Poverty Reduction Strategies

Martin Ravallion Georgetown University

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Keynote Presentation at the Commission for Social Development United Nations, New York, February 1, 2017

Is the policy “status quo” sufficient? What else is needed?

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Two messages of this presentation

1. Yes, there has been good overall progress against absolute poverty. But there are continuing challenges in reducing relative poverty and in making sure that “none are left behind.”

2. Poorer countries have relied less on direct interventions against poverty; economic growth has done the bulk of the work. This may need to change, but there are some challenges ahead.

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Message 1. Overall progress against poverty + continuing challenges

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Poverty monitoring must be socially relevant

• Absolute poverty reduction should remain the highest priority.

• However, this approach is not fully consistent with social thought and the aims of social policy in developing countries.

• Two main challenges: – incorporating social effects on welfare and – monitoring whether the poorest are left behind.

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Challenge 1: incorporating social effects on welfare

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Poverty is absolute in the space of welfare

• Poverty measures that use a constant real line do not take account of the concerns people face about relative deprivation, shame and social exclusion. These are specific to place and time.

• The overriding principle: poverty is absolute in the space of welfare: “…an absolute approach in the space of capabilities translates into a relative approach in the space of commodities” (Amartya Sen, 1983)

• Comprehensive global definition of poverty: someone is not poor if she is neither poor by the global international line nor poor by the standards of the country they live in.

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Higher (real) poverty lines in richer countries

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0

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0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 5.0

Log private consumption per capita ($PPP per day)

Nat

iona

l pov

erty

line

($P

PP

per

day

per

per

son)

Luxembourg

USA

Upper and lower bounds to the true welfare-consistent measure

• Absolute poverty measures can be interpreted as the lower bound to the true welfare-consistent measure. – The lower bound assumes that the economic gradient in poverty lines

across countries only reflects differing social norms.

• A weakly relative measure of poverty provides its upper bound, allowing for social effects on welfare. – The upper bound assumes that the gradient in national lines stems

solely from social effects on welfare—extra spending needed to attain the same level of welfare in richer countries.

• Strongly relative measures (e.g., 50% mean) are implausible. • The true welfare-consistent absolute line lies somewhere

between the two bounds.

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0

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20

30

40

50

60

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1980 1984 1988 1992 1996 2000 2004 2008 2012

Headcount index (% below poverty line)

Upper bound:absolute + relative

Lower bound:absolute poverty

Poverty measures for the developing world

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0

500

1000

1500

2000

2500

3000

1981 1984 1987 1990 1993 1996 1999 2002 2005 2008

Number of poor in millions

Numbers of poor

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Absolutely poor

Relatively poor but not absolutely poor

Two-thirds of the increase in the number of people who are relatively poor but not absolutely poor is accountable to the decrease in the number of absolutely poor.

Upper bound

Lower bound

Challenge 2: monitoring progress in assuring that no one is left behind

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A widely held view: the poorest are left behind

• “The poorest of the world are being left behind. We need to reach out and lift them into our lifeboat.” U.N. Secretary-General Ban Ki-moon, 2011

• “Poverty is not yet defeated. Far too many are being left behind.” Guy Ryder, ILO

• Yet economists appear to tell a very different story. Adages such as “a rising tide lifts all boats” or claims that “growth is good for the poor” or that there has been a “breakthrough from the bottom”

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The counting approach misses what is happening at the floor

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Same reduction in the poverty count but different implications for the poorest

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Poorest left behind Same reduction in the incidence of poverty but without leaving the poorest behind

Measure of welfare

Cumulative % of population

Measure of welfare

Cumulative % of population

Poverty line

Poverty line Floor stays put

Rising floor

Cumulative % of population

Measure of

welfare

Poverty

line

Cumulative % of population

Measure of

welfare

Poverty

line

Poorest left behind

Same reduction in the incidence of poverty but without leaving the poorest behind

Poorest left behind

Same reduction in the incidence

of poverty

but withou

t

leaving

the poorest behind

Measure of

welfare

Cumulative % of

population

Measure of

welfare

Cumulative % of

population

Poverty

line

Poverty

line

Poorest left behind Same reduction in the incidence

of poverty but without leaving

the poorest behind

Measure of

welfare

Cumulative % of

population

Measure of

welfare

Cumulative % of

population

Poverty

line

Poverty

line

We can also measure our success at leaving no one behind

• The floor is certainly not all we care about, but we cannot continue to ignore it in monitoring poverty.

• Our success in assuring that no one is left behind can be readily monitored from existing data sources under certain assumptions.

• That also assures consistency between how we monitor poverty and how we think about social protection policies.

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Focusing on the floor gives a very different picture to the counting

approach

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Much less progress in raising the consumption floor

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0

1

2

3

4

5

6

1980 1984 1988 1992 1996 2000 2004 2008 2012

Overall mean fordeveloping world

Consumption floor: expected level of lowest consumption

Mean consumption ($ per person per day)

$0.67 on average

No sign that the new Millennium raised the floor

Yes, the poorest have been left behind! Fewer people living near the floor, but little change in the floor

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0 10 20 30 40 50 60 70 80 90 100

Percentile

Abso

lute

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81-2

011

($ p

er p

erso

n pe

r day

)

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0 2 4 6 8 10 12 14 16 18 20

Per

cent

of t

he p

opul

atio

n

Consumption or income per person ($ per day, 2005 prices)

1981

2011

Difference (2011-1981)

Growing economies have seen rising absolute inequality

• We have seen that the mean has been rising markedly relative to the floor.

• This generalizes to the mean absolute gap => the absolute Gini index.

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-15

-10

-5

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10

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-0.2 -0.1 0.0 0.1 0.2

Annualized change in log meanAn

nual

ized

chan

ge in

abs

olut

e G

ini in

dex

-10

-5

0

5

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-0.2 -0.1 0.0 0.1 0.2

Annualized change in log mean

Annu

alize

d ch

ange

in re

lativ

e G

ini in

dex

Relative inequality (Gini)

Same data, but very different pictures

Differing concepts of “inequality” underlie development policy debates, not differences in data.

Absolute inequality (Gini)

Message 2. Better direct interventions are needed to complement growth

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Economic growth has been crucial, especially in poor places

• Few countries have seen sustained progress in reducing inequality. Growth has been distribution neutral on average.

• Thus, growth has been the main proximate source of progress against absolute poverty.

• However, high and (often) rising inequality threatens to undermine prospects for future growth, and dampens the impact on poverty.

• Countries starting out with a high poverty rate have a harder time growing their economy, and a harder time assuring that their growth is pro-poor.

• And uninsured risks galore, both macro and micro!

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Optimistic vs. pessimistic paths

• Maintaining the new growth trajectories since 2000 without a rise in overall inequality will lift about one billion people out of extreme absolute poverty over the next 15 years or so.

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0

10

20

30

40

50

60

1980 1990 2000 2010 2020 2030

Poverty rate: Percentage living below $1.25 a day

Optimistictrajectory

Pessimistictrajectory

“3% by 2030”

How to reach the optimistic path? • The optimistic path requires successful action in fostering the

conditions for continued, reasonably rapid, pro-poor growth – Poverty-reducing economic reforms. Making markets work

better for poor people – Assuring that poor people are able to participate fully in that

growth, which will in turn require that they have access to schooling, health care, labor-market opportunities and financial resources when needed

• And it will need a measure of good luck: – Avoiding major crises (financial and agro-climatic) – Success in dealing with climate change – Continuing progress in global trade

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How to achieve more pro-poor growth?

Literature and policy discussions point to the need to: • Develop human and physical assets of poor people • Make markets work better for them (credit, labor, land) • Remove biases against the poor in public spending,

taxation, trade and regulation • Promote agriculture and rural development; invest in local

public goods in poor areas • Remove restrictions on migration • Foster labor absorption from urban economies, esp., small

and medium sized towns

Even the optimistic path will leave over one

billion people living in relative poverty

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Growth is less effective against relative poverty, judged by predicted national lines for each country/date:

• Average elasticity of absolute poverty reduction to growth in the mean = -2.

• Elasticity of weakly relative poverty = -0.4.

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-30

-20

-10

0

10

20

-4 -2 0 2 4 6 8 10

Absolute povertyRelative poverty

Growth rate in survey mean (% per annum)

Proportionate change in poverty measure (% per annum)

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A role for direct redistributive interventions?

Huge expansion in “social safety nets” (SSN) in the developing world

• SSN: Direct non-contributory income transfers to poor or vulnerable families

• In last 15 years many developing countries have introduced new SSN programs.

• Today almost every developing country has at least one SSN program.

• Roughly one billion people currently receive assistance. • Using the World Bank’s ASPIRE database I estimate that

population coverage of SSN programs (% receiving any help) is growing at 9% per annum (3.5% points).

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http://datatopics.worldbank.org/aspire/indicator_glance

Cruel irony: Poorer countries are less effective in reaching their poor

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0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 22000

GDP per capita at PPP for year of survey

Safety net coverage for poorest quintile (%)Safety net coverage for whole population (%)

Poorest quintile

Population

Some poor countries have done better than others

Constraints on direct interventions

• Information: low administrative capacity => imperfect information – Weak proxies for the poverty of households – Weak relationship between individual deprivation and household

poverty • Incentives: longstanding concern about undermining personal

incentives for escaping poverty – Protection-promotion trade off: Finely targeting to guarantee a

minimum income can destroy incentives for promotion – Incentive constraints can never be ignored, but there is also a risk of

exaggerating their importance. • Budgets: how much a government is willing to spend depends

crucially on program design and effectiveness. • Political: attaining the consensus needed for pro-poor reforms

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Six recommendations for better direct interventions in poor places

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Recommendation1: Policies must be tailored to the realities of the setting

• Successful policies respect local constraints on the information available, administrative capabilities and incentive constraints.

• A key role for analysts is to learn about these constraints and make them explicit.

• Too often policy making is done in the absence of a proper understanding of these constraints, which makes for bad policies.

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Recommendation 2: Tap local information with effective state support

• Tapping local information can help identify those in need, and help in responding, but it must be combined with strong governments.

• We have seen greater use of participatory, community-based (governmental and non-governmental), institutions for income support and/or service provision.

• However, these should not be seen as substitutes for strong public administration, which will still be needed in guiding and monitoring local institutions, including addressing grievances.

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Recommendation 3: Focus on poverty reduction not finer “targeting” per se

• Excessive emphasis on reducing inclusion errors. • The most finely targeted policy (lowest inclusion errors) need

not have the most impact on poverty o Information problems; measurement errors o Proxy means tests are often poor means tests, esp., poorest o Hidden costs of participation o Adverse incentives: high marginal tax rates => poverty traps o Political economy; concerns about undermining social

support/political consensus

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Recommendation 4: Improve the protection-promotion trade-off

• There can be a trade off, though often exaggerated. • Transfers have a role in allowing markets to work better from the

perspective of poor people. • “Smart,” “Social investment,” approaches (Conditional Cash

Transfers and workfare) show promise, though assessments must consider all the costs and benefits and avoid paternalism.

• Greater flexibility is needed in responding to shocks. Participant capture is a common problem. Also local moral hazard.

• Don’t be too ambitious: administrative capacity is a key constraint in practice.

• Monitor and evaluate, and adapt accordingly.

Recommendation 5: Monitoring and evaluation are crucial

• There are persistent knowledge gaps about the effectiveness of this class of policies.

• In addressing those gaps, generalized preferences among the methodological options are rarely defensibly in the absence of knowledge about the setting, and (especially) the data that are available.

• There is a menu of defensible options. • It is no less important that policy makers are active in

identifying key knowledge gaps, and/or supporting the creation of relevant knowledge.

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Recommendation 6: Learn from mistakes

• Policy makers must also adapt to evidence of failure, admitting and learning from mistakes as well as scaling up successes.

• Too often, it seems, deficient programs survive well beyond their useful life.

• Bureaucratic inertia and participant capture appear to be common problems.

• The NGO GiveWell has a page on its website devoted to acknowledging its own mistakes (the first listed of which was not hiring a PhD economist, which the NGO is in the process of correcting at the time of writing).

• Citizens should demand that governments do the same.

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http://www.givewell.org/about/our-mistakes#to_2016_Failure_to_prioritize_hiring_an_economist

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• New approaches to measuring global poverty: “Toward

Better Global Poverty Measures,” Journal of Economic Inequality, Vol. 14, 2016, pp. 227-248.

• Optimistic and pessimistic paths to lifting 1 billion people out of poverty: “How Long will it Take to Lift One Billion People out of Poverty?” World Bank Research Observer, Vol. 28 (2), 2013, pp. 139-158.

• On progress in raising the consumption floor: “Are the World’s Poorest Being Left Behind?,” Journal of Economic Growth, Vol. 21(2), 2016, pp 139–164.

• Policies for fighting poverty: The Economics of Poverty. History, Measurement, and Policy, New York: Oxford University Press.

Further reading

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Thank you for your attention!

Poverty Reduction Strategies���Slide Number 2Two messages of this presentationMessage 1. Overall progress against poverty + continuing challenges�Poverty monitoring must be socially relevantChallenge 1: incorporating social effects on welfare Poverty is absolute in the space of welfareHigher (real) poverty lines in richer countriesUpper and lower bounds to the true welfare-consistent measurePoverty measures for the developing worldNumbers of poor Challenge 2: monitoring progress in assuring that no one is left behindA widely held view: the poorest are left behindThe counting approach misses what is happening at the floorSame reduction in the poverty count but different implications for the poorestWe can also measure our success at leaving no one behindFocusing on the floor gives a very different picture to the counting approachMuch less progress in raising the �consumption floorYes, the poorest have been left behind!�Fewer people living near the floor, but little change in the floor�Growing economies have seen rising absolute inequalitySlide Number 21Message 2. Better direct interventions are needed to complement growth Economic growth has been crucial, �especially in poor placesOptimistic vs. pessimistic pathsHow to reach the optimistic path?How to achieve more pro-poor growth? �Even the optimistic path will leave over one billion people living in relative poverty�Slide Number 28Huge expansion in “social safety nets” (SSN) in the developing worldCruel irony: Poorer countries are less effective in reaching their poorConstraints on direct interventionsSix recommendations for better direct interventions in poor placesRecommendation1: Policies must be tailored to the realities of the settingRecommendation 2: Tap local information with effective state supportRecommendation 3: Focus on poverty reduction not finer “targeting” per seRecommendation 4: Improve the protection-promotion trade-offRecommendation 5: Monitoring and evaluation are crucialRecommendation 6: Learn from mistakesFurther readingSlide Number 40