Richard Spady's account of economic growth reminds us of the tensions between domestic growth and development abroad, but the path forward isn't clear.
Global Poverty and the Lure of Resentment
At a recent workshop, a scholar mentioned as a matter of course that global poverty continues to “increase.” I followed up, mentioning different sources suggest a massive decline, with over one billion fewer people, in “extreme poverty” in recent decades. The scholar pointed to Oxfam data. I said I was pretty sure Oxfam drew on the same data I did, and I would have heard if the stunning trend had reversed. We both got out our computers and connected to the web.
I pointed to an Oxfam press release from September 2015:
Between 1990 and 2011, almost a billion people escaped extreme poverty, a number equivalent to the combined population of North and South America. Extreme poverty was halved in the 15 years from 1996 . . . This is in many ways a staggering success, the fastest reduction in poverty in human history . . . .
To be sure, I noted, while Oxfam recognizes the reduction in poverty, that recognition does not entail the problem had been eliminated. The first line in the next paragraph states, “Yet more than 1 billion people still live in extreme poverty and progress could have been even better.”
The scholar smiled at me and responded, “That’s data from 2015. Here’s data from 2019,” pointing to an Oxfam press release in January of this year.
Billionaire fortunes increased by 12 percent last year – or $2.5 billion a day – while the 3.8 billion people who make up the poorest half of humanity saw their wealth decline by 11 percent, reveals a new report from Oxfam today.
From this passage my interlocutor concluded that the poorest half of humanity had lost wealth in absolute terms. If you had $500 last year, you would have $445 this year.
I replied while these data are consistent with the possibility that global poverty still decreased. After all, they report a change in the proportion of wealth and not a change in the absolute level of poverty. After all, “if we have a bigger pie, then it’s possible we get more pie in absolute terms even if the proportion of the pie we get declines.”
The scholar gave me a tired smile, and moved on to another conversation.
Inequality versus Poverty
I remained curious, however. After all, perhaps the trend had reversed. While reporting the proportion was consistent with a continuing decline in poverty, the proportion was also consistent with the possibility that the trend in the reduction of extreme poverty worldwide had reversed itself in the last four years, and had started increasing again.
I returned to the Oxfam press release from January 2019 to find the original report that the press release announced.
The briefing paper, “Public Good or Private Wealth?” focuses on global economic inequality and argues for the need to increase taxes on wealthy individuals and corporations. The report acknowledges, however, the decline in absolute levels of poverty during the same time period.
One of the great achievements in recent decades has been the huge reduction in the numbers of people living in extreme poverty, defined by the World Bank as $1.90 per person per day. Yet new evidence from the World Bank shows that the rate of poverty reduction has halved since 2013.
The next line in “Public Good or Private Wealth?” notes from the World Bank report that extreme poverty in sub-Saharan Africa has actually increased. I’ll return to that below.
But first, the Oxfam briefing paper and the World Bank’s report on which the Oxfam commentary drew. (The World Bank’s report can be found here).
Indeed, extreme poverty has continued to decline globally in recent years. That is, as an absolute measure, poverty continues to decline even as inequality has increased. The economic pie has gotten bigger—the world’s poor eat more—even as the relative size of the poor man’s slice of the pie has decreased.
This fact—the world’s poor across the globe are eating more—can be glossed over by the reader in the Oxfam briefing paper because it uses the second derivative to frame the result; it reports the change in the trend’s change: “The rate of poverty reduction has halved since 2013.”
When read too quickly this line might seem to suggest that poverty has actually increased. But what has “halved” is not the reduction of poverty itself, but rather the rate at which poverty is declining.
In calculus, the first derivative of a function reports the change in that function at different points. The second derivative of a function then reports the change in the change of that function at particular points. For example, the velocity of a car reports the speed of the vehicle at a particular point in time. The acceleration of the car, however, reports the change in the velocity of the car.
We all know intuitively that the acceleration of a car can decline while velocity is still increasing. Declining acceleration simply reports a decrease in rate at which the vehicle’s velocity is increasing.
According to the World Bank report, global poverty continues to decline, but the rate at which this decline continues after 2013 is lower than prior to 2013. According to the World Bank report, the world saw a one percent reduction in global poverty between 2013 and 2015. This “reflects steady but slowing progress” in poverty reduction.
Acknowledging the stunning progress in reducing global extreme poverty while not suggesting it has been solved presents a tricky problem for Oxfam, and even for institutions like the World Bank. To the extent that the public perceives global poverty to be decreasing, organizations fear both the public and policy makers may feel less pressure to respond to the poverty that remains. Even more pointed is the possibility that global poverty is declining because of increasing economic inequality rather than in spite of increasing inequality. This challenges a central liberal nostrum that economic inequality causes poverty.
World Bank President Jim Yong Kim, for example, observed,
Over the last 25 years, more than a billion people have lifted themselves out of extreme poverty, and the global poverty rate is now lower than it has ever been in recorded history. This is one of the greatest human achievements of our time.
In the Foreword to the full report Kim noted “that in 1990, more than a third of people on earth lived in extreme poverty,” yet by 2015 this declined so that “approximately one-tenth of the world’s population lived in extreme poverty.”
Poverty is on the rise in several countries in Sub-Saharan Africa, as well as in fragile and conflict-affected situations. In many countries, the bottom 40 percent of the population is getting left behind; in some countries, the living standard of the poorest 40 percent is actually declining.
On this point the World Bank’s recent report is refreshingly explicit. It notes it its own shift in how it defines poverty.
There is a difference in extreme poverty—defined by the World Bank as living on less than $1.90 per day—and less-than-extreme poverty that is still poverty nonetheless. The World Bank report notes decline in extreme poverty, while significant in its own, is not really an appropriate measure for progress in poverty reduction in middle-class countries. There is in fact an appropriately “relative” aspect to poverty once we move beyond basic physical survival.
The Lure of Resentment
Here the World Bank’s report engages in careful analysis while Oxfam’s report deploys the predictable blunderbuss on inequality. For example, the World Bank discusses the role political upheaval’s play in poverty as well as the need for investment in human capital. Oxfam is all about channeling resentment against rich people to increase their taxes.
But here is a conundrum for the populist approach to solving global poverty: The world has seen the most significant decrease in poverty ever recorded in human history, yet economic inequality has increased during the same period. What if the two are causally related? That is, what if global poverty declined because economic inequality increased?
This is the challenge of the two global trends occurring simultaneously, that is, both a massive reduction in extreme poverty worldwide and increasing inequality: The productive energy that lifted over one billion souls out of extreme poverty worldwide is the same energy that the lifted the extremely rich into even greater wealth. The poor became richer because the rich did as well. It presses the possibility that we cannot have the one without the other. And so it presses the question of what’s most important to us, that the poor eat more or that we deprive the superrich some of their baubles and trinkets?
If so, Adam Smith seems to make the appropriate response in his Theory of Moral Sentiments when he suggests we let the rich keep their “baubles and trinkets” so the poor can also prosper:
The rich only select from the heap what is most precious and agreeable. They consume little more than the poor, and in spite of their natural selfishness and rapacity, though they mean only their own conveniency, though the sole end which they propose from the labours of all the thousands whom they employ, be the gratification of their own vain and insatiable desires, they divide with the poor the produce of all their improvements. They are led by an invisible hand to make nearly the same distribution of the necessaries of life, which would have been made, had the earth been divided into equal portions among all its inhabitants.