Assessment, 2015. Notes: The results refer to time periods of analysis from 1985 to 2004 for Brazil, 1981-2001 for China, and 1951 to 1991 for India. National poverty lines are used for all countries. Vertical axis measures regression coefficients (unadjusted by sector shares). 12
As countries move up the income ladder, structural transformation clearly begins to matter more Turkey 5 USD/day poverty declined from 44 to 22 percent between 2002 and 2011 Poverty reduction driven mostly by increased labor earning, linked to structural transformation and increased minimum wage Move to formal sector jobs in industry and services have driven upward mobility 13 Source: Azevedo, J.P. and Atamanov, A., Pathways to the Middle Class in Turkey, 2013; Note: Authors calculations based on LFS data and Turkish Statistical Institute. Sixe of bubbles indicates number of employed
Percentage of Population But even in middle income countries many of those who escape poverty remain vulnerable Indonesia 50 40 30 20 10 MANY LIVE JUST ABOVE POVERTY 62m Vulnerable 30m Poor AND ENTER POVERTY EASILY 55% of this year s poor were not poor the year before 0 Between 1.0x and 1.5x Poverty Line Below Poverty Line Existing Poor Newly Poor Source: Susenas 2011 Source: 2009-10 Susenas Panel and World Bank calculations 14
Shocks are an increasing threat for poor and vulnerable households in both low and middle income countries Incidence of natural disasters Large recessions Source: WDR 2014 team based on data from World Bank World Development Indicators (database); EM-DAT OFDA/CRED International Disaster Database; World Development Report 2014. 15
Households need to be better prepared to manage risks and withstand shocks to ensure the sustainability of poverty reduction 16 Source: Foa 2013 for the World Development Report 2014.
However, a new middle/consumer class is emerging in MICs, which is likely to play a big role in driving future economic growth Indonesia 17
It is often formal jobs that help people move out of poverty and vulnerability, and into the middle class Latin America, sector of work (share of formal) by socio-economic class 18 Source: Economic Mobility and the Rise of the Latin American Middle Class, World Bank, 2013
Accessing these jobs requires greater human capital, but the poor are at a disadvantage Latin America, years of education by socio-economic class 19 Source: Economic Mobility and the Rise of the Latin American Middle Class, World Bank, 2013
Human capital assets are unequally distributed, affecting the opportunities for the poor to eventually access good jobs Poorer children have lower opportunities Likelihood that a child drawn at random from different ends of the wealth distribution will not be stunted 20
Inequality of opportunities is affected by initial conditions, putting the poor at a disadvantage since childhood INDIA: Contribution of each circumstance to inequality of opportunities, % (circa 2008) 21 Source: Visualize Inequality
It is fundamental to improve not only access to but also quality of basic services for the poor INDONESIA: Learning outcomes by income quintile, PISA scores 22 Source: PISA database.
Transfers can also play an important role in reducing poverty, but to be effective they need to be well targeted and cover the poor Ethiopia 2% Percentage point reduction in poverty indices as a direct result of the Productive Safety Nets Program (PSNP) transfers in 2011 Direct transfers as share of income (by market income decile) 1% 0% Headcount Ratio Poverty Gap Poverty Severity Source: Ethiopia Poverty Assessment, World Bank, 2014. 23
Transfers can also contribute to poverty reduction indirectly, by helping to build human capital assets Conditional Cash Transfers can improve development outcomes Conditional Support Program PROSPERA (Mexico) Impact evaluation and selected key results (1997-2009) Education Years of schooling increased by 0.85 for female and 0.65 for male beneficiaries between 17 and 22. Health Increased use of health services (especially preventive) Reduction by 22.2 percentage points in the prevalence of stunting in children below the age of two Reduction by 11.8 percentage points in the prevalence of anemia in children below the age of two reduction by 5.4 (urban areas) and 14.2 (rural areas) percentage points in the prevalence of anemia in pregnant women between 17 and 22 years. 24 Source: Extract from World Bank Project Appraisal Document, Mexico, 2014.
Share of Market Income Share of GDP Share of Market Income Share of GDP The government s redistributive role goes well beyond transfers Incidence of taxation Direct taxes Indirect taxes 35% 16% 35% 16% 30% 14% 30% 14% 25% 12% 25% 12% 20% 15% 10% 8% 6% 20% 15% 10% 8% 6% 10% 4% 10% 4% 5% 2% 5% 2% 0% 0% 0% 0% Poorest decile Richest decile Share of GDP (right axis) Poorest decile Richest decile Share of GDP (right axis) 25 Source: Higgins and Pereira, 2014; Scott, 2014; Jaramillo, 2014, Bucheli et al, 2014; Lustig et al, 2014; Jellema et al, 2014; Arunatilake et al, 2014; Younger et al, 2014. Woldehanna et al 2014.
Social policy and the incidence of social spending can ensure growth translates more effectively in reducing poverty and inequality Ethiopia, Education spending incidence Education spending incidence (share of benefits by market income decile) Spending on education is progressive in relative terms (as share of market income) Spending is pro-poor in primary education (ie. absolute amount received in terms of education benefits by poor HH is greater than for rich HH) Source: Ethiopia Poverty Assessment, World Bank, 2014. 26
So what will it take going forward?
Growth with jobs, improving opportunities for the poor and effective government policies and programs are key Economic growth that leads to the creation of better jobs for the poor and vulnerable is fundamental Drivers of growth and growth incidence matter Expanding access and quality of opportunities for the poor and vulnerable works Investing in health and education, and quality services for the poor Social assistance protects households from shocks and facilitates upwards mobility Cash transfers can be equalizing But their effectiveness in reducing inequality depends on both their size and how well-targeted they are Governments redistributive role also matters Fiscal spending directed at social spending Incidence of taxation favorable to the poor 28
What is the World Bank doing? (1) Creating better Jobs EGYPT - More Jobs, Better Jobs: A Priority for Egypt Context-relevant and forward-looking analysis that highlights policy interventions needed to unleash the potential of the private sector to create a large and diverse set of jobs. The report outlines a three-level approach to the informal jobs dilemma: 29 encourage entrepreneurial firms to formalize, incentivize existing firms to offer formal jobs, and work to provide the benefits of stability to the unorganized and informally employed through unions, NGOs, and public-private partnerships. By reforming Egypt s economic policies and public services, the government can help to bring better quality jobs to a new generation of educated Egyptians, and to build a stronger, more resilient labor market for the generations to come.
What is the World Bank doing? (2) Strengthening human capital of the poor through social programs BANGLADESH Income support program for the poorest Concessional loan and technical assistance to run a conditional cash transfer program. The project will provide cash transfers to the poorest mothers to reduce their poverty with the objective of improving their children s nutrition and cognitive development. 30 (3) Understanding inequality of opportunities VISUALIZE INEQUALITY Interactive analytical tools Innovative tools such as the Visualize Inequality dashboard allow for a deeper understanding of where inequality in access to opportunities among children persists, and where more targeted policies are necessary to level the playing field from the start. Visit www.worldbank.org/visualizeinequality
What is the World Bank doing? (4) Managing risks and vulnerability MALAWI Flood response and building resilience to risks The Bank provided financing for a quick response for land recovery, a damage assessment and to support the Government with response logistics. Data collection and analysis to examine distributional impacts of disaster and help design targeted long-term responses. In a context of a changing climate, disaster risks are likely to get worse, making resilience-building measures and policies even more important and urgent. In coordination with the Malawi Government, the Bank is also examining the exposure and vulnerability of poorer households and individuals. This will allow reviewing instruments that can help them adapt and cope, such as social protection initiatives and safety nets, all of which can be rapidly scaled up after a natural disaster. 31
What is the World Bank doing? (5) Equitable fiscal policies COMMITMENT TO EQUITY Groundbreaking analysis on the impact of fiscal policy on poverty and inequality, in collaboration with Tulane University, looking at: whether taxes and social spending are progressive, whether fiscal policy as a whole contributes to reducing poverty and inequality, whether tax and transfer policies are effective at distributing income given the fiscal resources used We provide country-specific policy options that can enhance the ability of fiscal policy to reduce poverty and inequality. 32
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