Global Economy: Poverty and Inequality Punam Chuhan-Pole DECVP Global Issues Seminar Series-Spring 2007 April 18, 2007

1. Global Economy: Poverty and Inequality Punam Chuhan-Pole DECVP Global Issues Seminar Series-Spring 2007 April 18, 2007

2. Outline I. What are poverty and inequality? II. The “globalness” of poverty and inequality III. Growth and poverty IV. Forces shaping the poverty and inequality agenda V. Globalization and the poor VI. The international community’s focus on poverty reduction VII. Role of the WB

3. I. Concepts and measures of poverty and inequality What is poverty? The conventional notion of poverty is narrow--lack of essential goods and services. A broader view of poverty encompasses non-income dimensions of poverty such as education, health, prevalence of disease, gender equality, and access to water and sanitation. A “capability approach” to well-being--poverty arises when people lack key capabilities to function in the society in which they live. What is inequality? The gap between the poor and the rich.

4. I. contd. Measuring poverty Absolute and relative poverty Poverty lines national poverty line international poverty line Headcount index Poverty gap Human Development Index

5. I. contd. Measuring inequality Absolute and relative inequality Lorenz curve Gini coefficient Distribution of income by quantiles With-in country inequality Between-country inequality intercountry inequality international inequality global inequality

6. II. Poverty and inequality are global issues Where the poor are Extreme poverty has dropped below 1 billion people for the first time since the Bank began measuring poverty People living on less than $1.08 a day, by developing region (1981-2004) Source: Global Monitoring Report 2007. Note: The MDG for poverty calls for the halving of the proportion of the population living on less than a dollar a say from 1990 levels by 2015.

7. II. contd.Most regions will reach the poverty MDG by 2015, but SSA is off track Source: Global Monitoring Report 2007. Note: Preliminary data.

8. II. contd.Incidence of poverty – then and nowProgress on poverty reduction has been mixed: some countries have seen a dramatic decline in poverty, others have not

9. II. contd.Globally the primary completion rate has increased from 63 percent to 83 percent in 1990-2005, but a large number of countries will not reach the goal on current trends. Source: Global Monitoring Report 2007.

10. II. contd.Most countries are off track on the child mortality MDG – no Sub-Saharan African country is on track to achieve this goal (based on 2005 data) Source: Global Monitoring Report 2007.

11. II. contd.Maternal mortality ratios are unacceptably high Maternal mortality ratios in 2000 Source: Global Monitoring Report 2007.

12. II. contd. Evolution of the world distribution of income

13. III. Growth and poverty Encouraging rebound in growth in developing countries, including in SSA Per capita GDP growth by country groups

14. III. contd.Growth is central to poverty reduction Source: GMR 2005

15. contd.Inequality and poverty reduction Inequality Matters for Poverty Reduction Inequality can affect the pace of poverty reduction through reducing the effectiveness of growth in achieving poverty reduction. Two identical economies, but with very different income distributions, will have different poverty responses to growth-- the country with high initial income inequality is likely to see a smaller positive impact of growth on poverty reduction than the country with low initial income inequality.

16. IV. Forces shaping the poverty and inequality agenda Poverty and equality are top concerns

17. IV. contd. Advocacy groups -- have played an important role in building consensus on key public actions by the international community. Their campaigns on critical issues such as debt relief and a fair global trading system have raised awareness among citizens of rich and poor countries alike. World leaders -- have acknowledged the global threat posed by deep poverty. A 2004 U.N. report lists poverty, communicable diseases, and degradation of the environment among the top six threats to international peace and security facing the world in the 21st century. Population growth -- by 2015 world population is expected to increase by over three-quarters of a billion. Virtually all of this growth (95 percent) will occur in developing countries, and many of these people will be born into poverty

18. V. Globalization and the poor Does globalization harm the poor? Globalization has many facets, including foreign trade, cross-border financial flows, international migration, temporary movement of service providers, and information flows. The focus here is on openness to trade. The standard, macroeconomic perspective is that openness to trade reduces poverty by stimulating economic growth impacts poverty is by boosting productivity, which is necessary for fostering long-term growth lowers the prices of households’ consumption baskets (including through lower tariffs) raises wages and employment increases government revenue and spending Several studies suggest that the linkages between globalization and poverty are not so straightforward. The outcome is influenced by other factors, including the degree of labor mobility across sectors; access to credit markets for the poor, so they can avail themselves of profitable investment opportunities; and access to technical know-how and training programs. Thus globalization can in some situations have a negative impact on the poor, especially in the near term. This points to the need to have appropriate policies in place to ensure that the poor gain from globalization.

19. V. contd. Recent empirical literature finds no simple generalizations about the impact of openness to trade on poverty The evidence shows that in the long run, trade liberalization reduces poverty on average, and there is no evidence of a generally negative impact on poverty. Trade liberalization in some cases has resulted in: lower employment and wages for the poor and declining fiscal revenues that have caused spending on the poor to be curtailed. The empirical evidence also shows that poor households are less able than better-off households to take advantage of new economic opportunities or to protect themselves against negative shocks.

20. V. contd. Has globalization worsened economic inequality? As noted earlier, whether economic inequality has declined or not depends upon what is being measured—absolute as opposed to relative differences in inequality Studies have shown that, on average, the impact of openness to trade on the distribution of the growth of income is neutral. trade liberalization on average does not affect relative inequality, but it does widen absolute inequality some countries have seen a widening of within-country relative inequality during growth spurts.

21. VI. The international community’s focus on poverty reduction There is a broad consensus within the international community on how to reduce poverty and reach the MDGs. The consensus rests on a framework of mutual accountability between developed and developing countries. This consensus recognizes the need to harness global forces to tackle poverty through - better access of developing country producers to developed country markets - better access to international financial resources to boost investment in health, education, and infrastructure, and to reduce vulnerability to external shocks and natural disasters - debt relief to free up resources for investing in health, education, water and sanitation, and to reduce debt overhang - adapting technological and scientific advances and medical research to directly benefit the poor. For their part, developing countries need to pursue sound policies and make a commitment to good governance, which is central to development.

22. VI. contd. 2005 was the year of development At Gleneagles G-8 leaders pledged to double their aid to Africa—an increase of $25 billion a year—by 2010. Donors worldwide agreed to expand their aid to all developing countries by about $50 billion. Major progress was also made in 2005 in extending and deepening debt relief to the poorest countries through the MDRI. The U.N. World Summit focused attention to the interconnectedness of economic development and security—creation of the U.N. Peacebuilding Commission, which will be critical to meeting the special challenge facing fragile states, in which government and the rule of law are weak.

23. VII. Role of the World Bank in poverty reduction The World Bank’s mission is to work for a world free of poverty. The Bank is helping developing countries achieve the MDGs and sustained development through a two-pillar strategy building a climate for investment, jobs, and sustainable economic growth investing in and empowering poor people to participate in development. The Bank helps countries reduce poverty and sustain development by providing financial assistance—concessionary financing through IDA loans and grants, and nonconcessionary financing through the International Bank for Reconstruction and Development (IBRD) a wide range of policy advisory and analytical services and technical assistance.

24. VII. contd. IDA is the largest source of concessional financial assistance for the world’s poorest countries. IDA commitments totaled $8.7 billion in FY05 and $9.5 billion in FY06. Africa received $4.7 billion in new commitments in FY06 South Asia $2.6 billion East Asia and the Pacific $1.1 billion. The sectors receiving the largest support were public administration, including law and justice; health and social services; and transportation. IDA allocates resources to individual countries on the basis of their need and performance. The performance factors include the quality of policies and institutions, with a particular emphasis on governance. BRD commitments were $13.6 billion in FY05 and $14.1 billion in FY06.

25. For more information Visit the following websites World Bank PovertyNet www.worldbank.org/poverty Poverty Action Lab www.povertyactionlab.com Make Poverty History www.makepovertyhistory.org Global Monitoring Report www.worldbank.org U.N. Millennium Development Goals www.un.org/millenniumgoals U.N. Millennium Project www.unmillenniumproject.org

26. Thank you