Global poverty and national inequality: What’s the connection?

Inclusive Economy21 Sep 2016Andy Sumner, Chris Hoy

The Sustainable Development Goals aim to achieve a world free from extreme poverty by 2030, as well as a reduction in inequality within countries. Although presented as two separate issues, these goals are interrelated in a fundamental way. In fact, the key finding of new research is that three-quarters of global poverty could be eliminated by addressing inequality and redistributing existing resources within developing countries.

Yes, you heard correctly: most of the world’s poor live in countries that already have the national financial capacity to end extreme poverty. In fact, the end of extreme poverty is increasingly about reducing national inequality. And, reducing national inequality would not just tackle extreme poverty at $1.90 per day, but potentially eliminate poverty up to $5 per day. The means to achieve these goals are within the grasp of developing countries. Over 100 developing countries already have cash transfer programmes, which have been shown to reduce poverty. These programmes provide a direct route through which to end extreme poverty.

Hence, a strong instrumental case can be made for redistribution within countries to end extreme poverty, not by 2030, but much earlier. This is possible for three reasons. First, based on recent growth rates, the poorest people in many countries will not all be able to escape extreme poverty until well beyond 2030. Surprisingly, we found that the poor in what are considered ‘better-off’ developing countries are barely better off than the poor in ‘poorer’ developing countries – despite a much larger pool of domestic resources. In fact, the average poor person in Brazil is actually worse off than the average poor person in the Democratic Republic of Congo, and the average poor person in Ethiopia is only slightly worse off than the average poor person in China or India. Indeed, contrary to popular belief, the average person living in extreme poverty in a middle-income country is not necessarily better off than the average person living in extreme poverty in the world’s poorest countries.

Second, based on a set of conservative assumptions, the research found that a mixture of new taxes and changes to exist public spending would end three-quarters of extreme poverty and may even end poverty up to $5 per day. High growth rates in many parts of the developing world since the beginning of the millennium have not only reduced the number of people living in extreme poverty, but also significantly increased the number of people who would not be considered poor by US standards. This has created a new capacity for redistribution through taxes. If higher taxes were levied on those living in the developing world who would not be considered poor in the US, the number of people living in extreme poverty could be halved.

Third, higher taxes are just the tip of the iceberg. We found that two-thirds of extreme poverty could be eliminated by redirecting public spending from two areas in particular. These are regressive fossil-fuel subsidies, which include things like cheap petrol, which actually benefit the rich, and ‘surplus’ military expenditure, defined as higher military spending than your regional neighbours. If one adds these amounts together with the cash from higher taxes, three-quarters of extreme poverty could be potentially eliminated. The large populous countries that dominate global poverty counts, such as India, China, Indonesia and Pakistan, could end extreme poverty by redirecting such spending into cash transfers to the poor. In fact, almost everyone in these countries could be lifted above the $5 a day poverty line through the reallocation of regressive fossil-fuel subsidies alone. Surprisingly, even in a number of the world’s poorest countries, such as Ethiopia, Mozambique, Tanzania and Uganda, reallocating fossil-fuel subsidies alone would cover a third to one half of the cost of ending poverty. If one adds redirecting ‘surplus’ military spending in these countries, a further 10–20% of extreme poverty could be eliminated.

In short, what the results suggest is that the causes of poverty are shifting from resource scarcity to national inequality and political economy. These findings call for the stronger consideration of national redistribution as a tool for ending global poverty quicker. Ending global extreme poverty is within the financial capacity of most national governments of developing countries, through taxation and the reallocation of public finances. These measures would eliminate at least three-quarters of extreme poverty globally, with the resources available today. So why wait until 2030?

This article is based on the following research paper: Hoy, C and Sumner, A (2016) Gasoline, guns and giveaways: Is there new capacity for redistribution to end three quarters of global poverty? Centre for Global Development, Washington DC.