This blog is written by Chris Hoy, Independent Consultant – Economics and International Development
Next month, the World Bank’s Commission on Global Poverty will release a report about measuring progress towards reducing poverty and promoting inclusive growth that is likely to shape the next 15 years of the international development agenda on this aspect of the SDGs. This blog highlights three challenges for the Commission as they think through solutions; to avoid creating perverse incentives, to ensure that countries starting points are taken into account and to combine poverty and inclusive growth in a constructive way.
I’m going to illustrate these by drawing on an ODI paper launched today that projects what levels of national poverty (that is, poverty defined by national poverty lines) might look like in 2030. While there have been numerous projections of extreme poverty to 2030, this paper is the first time the same exercise has been done with national poverty. Specifically, the paper looks at the feasibility of Sustainable Development Goal (SDG) target 1.2 to halve national poverty. It shows that the vast majority of developing countries could achieve this target if high growth prevails for the bottom 40% of their population (and national poverty lines don’t change).
The challenges for the Commission are discussed one by one below:
Avoid Creating Perverse incentives
The way targets to reduce poverty are measured can create perverse political incentives as unlike most indicators in international development, poverty lines are set and updated by the institutions that are aiming to reduce poverty. This is particularly the case for national poverty as there’s little incentive for governments to raise the level of national poverty lines (ie the level of their ambition) if they’re also trying to meet targets to reduce national poverty. If they did so, of course, the government would be increasing the number of people who live in poverty making it harder to reach poverty reduction targets.
For example, Indonesia is on track to virtually eliminate national poverty by 2030. Currently only around 10% of Indonesians live below the national poverty line of around $1.10 (2005 PPP), which is one of the lowest in the world. If the national poverty line was consistent with other countries of a similar average income, it would be almost three times higher and two-thirds of the population would live below the national poverty line. As it stands, there is little incentive for the Indonesian government (or that of any other country) to ensure poverty lines truly reflect national realities.
Countries should be encouraged to dramatically reduce poverty, however how their progress towards this is measured should not create preserve incentives that allow governments to claim to have made rapid progress even if there has been little change in the standard of living of the poor.
Ensure countries starting points are taken into account
Efforts need to be made to ensure countries’ starting points are taken into account when comparing progress in reducing poverty across countries. This is because the current level and depth of poverty in a country is a key factor in determining how likely it is to be able to meet any target to reduce poverty.
For example, countries are on a very uneven playing field trying to achieve SDG target 1.2 to halve national poverty by 2030. In some countries, over 60% of the population lives below the national poverty line, while in others that figure is less than 10%. This can be seen in the chart below of current levels of national poverty in 59 developing countries that had recent and reliable data available.
How far people live below the national poverty line – the poverty gap – also matters. The target to halve national poverty is significantly more challenging for countries in Latin America and Sub-Saharan Africa where the average poverty gap is around 20% compared to less than 5% in East and South Asia. This means the incomes of the poor need to increase much more in countries in Latin America and Africa compared to in Asia to meet the target. Therefore the target only requires some countries to take relatively small steps while others need to jump substantially higher to meet the same target.
Combine poverty and inclusive growth agendas by prioritising high growth for the bottom 40% of the population
Focusing solely on promoting high growth for the bottom 40% of the population is one of the most efficient ways to reduce income poverty and promote inclusive growth. Unfortunately the World Bank and SDG inclusive growth targets do not directly aim for this. They are measured by comparing the average growth rate in a country with the growth rate of the bottom 40%. However if both the average and bottom 40% growth rate in a country are low then achieving inclusive growth targets could have little impact on reducing poverty.
The projections of national poverty to 2030 in the ODI paper clearly illustrate the need to prioritise high growth for the bottom 40%. Twice as many countries would be on track to halve national poverty by 2030 if the bottom 40% grows 2 percentage points faster than the average compared to equal growth across the distribution, keeping the overall level of growth constant. In other words, for the same rate of average growth, huge progress can be made in reducing poverty if the bottom 40% are the main beneficiaries. This can see in the case of India: equal growth across the distribution would leave 18% of its population in national poverty in 2030, whereas if the bottom 40% grow 2 percentage points faster than the average, this could virtually eliminate national poverty.
These challenges need to be addressed for the ambition of the SDGs – and the World Bank’s – goals to be realised. Otherwise progress reducing poverty and promoting inclusive growth could be said to be achieved even if there is actually little change in living standards for the poor.