Economic Growth is Reducing Global Poverty

Summary of working paper 8933
Featured in print Digest

The number of people living in extreme poverty declined dramatically, from 430 million people in 1970 to 52 million in 1998.

The fierce debates over economic globalization have focused recently on global poverty and income inequality. Academics, journalists, and multilateral organizations of all stripes have weighed in on this matter, and a general consensus seems to have formed around the proposition that poverty and inequality are on the rise.

But NBER Faculty Research Fellow Xavier Sala-i-Martin begs to differ, and offers his case in The World Distribution of Income (Estimated from Individual Country Distributions), (NBER Working Paper No. 8933). He concludes that global poverty -- measured by poverty rates as well as absolute headcounts -- declined significantly from 1970 to 1998. Moreover, income inequality also declined, particularly in the last two decades he studies.

According to the author, his paper represents "the first attempt to construct a world income distribution by aggregating individual-country distributions." Using income data covering 97 countries, Sala-i-Martin estimates five income shares for each country from 1970 to 1998. He then integrates the individual country data to form a single picture of global income distribution. He also incorporates 28 additional countries for which there are no individual income share data available, bringing the total in his sample to 125 nations, or roughly 88 percent of the global population in 1998.

Drawing on these data, the author first highlights the poverty and inequality experiences of the nine most populous countries in the world: China, India, the United States, Indonesia, Brazil, Pakistan, Japan, Bangladesh, and Nigeria. These cases reveal differing insights into the relationship between income growth and income inequality. In China, for instance, poverty rates plummeted in 1970-98, but inequality increased. In Indonesia, extreme poverty virtually disappeared and income inequality declined at the same time, countering the popular notion that growth and inequality must go together. Finally, Nigeria offers a cautionary tale: as in much of Africa, Nigerian per capita income dropped over the last thirty years, and extreme poverty rose from 45 percent of the population in 1970 to 70 percent in 1998. However, inequality also increased so drastically that the richest Nigerians were actually better off in 1998 than in 1970.

Sala-i-Martin finds that, on a global level, the number of people living in extreme poverty (income of less than $1 per day at the prices of 1985) and poverty (less than $2 per day) declined significantly during the period under study. In 1970, roughly 40 percent of the global population subsisted under the $2 poverty line, while about one-sixth lived under the $1 line. The picture was much the same in 1980, but "things changed dramatically in the 1990s" the author writes, when China, India, and Indonesia began growing rapidly. By 1998, less than 20 percent of the world population was beneath the $2 dollar level, while, less than 7 percent was below the $1 level. "The world, therefore," explains Sala-i-Martin, "has had an unambiguous success in the war against poverty rates during the last three decades." Even in absolute terms, from 1976 to 1998, the number of people living under $1 per day declined by 235 million between 1976 and 1998, while the number of people living on less than $2 per day declined by 450 million.

The author then delves into regional differences and finds that reductions in poverty varied tremendously across continents. Asia was the best performer. The number of people living in extreme poverty declined dramatically, from 430 million people in 1970 to 52 million in 1998. Latin America's track record is more mixed, with poverty rates declining in the 1970s but rising thereafter. Finally, Africa presents the worst performance of all, with the poverty rate nearly doubling --- from 22 percent to 40 percent -- from 1970 to 1998. The contrast between Africa and Asia is stunning: in 1970, of all the people living under $1 per day, 11 percent lived in Africa, compared to 76 percent in Asia. By 1998, the figures were nearly reversed, with 66 percent living in Africa and only 15 percent in Asia. The key difference, the author writes, is that Asian economies experienced rapid growth, while Africa experienced negative growth. "The welfare implications of finding out how to turn around the growth performance of Africa are so staggering, that this has probably become the most important question in economics," Sala-i-Martin explains.

Finally, the author uses the nine most common income inequality indices in the economics literature to analyze the world distribution of income from 1970 to 1998. All of them offer the same overall result: Though inequality remained more or less constant, or possibly increased, during the 1970s, it declined substantially in the 1980s and 1990s. As a result, the shape of the income distribution has changed, from a bimodal distribution with a peak of poor people and a peak of rich in 1970, to a smoother distribution in 1998, suggesting the emergence of a "world middle class."

Despite these improvements, some 350 million people still lived on less that $1 per day in 1998, while nearly one billion subsisted on under $2 per day. "Success," cautions the author, "does not mean victory" in the fight against poverty and inequality.

-- Carlos Lozada