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  • Raghav Sand

Growth is Necessary to Reduce Poverty

Poverty can be outward or disguised. Those who are doing well for themselves don’t seem to bother much about the inequality around them. Having more money than those around us, gives some people a sense of false pride and security. Talking about poverty reduction and equality can easily get you labelled as socialist or envious. A reasonable amount of money is needed for basic everyday activities, education and healthcare. Thankfully, not everyone dreams of spending money on unnecessary ego-boosting displays.

How do people generate wealth? The wealth one accumulates comes from providing services and selling goods. There is no harm or guilt in enjoying the fruits of labour and sacrifice, but some introspection about societal issues is recommended. Someone who was recently among the have-nots, should be more outspoken and mindful about the elephant in the room.

Adjusted for the purchasing power in each country, 85% of the world population live on less than $30 per day. In the context of low per capita income countries, this may be an unreasonable number, while for others it is a threshold which separates people economically.  

If we want global poverty to decline substantially, then the economies that are home to the poorest billions of people need to grow. Those who don’t see the importance of growth are not aware of the extent of global poverty. One of the most important insights of economics is that people live in poverty not because of who they are, but because of where they are.

A person’s knowledge, their skills, and how hard they work all matter for whether they are poor or not – but all these personal factors together matter less than the one factor that is entirely outside of a person’s control: whether they happen to be born into a large, productive economy or not.

A person living in Denmark has a chance of 86% that they are not poor. A person who happens to be born into a country where the average income is low is almost certainly living in poverty. This is why a rise in the average level of income in a country – economic growth – is so crucial for reducing poverty.

This visualization shows the extent of global poverty today. The huge majority of the world lives in countries where the majority is poor. As you can read above this chart, 77% of the world population live in countries in which more than 90% live on less than $30 per day. In India more than 99% of the population live on less than $30 per day.

Considering a scenario in which global poverty declines to the level of poverty in Denmark is a more modest scenario than one that considers an end of global poverty altogether. It is a scenario in which global poverty would fall from 85% to 14% and so it would certainly mean a substantial reduction of poverty. In most richer countries the surveys capture people’s incomes, while in poorer countries these surveys capture people’s consumption. The two concepts are closely related: the income of a household equals their consumption plus any saving (or minus any borrowing).

Reducing global poverty is not the only important global goal. It will also be crucial to reduce humanity’s very large impact on the environment. Yes, it will be very hard to achieve both goals at the same time and we should be clear about how difficult this challenge is. This challenge comes down to the question of whether it will be possible to decouple economic growth from environmental harm and then achieve the transition to a sustainable production of the goods and services that people need.

Is this scenario our only option?

If those who say that it is not possible to decouple growth from environmental harm are right, then the future will be bleak. If indeed there should be no possibility to decouple growth from environmental impacts, then the future will be either one of continuing global poverty or one of continuing environmental destruction, or both. If we want to achieve a future in which global poverty is substantially lower than today and in which humanity has a smaller negative impact on the environment, then it will be necessary to decouple growth from environmental impacts and achieve a sustainable production of the products we all need.

In the last years many countries have reduced negative environmental impacts while production and incomes increased. Many European countries have reduced (consumption-adjusted) CO₂ emissions while incomes increased. Global emissions of ozone-depleting substances have declined in the last three decades.

In the quest for reducing their carbon footprint, rich nations have outsourced manufacturing to poor nations. This myopic attitude will do more harm than good. Poor nations may have become the factories of the world, but the environmental impact might be catastrophic. Sadly, but surely we cannot have the best of both worlds until and unless cleaner technology is adopted globally.

It is debatable whether humanity will be successful in leaving poverty behind, while substantially reducing its environmental impact. We should be clear about the immense difficulty of this challenge and it is certainly not helpful and actually very harmful to pretend that there are easy ways out. Pretending that it is possible to reduce global poverty without large aggregate growth would leave us entirely unprepared to meet the difficult challenge that we actually face, a reduction of environmental harm while also reducing global poverty.

Is it possible for poor countries to achieve this growth?

One important reason why a large number of people live in poverty today is that these countries were exploited by colonial powers that did not allow those economies to grow and instead impoverished them. The actions of rich countries still harm the prospects of poorer countries in many ways, but the end of colonialism was extremely important for the prospects of billions of people in the world and since the end of colonial rule many former colonies did substantially reduce poverty.

A second aspect to consider is that countries around the world saw large improvements in health and education in recent years. Health and education do not automatically translate into higher prosperity, but surely make it more likely that a country can leave poverty behind.

A third reason is to see that catch-up growth can be very fast: several countries have achieved annual growth rates of more than 5% in recent decades. And a last reason to consider is that up to the pandemic the majority of countries in the world – but not all – did make progress against poverty. Global poverty has declined very substantially in recent decades, no matter what poverty line you want to draw.

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