Don’t get the hump, but what really changed on global income, and what didn’t?

March 29, 2019

     By Duncan Green     

I was wondering when that phrase would appear…..  Andy Sumner & Kathleen Craig of the King’s Department of International Development continue the humpology debate.

Duncan’s blog on the global hump and Jose Manuel Roche’s reply raise the question of what has actually changed and what hasn’t. Here’s (yet) another take and in an attempt to be less geeky and more narrative-based, no graphs, we promise.

First, what has actually changed?

There is a new hump which is an emerging polarisation within the developing world between ‘stuck’ and ‘moving’ countries

Most developing countries have grown over the last two decades. Only a small set of 25 developing countries remain ‘stuck’ in terms of economic growth. These countries are home to about 10% of the population of the developing world. In contrast, most of those living in the developing world are resident in faster-moving countries. This multi-speed world generates a binary between a group of countries that are likely to remain ‘stuck’ in terms of growth, and a larger set of developing countries that have been growing substantially (and where most of the world’s poor live). Yet it is important to remember that the income gap between the majority of the ‘moving’ developing countries and the developed world remains enormous (more on that in a moment).

There has been a dramatic decline in the significance of aid

There are only about 30 developing countries that remain highly aid dependent and these countries are home also to about 10% of the population of developing countries. There’s some overlap with the moving/stuck polarisation but not completely. In short, in most developing countries, ‘traditional’ official development assistance (ODA) is, or in the foreseeable future will become, insignificant compared to domestic resources.

There are dramatically expanding domestic resources to end poverty, but those resources are kind of ‘locked’

Around three-quarters of the world’s poor live in countries with the potential to end poverty through national redistribution, i.e. through changes in domestic public expenditure and taxes. However, this is only the case up to approximately the US$5-per-day poverty line, which is still pretty low (any FP2P readers offering to live on that? Thought not). Above that, international redistribution remains necessary to eradicate poverty. Further, many developing countries – like any country – will face political contestation to introducing new taxes, reducing subsidies that benefit the rich most like petrol subsidies or curtailing military expenditure, in favour of redistributive transfers to the poor. In short, resources are kind of locked and national political economy constraints will still make ending poverty difficult.

Second, what has not changed or not changed so much?

There is a ‘sunshine narrative’ on catch up, yes, though it fades without China

Yes, economic growth is taking place across the developing world, but the ‘sunshine’ narrative of falling inequality between developing and developed countries has been oversold, because it largely depends on China. The fall in between-country inequality is very modest between 1990 and 2015 if China is removed from consideration.

And even China still has a long way to go in terms of catching up with the richer countries, in that China’s GDP per capita (2011 PPP) stands at $15,000, which is still only around a quarter of the GDP per capita of the US. China could theoretically catch up by the mid-2030s if it has another two decades of fast growth. Yet the most sophisticated long-run projections err on the side of caution, forecasting that China will catch the US around 2050. India could also catch up with the GDP per capita of the US but it would need another 5 decades of fast growth.  And Brazil and South Africa, which start out on a much higher per capita income than India, may not catch up at all. Of course, this is all largely speculative. It does, however, demonstrate the assumptions that are needed to trumpet a catch-up argument.

Global monetary poverty has fallen, but every 10 cents on the poverty line adds another 100 million people and multidimensional poverty doubles the total poverty count

Global poverty has fallen at the new extreme poverty line of $1.90-per-day, but the fall in the global poverty

headcount when China is excluded is more modest. This is not at all to say that the income growth among the poorest people in the world has not been positive. The issue is that setting very low poverty lines and communicating trends based on these lines may evoke a story that absolute poverty is virtually eradicated or on the road to being eradicated in a decade or so.

Yet the estimate that a tenth of the world population is poor by the $1.90 poverty line sits alongside the fact that every 10 cents added to that line adds almost 100 million people to the global poverty headcount, up until around the $3.50-per-day mark. Additionally, poverty measured as multidimensional poverty – including education, health and nutrition poverty – is double that of the $1.90 income poverty count.

And if a poverty line is used that is associated with a permanent escape from poverty – $10-per-day – some 4.5 billion people (well over half the people on the planet) are still living in poverty.

So all things considered, some important stuff has changed. There are fewer very poor countries (as Duncan noted), a fall in the significance of traditional aid, though that should just mean the beginning of a new era not the end of one as countries wind down traditional aid, concessionary finance is still important, and especially so if expanding domestic resources are ‘locked’ by domestic political economy.

On the other hand, catch up is a long way off for most developing countries. And small changes in the poverty line add many more people to the global poverty headcount. So, in some ways how much has really changed? And for those going through cold turkey, here’s the graphs.

That enough on humps (for now)? Hope so, because FP2P has a big new announcement coming up next week…..