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Poverty is among the most central problems of economics, and its alleviation is a long-standing challenge for economists and policy makers alike. The Millennium Development Goals (MDG) adopted by the United Nations in 2000 aim to lower the fraction of the world’s poor by the year 2015 to half its 1990 level, where “poor” includes those subsisting on less than $1 a day. This description of poverty is close to the $1.08-per-day poverty line (in 1993 dollars) adopted by the World Bank. Defined by the $1 cut-off, in 1998 one in five people in the world (1.2 billion) were poor, and they were concentrated in South Asia (522 million), sub-Saharan Africa (291 million), and East Asia (278 million).
Worldwide Distribution of Poverty
Measured in terms of certain basic capabilities—health, education, political voice, credit—these regional poverty patterns persist. The 2004 Human Development Report states that sub-Saharan Africa accounts for 22 percent of the world’s malnourished population and 42 percent of primary school-age children not in school. For East Asia the corresponding figures are 25 percent and 13 percent, and for South Asia, they are 37 percent and 31 percent, respectively. Thus, the $1-a-day measure seems to do a reasonable job of capturing other relevant dimensions of poverty.
How do those with less than $1 a day really live? Based on household level surveys across thirteen countries, Abhijit Banerjee and Esther Duflo (2007) give us a vivid picture: They often work multiple odd jobs (and not only in agriculture); frequently migrate temporarily for work; own few assets other than land; lack access to credit and insurance; get poor-quality health care and education (if at all); are frequently malnourished; spend much (but not all) of their income on food (50–75%), alcohol and tobacco (resisting temptations to spend more), and festivals (but few other forms of entertainment); and importantly, although they do feel the pinch of poverty, their self-reported levels of happiness and health are not particularly low. If this poverty cut-off were doubled to just $2 a day, nearly half the world’s people would be deemed poor (2.8 billion)—and shockingly, they consume less in a month than what the nonpoor consume in a single day.
These figures are grim, but to gain some perspective on them and assess how realistic the MDG are, we need to measure the progress the world has made in alleviating poverty. Taking the long view, the drop in the poverty rate—from 84 percent in 1820 to 50 percent in 1950, to 24 percent in 1992—and the rise in life expectancy— from twenty-seven years to sixty-one years over the same period (Bourguignon and Morrison 2002)—is dramatic. Over a shorter period it is less so. According to the World Bank, the poverty rate worldwide has fallen from 28.7 percent in 1987 to 24.3 percent in 1998 (World Bank 2007). (These numbers are somewhat sensitive to the time period and data sources used; Angus Deaton  points out that this can be explained by the use of different underlying data sources, but there is less disagreement of the pattern of changes than in levels.) Once again, there is sharp regional variation—from 26.6 percent to 15.3 percent in East Asia (mostly China) and 44 percent to 40 percent in South Asia, but stagnant around 46 percent in Africa, with an increase of 50 million in the region’s poor. These sharp regional variations in poverty reduction emphasize the question of what the underlying causes of poverty are. Not surprisingly, there are multiple views on what is the “right” answer.
Alleviating Poverty: is Market-Driven Growth Enough?
The dominant view of the 1980s, the “Washington Consensus,” still prevalent in some influential quarters (such as the International Monetary Fund), is that growth is the best answer to the poverty problem and that marketfriendly policies are best suited to achieving growth. Does the data support this view? There is strong evidence of positive correlation between growth and poverty reduction— which, of course, is not the same as causation. Based on numbers from sixty countries with data for more than one year, Timothy Besley and Robin Burgess (2003) find that poverty rates are very responsive to changes in income per capita (elasticity = 0.73 worldwide), but yet again, with large regional differences (-1.0 in East Asia versus 0.49 in sub-Saharan Africa). They conclude that, given historical growth rates of per capita income, growth alone is unlikely to help achieve the poverty reduction targets set in the MDG in most regions (Besley and Burgess 2003). As for evidence of market-driven growth, it is now widely agreed that the most prominent growth story of the past three decades, the “East Asian miracle,” involved active government intervention in markets (Amsden 2001). Overall, support for the Washington Consensus view does exist, but it is not overwhelming. As a practical matter, many countries have had a less than favorable experience with certain aspects of “stabilization plans” based on this view—a policy package typically involving openness to trade and foreign capital markets, restrictive monetary and fiscal policies, privatization of state-owned enterprises, and deregulation of important markets. Concerted international action to tackle poverty, in the form of foreign aid, has been well below the United Nations’s aid target of 0.7 percent of gross domestic product of the G7 countries (the United States, France, Germany, Italy, Japan, the United Kingdom, and Canada). But even if that aid were available, it would be only one-third of what is needed to achieve the MDG. Collectively, these realities have forced a search for alternative explanations for and solutions to the poverty problem.
The Institutional Approach to Poverty Reduction
A shift in the thinking on poverty is also being driven by a deeper theoretical understanding of both market failure and government failure—that is, how market imperfections deny the poor a chance to make the investments needed to rise out of poverty, and why governments are not always effective in making up for this lapse. One important conclusion emerging from research in this area is the need for sound domestic institutions to promote growth and poverty reduction—more so than a country’s geographical or “cultural” legacies. A natural consequence of this finding is a call—by the World Bank (World Bank 2003) and by academic economists—for a wider set of institutional reforms, including promoting democracy and other forms of political voice for the poor, the rule of law, property rights for the poor, increasing government accountability, and reducing corruption. There has been a steady trickle of evidence supporting the favorable impact of sound institutions on outcomes for the poor: for example, how property rights over land in urban areas in Peru help the poor gain access to credit, increase labor supply, and be more productive (De Soto 2000; Field 2002); how political representation for women in India results in more funds for public goods they care about (Chattopadhyay and Duflo 2004); and how a newspaper campaign concerning government accountability increased the resources reaching public schools in Uganda (Reinikka and Svensson 2001).
Service Delivery: Getting “Trickle Down” Right
Although progress on institutional reform is crucial, it can be slow. A parallel approach is a package of policy measures that target poverty and redistribute resources to the poor through schools and health clinics, promoting small businesses, access to credit, better social safety nets, and so on. Here, theoretical research has helped to explain why certain redistribution mechanisms—for instance, in-kind rather than cash transfers—can deliver greater equity and growth when there are market imperfections. This research has shed light on the political economy of public good provision, with insights into suitable incentives for policy makers, providers, and program recipients. On the ground, the better programs have worked through effective design and implementation. For instance, Mexico’s Progresa program involves cash benefits for women and their families that are conditional upon the child(ren) being sent to school and being taken for health check-ups. Microfinance—pioneered by Mohammad Yunus of the Grameen Bank—uses a combination of “peer monitoring” and group liability for borrowers, which makes possible “micro” loans to those too poor to offer collateral. One common feature of both these programs is that they channel resources to poor households through women. Such a gender-based strategy of redistribution is gaining support, given widespread evidence of women’s tendency to spend more resources on children’s welfare and human capital, relative to men (Haddad, Hoddinott, and Alderman 1987). It has also been recognized as a viable solution to the problem of child labor and low schooling, breaking the vicious link from current to future poverty. While there is strong evidence for the positive impact of Progresa (Schultz 2004), ongoing work is evaluating and refining the design of microfinance initiatives.
More broadly, a combination of empirical and, more recently, experimental work is helping design and systematically evaluate a host of service-delivery mechanisms, including the effect of improved child health on school attendance (Kremer-Miguel 2004); the impact of more rural bank branches on poverty (Burgess and Pande 2002); and the impact of corruption in the issuance of drivers’ licenses by the government (Bertrand, Djankov, Hanna, and Mullainathan 2007).
New Perspectives on Poverty
As part of these experiments with program design and implementation, economists have sometimes found it hard to rationally explain certain choices that the poor make, be it with regard to savings, or technology adoption (Ashraf et al. 2006; Duflo et al. 2006). This gives rise to an exciting new behavioral economics approach to poverty that seeks to understand decisions of the poor from not just an economic perspective, but also a psychological one. Insight into the strengths and weaknesses of governments and markets also blurs the line between private and public-service delivery (Besley and Ghatak 2004), giving rise to innovative approaches such as the Advanced Commitment for Vaccines initiative. Some even argue that the world’s poor constitute not just an obligation for the rich, but also a vital, untapped market (Prahalad 2004).
At the international level, however, some important issues that affect poverty remain difficult to resolve. Globalization and trade have been a boon to some countries (or some areas within countries), but a bane to others, creating greater income insecurity for the poor in some developing and developed economies. International agreements on trade and immigration, intellectual property issues, and environmental pollution have not always been favorable to poor economies. These remain areas where large strides can be made toward reduction of global poverty.
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