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Ending Poverty by 2030: Sharing Prosperity with the Bottom 40%

Ending Poverty by 2030: Sharing Prosperity with the Bottom 40%

By Christopher Lakner, Mario Negre, and Espen Beer Prydz

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 in 2012 almost 900 million people (12.7% of the world’s population) lived below the $1.90/day threshold (based on 2011 PPP or purchasing power parity). Projections to 2030 suggest that even under optimistic growth scenarios, the global poverty target may not be achieved.

World Bank estimates show that if developing countries were to grow at the (rather unprecedentedly high) rates of the 2000s, the global poverty headcount could decline from 12.7% in 2012 to 4.2% in 2030 — still 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 remains an important driver of future poverty reduction, but the inclusiveness of growth will also matter. Particularly in a context of global growth slowdown.

A paper entitled “Twinning the goals: How can promoting shared prosperity help to reduce global poverty?” (currently being updated) explores this topic from the perspective of the World Bank goals of promoting shared prosperity and ending 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, as such, is an articulation of inclusive growth. Our question is this: How can this goal of boosting the growth of the poorest 40% in every country help to reduce global extreme poverty by 2030?

To understand the potential effect of boosting shared prosperity on 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 above 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 share of the bottom 40% in this growth varies. Under scenario A, everyone in each country grows at the same rate. In scenario B, everyone in the bottom 40% grows 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 2.0% to as high as 9.3%.

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 in Sub-Saharan Africa living in poverty in 2030 remains above 10% 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 — that is, if there is no growth in GDP — 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 poverty headcount would increase to 24%. If, however, the bottom 40% grows at 2%, the headcount still falls to 6.2%, meaning, of course, that redistribution by itself is a powerful economic tool.

Importantly, it turns out that the “cost” of boosting growth for 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, if the bottom 40% grows 2 percentage points above the mean (8.1% versus 6.1%), then the top 60% still grows at just 0.4 percentage points below the mean (5.7%). This would have been the case anyway with distribution-neutral growth.

Although these findings are based on a number of assumptions, the simulations show how inclusive growth and pursuing the World Bank’s goal of boosting shared prosperity can be an important factor in reducing poverty by 2030. These findings are also relevant beyond the World Bank goals and, in particular, to 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.

Mario Negre is a Senior Economist on the Poverty and Inequality Team with the Development Research Group of the World Bank and German Development Institute. He will be speaking at CIPS on 7 March 2016 at noon about The Role of Inclusive Growth in Ending Extreme Poverty.

Christopher Lakner and Espen Beer Prydz are both Economists on the Poverty and Inequality Team with the Development Research Group of the World Bank.

A previous version of this piece was first published by the World Bank: http://blogs.worldbank.org/futuredevelopment/poverty-will-only-end-2030-if-growth-shared

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