Reason and the end of poverty

By Kaushik Basu

Study shows the bulk of poverty eradication is driven by economies’ overall income growth

The World Bank has set two new goals for itself: ending extreme and chronic poverty in the world by 2030, and promoting shared prosperity, defined in terms of progress of the poorest 40% of the population in each society.

Now that the United Nations General Assembly Open Working Group on Sustainable Development Goals has endorsed the Bank’s anti-poverty target, debate about how to achieve it has revived an old question: Will the benefits of economic growth trickle down on their own, reaching all, or will we need targeted redistributive policies?

Many people remain in the growth-only camp only because of an error in deductive reasoning; unlike committed ideologues, they can be weaned from their position. That is why the World Bank’s second goal of promoting shared prosperity is important not only in itself, but as an essential complement to the goal of ending poverty.

Recognising that some “frictional” poverty will inevitably persist over the next two decades, the World Bank’s formal target is to reduce the percentage of people living below the poverty line – defined as daily consumption of less than $1.25 (in purchasing-power-parity terms) per person – to less than 3%.

World Bank research predicts that if all countries grow at the same rates that they did over the past 20 years, with no change in income distribution, world poverty will fall to 7.7% by 2030, from 17.7% in 2010. If they grow faster, at the average rates recorded in the 2000’s, the poverty rate will fall to 5.5%.

These numbers suggest that growth alone is unlikely to get us to the 3% target. But this is mere suggestion. One can argue that we should nonetheless rely on growth and simply adopt measures that encourage more of it.

In a new paper, David Dollar, Tatjana Kleineberg, and Aart Kraay analyze empirically the relationship between growth and poverty. Their comprehensive study draws on high-quality survey data from 118 countries and reaches a clear conclusion: the bulk of poverty eradication that took place in recent decades was driven by economies’ overall income growth.

More specifically, 77% of the cross-country variation in the income growth of the poorest 40% of the population reflects differences in average income growth.

Findings like these lead many people to conclude that eradicating poverty requires us to rely on overall growth, and that direct government policy interventions have little merit. But this is a wrong conclusion, which illustrates a lapse of logic.

To see why, suppose that in 1930 an economist conducted an empirical study of what cured infectious diseases, and, analyzing masses of data from previous years, concluded that 98% of all treatable illnesses were cured by non-antibiotic medicines – “tradicines,” which include all traditional medicines of various schools.

This conclusion would most likely be valid, because the use of antibiotics before 1930 – just two years after Alexander Fleming discovered penicillin and years before it was fully workable as a cure – was rare and mostly inadvertent.

But now suppose that the economist goes on to argue that, therefore, it would be silly to give patients penicillin, because we know that 98% of all treatable diseases were cured by tradicines, and penicillin is not a tradicine.

That is a wrong deduction, based on evidence that does not exist. What the economist’s study in 1930 showed is that tradicines accounted for 98% of the cases that were successfully treated. It does not show that penicillin does not work.

This is a common mistake. We often hear assertions like, “We must rely on the private sector to create jobs, because studies show that 90% of past jobs were created by the private sector.” If we accepted this reasoning, we would have to accept a Soviet researcher’s assertion in the late 1980’s that we must rely on the state to create jobs, because 90% of past jobs were created by the state.

On job creation, there is both theory and evidence to support the conclusion that the private sector is the main driver of sustainable expansion (which is not to deny that there may be scope for tweaking public policies to make the private sector more employment-friendly).

But on poverty eradication, theory and evidence show that policy interventions, when skillfully designed, can play a significant role. Some of these policies already exist; some have to be crafted – the antibiotics of our time.

In India, the government has tried for decades to get cheap food to the poor. Cost-benefit analysis has led many to declare it a failed policy. But the fault lies with the program’s method, which is to rely on the state both to collect the food from farmers and to deliver it to the poor.

Around 45% of food grain leaks out and disappears in this process. This means that the program’s leaks need to be repaired, not that the entire scheme should be abandoned. A carefully designed public-private partnership – in which the state gives a subsidy directly to the poor, who then buy food from private farmers and traders – would benefit all.

Obviously, when the poor have more (and healthier) food, their nutrition improves; when better-nourished people go to school, they become more productive; the same is true of health services. Overall economic growth is important, but the poor should not have to wait until its benefits trickle down to them; with the right anti-poverty policies, governments can encourage trickle-up growth as well.

Kaushik Basu, Chief Economist and Senior Vice President of the World Bank, is on leave from Cornell University, where he is Professor of Economics.