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We can reduce extreme global poverty by three-fourths — right now

Favela Residents Continue To Struggle Near Rio's Famed Maracana Stadium, Host To The Olympics Opening Ceremony
A scene in Rio de Janeiro, during the Olympics.
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Suppose someone said you could cut global poverty by three-quarters within a year or so — without waiting for economic growth to do the job. Sound unbelievable? A generation ago it may have been, but today it’s entirely possible, given the new public and private financial situations emerging in developing countries.

It continues to be widely asserted that developing countries don’t have the economic capacity to make a dent in poverty through redistribution. But our research suggests that is no longer so — whether extreme poverty is defined as $1.90 a day (the World Bank's figure), $2.50, or $5 a day.

Poverty is a political problem as much as an economic one

First, we have to start with a simple question: Why are some people poor? A famous study of famines by Amartya Sen, the Nobel Prize-winning economist, found that generally in such scenarios people die not as a result of literal food shortages but because some people lacked any entitlement to the food that was available. Famine was a political-economy problem, Sen argued, not a problem of resources per se.

Today we need to ask whether such a situation is the case for much of global poverty. Given the progress many countries have made in economic growth in recent decades, and the new public and private resources such growth has generated, is much of global poverty is essentially a governance failure?

To embrace this idea requires a rethinking of some fundamental assumptions that economists make about helping the poor. The mantra has been that poverty must be ended by fostering growth, and that redistribution, while it has its place, could actually be dangerous if it leads to lower levels of growth. But that mantra is being overturned. Surprisingly, even IMF economists concluded that the combined direct and indirect effects of redistribution are on average good for growth.

The widely used line demarcating extreme poverty was recently updated to $1.90 a day, a level the World Bank has determined marks a meaningful division between (bare) subsistence and absolute destitution. Debates continue about the accuracy and usefulness of that figure. Nevertheless, we find that approximately three-quarters of extreme global poverty, using that measure, could now be eliminated if available national resources were reallocated toward those below it.

But why use that meager consumption level as the standard? We find that three-quarters of global poverty could be ended at more reasonable lines of $2.50 or even $5 per day. These higher poverty lines are, respectively, the figures you get if you average all the national poverty lines in the developing world, or all the poverty lines around the entire world.

When it comes to the extreme poor, redistribution isn't "ideological"

In developed countries, redistribution is often treated as an ideological question, turning on the question of whether a gulf between the rich and the rest is unfair, and on the effects of redistribution on incentives to work. But redistribution of the fruits of growth to people making less $1.90 a day, or even $5 a day isn’t ideological. It’s the difference between being a member of society, at a basic level, and living in the margins — beyond the pale, without dignity.

Redistribution could, in one stroke, massively raise global well-being. Our research suggests that more than 100 developing countries already have the necessary policy infrastructure in place to get cash payments direct to their poorest citizens. Social safety nets, once the preserve of middle-income countries, have been spreading into the developing world. And the evidence that cash transfers to the poor reduces poverty is now clear. The argument that the poor fritter the cash away doesn’t hold.

To take a step back, what’s made this proposal possible is a decade of impressive economic growth in the developing world. GDP per person in the developing world has more than doubled since the late 1990s. This is not just about China, where growth has led to a quadrupling of output per person. In India, Bangladesh, and Nigeria, countries that account for large numbers of the world’s poorest people, GDP per person has much more than doubled, too.

New resources were generated, but they haven't been spread around. High growth rates in many parts of the developing world since the beginning of the millennium have — even without the kind of redistribution proposed here — reduced the number of people living in extreme poverty, although this improvement has been largely confined to China and a handful of other countries. The growth, however, has also significantly increased the number of people who would not be considered poor even if they lived in the United States.

The first option: taxes

Modest taxes levied on this group — those who are not poor by the standards of their own countries or even by US standards — as well as on those who are genuinely well-off would be one way to finance an anti-poverty program.

The additional tax rates required to eliminate extreme poverty would be in the order of 1 to 2 percent in populous middle-income countries like Brazil, China, and South Africa. But the rates differ across countries. In poorer developing countries, taxes would have to be higher, given the smaller number of middle-class and wealthy citizens. New taxes could end half of extreme poverty if a marginal tax rate limit of 50 percent is set. Although that kind of level of marginal tax rate is not unusual in Europe, it is likely to be politically challenging in many developing countries.

The good news is that those kind of marginal taxes rates may not be necessary to raise revenues because governments in the developing world have the scope to redirect existing spending.

An alternative: reallocating military expenditures and energy subsides

Governments could instead reallocate some of their annual expenditures on "public bads" (as opposed to public goods) to payments to the poor. What if governments, for example, spent only as much on their military as their regional neighbors with the lowest "spend" per person? Any amount above that — call it "surplus" military spending — would be redirected.

Those funds alone would cover up to 60 percent of extreme poverty. (Of course rich countries are also guilty of prioritizing defense spending over anti-poverty efforts. If the plan outlined here were adopted, the developing world might shame them into improving their own social policies.) We can debate whether ours is the proper measure of surplus military spending, but it’s inarguable that there are substantial resources in this sector available to be tapped.

There is yet one more option, though, with even higher impact: Call it the trillion-dollar bill sitting on the sidewalk. That option is redirecting regressive fossil fuel subsidies, which amount to a trillion dollars in developing countries annually. Fossil fuel subsidies cover government subsidies of petroleum products such as gasoline, diesel, and kerosene, as well as subsidies of electricity, natural gas, and coal. In each case, either the energy producer is paid above the market price or the energy consumer pays below the market price. These subsidies are highly regressive, benefiting richer groups much more than the poor.

Common examples are price controls on petrol at the pump, or state-owned enterprises selling energy below market value to large companies. But the subsidies can take many forms, including tax breaks or cheap loans to energy companies.

We find that up to 70 percent of extreme poverty could be eliminated by redirect public spending from such regressive subsidies to the world’s poor. (Again, the rich countries are guilty on this score; again, the poor countries would be leading by example.) And don’t forget the potential impact on climate change or reorienting countries toward greener growth.

And it’s not just the booming emerging economies that rely heavily on fossil fuel subsidies. Even in a number of the world’s poorest countries — including Ethiopia, Mozambique, Tanzania, and Uganda — reallocating fossil fuel subsidies alone would cover a third to one-half of the cost of eliminating extreme poverty.

So, take your pick of ending 50, 60, or 70 percent of extreme global poverty. Or combine the three and end three-quarters of global poverty. (The cumulative total isn’t more than that because the list of countries that could reduce poverty by new taxes overlap substantially with the list of countries who also spend high on "surplus" weaponry and the list of countries who spend high on regressive fossil fuel subsidies.)

The new geography of poverty is creating new challenges — and possibilities

And don’t panic that the 100-plus developing countries will never go for these plans. Eighty-five percent of the poor live in just 18 populous developing countries; if those countries alone took action, that would dent global poverty quickly. That’s because of a significant relocation of poverty since the Cold War.

Three-quarters of the world’s poor live in countries officially classified as middle income. This development highlights the importance of thinking about poverty as a political challenge and not purely a matter of resources.

The leaders of the G20 meet Sunday and Monday in Hangzhou, China. China, India, Indonesia, South Africa, and Brazil — all G20 members — alone account for 43 percent of global extreme poverty. The G20 would be an ideal place to discuss global leadership on ending global poverty.

Of course, there are caveats to the solutions outlined above. The removal of fuel subsidies could raise transportation costs and thus prices of other goods — that would affect poverty. That said, governments could relatively cheaply compensate the poor for such costs.

One large, G20 developing country is already leading the way. Until recently, Indonesia had a fossil fuel subsidy that had grown to 5 percent of GDP; it covered financing cheap petrol at the pump to consumers as well as cheap electricity to large companies. It has been redirecting that spending to poverty programs and infrastructure, taking the opportunity presented by lower oil and gas prices globally. India and Nigeria, too, have moved to reduce or attempt to eliminate fuel subsidies.

We think these findings are startling. Growth is good, but it will take quite some time for it to raise everyone above a minimal income floor. Redistribution is possible right now and could accomplish that goal much faster — and be good for future growth and prosperity. Ending global extreme poverty now is within the financial capacities of most national governments of developing countries

If it is possible to eliminate three-quarters of global poverty using the resources available today, why wait?

Andy Sumner is a reader in International Development at King’s College London, and a visiting fellow at the Center for Global Development, Washington, DC. He is the author of the forthcoming book Global Poverty: Deprivation, Distribution, and Development Since the Cold War and co-author, with Chris Hoy, of the article "Gasoline, Guns and Giveaways: Is There New Capacity for Redistribution to End Three Quarters of Global Poverty?"