Try this test of your economic literacy: has world poverty decreased or increased since 1990? If you said decreased, congratulations. You’re smarter than the average bear.
If you were sure it had increased, you’re the victim of a news media gone overboard in indulging your preference for bad news over good.
A lot of bad things are happening in the world, but also some really good things, and we immiserate ourselves when we fail to give them the notice they deserve.
In October the Word Bank issued a report announcing that world poverty had fallen in the two years to 2015. But since this was the continuation of a longstanding trend, the media took little notice.
So let me give it the fanfare it deserves. World poverty has been falling continuously – and rapidly - for the past quarter century. In 1990, 36 per cent of the world’s population lived in extreme poverty, but by 2015 this had fallen to 10 per cent – the lowest in recorded history.
This means the number of people living in extreme poverty has fallen by a billion, from almost 2 billion to 736 million. And that really does make it “one of the greatest human achievements of our time”.
The World Bank defines extreme poverty as living on less than $US1.90 a day, which has been adjusted for the US dollar’s differing purchasing power in different countries in 2011.
But how did this great achievement come about? It’s the result of rapid economic growth in the developing countries over the past three decades, particularly in China (and its trading partners in east Asia) and India (and other south Asian countries, including Bangladesh).
These countries have made no herculean efforts to redistribute income from the rich to the poor, they’ve just grown a lot over a sustained period. Which makes the fall in poverty in these countries a fabulous advertisement for the benefits of market economies and freer trade between countries.
And it’s a reminder that, in poor countries at least, a fair bit of the income generated by economic growth does trickle down to those at the bottom. Low-income households also benefit as more of the country’s income is spent on increasing primary education and spreading access to electricity, decent water and sanitation.
Actually, lower-income households in Australia have benefited from our 27 years of continuous economic growth, with their incomes growing quite strongly in real terms. That’s because of employment growing faster than the working-age population, wages growing faster than prices (until five years ago) and pensions (but not the dole) being indexed to wages.
But real wage and pension growth occur because of government policy. And since, in truth, tax cuts for companies and high income-earners do little to boost the economy and employment, their benefits don’t trickle down to any great extent.
Back to the point. Though the rate of extreme poverty has fallen in all the world’s regions since 1990, it’s fallen only a bit in Sub-Saharan Africa, while its population has continued growing strongly.
This means the Sub-Sahara now accounts for more than half the 736 million people remaining in extreme poverty, with south Asia accounting for a further quarter. It’s been largely eliminated in east Asia and the other regions.
If India’s present strong economic growth continues, its share of world poverty will fall away. The World Bank projects that, by 2030, Sub-Saharan Africa will account for nearly nine out of 10 of the world’s extreme poor.
Globally, poor people live overwhelmingly in rural areas and have lots of children. Judge poverty not by people’s income but by their access to education, electricity, water and sanitation, and the proportion in rural areas is even higher.
Note that the World Bank’s austere “international poverty line” of $US1.90 a day is an absolute measure of poverty. You work out the value of goods needed to barely stay alive, then adjust it for inflation over time, ignoring what’s happening to the incomes of the better-off.
By contrast, in rich countries like ours we measure relative poverty: how are real incomes at the bottom (often defined as half the median income) travelling relative to those around the middle and at the top?
So absolute poverty falls whenever low incomes grow faster than inflation whereas, for a fall in relative poverty, the real incomes of the poor need to grow at a faster rate than everyone else’s.
This, by the way, explains why absolute poverty in China and India can fall even while income inequality – the gap between rich and poor – increases. As it usually has.