Foreign Polcy: The Price Is Right

Jul 20, 2011


July 11 was World Population Day, an annual occasion on which the United Nations reminds us all of the number of people on the planet — now approaching 7 billion — and the monumental challenges entailed in the task of caring for such an enormous human family. Among those challenges was "ending poverty," said U.N. Secretary-General Ban Ki-moon in a statement, one whose resolution would "unleash ... vast human potential."

That's undoubtedly true — were a world free of poverty more than an idle dream. And the good news is that perhaps it is.

Poverty is, of course, a highly relative concept, but the usual definition of "absolute" poverty is an income of less than $1.25 a day. And it is an increasingly manageable task to ensure no one on the globe lives below that income. There are already a lot fewer poor people living at that level of destitution than there used to be — indeed, less than half as many as there were 20 years ago. Laurence Chandy and Geoffrey Gertz at the Brookings Institution estimate there were around 1.8 billion people worldwide living on less than $1.25 a day in the early 1990s; the figure dropped to 1.3 billion people in 2005 and further to 900 million in 2010. Chandy and Gertz suggest that if we could accurately and directly supplement the income of each poor person in the world to bring his or her daily income up to $1.25, it would have cost $96 billion in 2005. But by 2010, as the number of poor people fell, that cost had dropped to $66 billion. This is something close to an aid official's dream: a foreign assistance program that actually gets cheaper every year.

Of course, donor countries might balk at combating absolute poverty in countries rich enough to handle the problem themselves. Martin Ravallion of the World Bank argues that the majority of countries with an average income above $4,000 could end domestic absolute poverty through a tax on those earning more than $13 a day in the country. For China in 2005 (with an average income just over $4,000), for example, he estimates that a 37 percent tax on those earning over $13 a day would provide enough revenue to bring every poor person in the country above the $1.25-a-day line. We've had six more years of growth in China since then; World Bank data suggests average incomes climbed 50 percent between 2005 and 2009 alone. That means there are a lot more rich people and a lot fewer poor people in the country already, and the necessary tax would be even lower today.

What about poor people living in countries with average incomes under $4,000? Such countries were home to about three-quarters of all those living on less than $1.25 a day six years ago, according to the World Bank. And because these countries contained most of the world's very poorest people, they also accounted for as much as 90 percent of the "income gap": the money required to lift poor people up to the $1.25 mark. If we assume (conservatively) that this share of the income gap is still about right, that would leave the annual global cost of eliminating absolute poverty in countries too poor to deal with it themselves at about $59 billion, or less than the annual budget of New York City.

And even that number is likely to drop fairly rapidly. Chandy and Gertz suggest that by 2015 there may only be 586 million people living below $1.25 a day, suggesting that the annual cost of eliminating poverty in poor countries could be only $40 billion in four years' time. By that time, too, more countries will be rich enough to handle poverty on their own, and the income gap will have fallen further, meaning that the actual number could be even less.

That's the theory, at least. But the $40 billion figure rests on the assumption that we can identify the world's poorest, work out exactly how poor they are, and deliver them the right amount of money to get them to $1.25 a day. We can't. Even the best income surveys are inaccurate, and enough people cycle in and out of absolute poverty that it would be an impossible task to precisely track and target them over time.

Still, we shouldn't overstate the scale of the problem: It isn't that hard to get a reasonably accurate measure of a household's income and wealth. In 1998, economists Lant Pritchett and Deon Filmer found that tracking people's ownership of 23 different assets — bicycles, land, and flush toilets among them — was a very reliable guide to their affluence or lack thereof. If you are willing to accept a little more imprecision, even simpler approaches are possible. In Bangladesh, a cash-transfer program kicks in if families meet one of only a few criteria for eligibility: working as day laborers, as sharecroppers, or in one of a few low-paid occupations such as fishing or weaving; belonging to a female-headed household; or owning less than half an acre of land.

The Bangladeshi program is designed to target families in the bottom 40 percent of the country's population with cash transfers. The Primary Education Stipend is given to parents of 4.8 million children from deprived households in return for sending their kids to school, at a rate of about $1.76 per child per month. Six national banks disburse funds to parents with bank-issued identity cards at temporary distribution points set up within a maximum of five kilometers from each school. The program has been analyzed by Bob Baulch of the International Food Policy Research Institute, and the study suggests that even a very poor and very populous country can operate a large-scale targeted cash-transfer mechanism. A little under 30 percent of the poorest fifth of the country's rural households get the stipend compared with around 10 percent of the richest fifth — far from perfect accuracy, but some evidence that targeting can work. (And considering that the average income in Bangladesh is under $4 a day, even the least-poor recipients of the subsidy are still poor by any reasonable definition.)

Based on the Bangladeshi experience, it's safe to assume that the real price tag of ending absolute poverty in poor countries by 2015 would be a lot higher than the theoretical cost of $40 billion. But it's hard to imagine even a relatively inefficient, bureaucratic, and poorly targeted cash-payment-based program exceeding $100 billion. That's less than the value of current aid flows, which stands at around $129 billion — and it amounts to only 0.25 percent of the GDP of high-income OECD members. In cash-strapped times and with the effectiveness of traditional aid still widely questioned, many rich countries have been wary of any commitment to increase assistance. But perhaps they could all agree to an additional one-quarter of 1 percent of their GDP going directly to the planet's poorest? For a measure that could end absolute poverty worldwide, it hardly seems like too much to ask.

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