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UNCTAD Policy Brief No. 2/2013, Growth and Poverty Eradication: Why Addressing Inequality Matters

Policy brief by Kozul-Wright, Richard/UNCTAD, 2013

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The Millennium Development Goals have centred on social outcomes, primarily in the fields of poverty, health and education. The goal of halving extreme poverty globally has already been met, albeit in large part thanks to the remarkable performance over three decades of the Chinese economy. Greater ambition is expected for a post-2015 agenda, with the eradication of extreme poverty a possible new goal. However, this goal is very unlikely to be reached by 2030 if business as usual is the order of the day. Paradoxically, this partly reflects the lack of ambition in the conventional poverty line of $1.25 per day, which is by any standard extremely low; but it is also because poverty eradication, even at this level of ambition, will not happen without addressing the more challenging issue of global inequality.

GROWTH AND POVERTY
ERADICATION: WHY ADDRESSING
INEQUALITY MATTERS
The Millennium Development Goals have centred on social outcomes, primarily in
the fields of poverty, health and education. The goal of halving extreme poverty
globally has already been met, albeit in large part thanks to the remarkable
performance over three decades of the Chinese economy. Greater ambition is
expected for a post-2015 agenda, with the eradication of extreme poverty a
possible new goal. However, this goal is very unlikely to be reached by 2030 if
business as usual is the order of the day. Paradoxically, this partly reflects the
lack of ambition in the conventional poverty line of $1.25 per day, which is by any
standard extremely low; but it is also because poverty eradication, even at this
level of ambition, will not happen without addressing the more challenging issue
of global inequality.


The scale of global inequality
Measuring global inequality is a difficult exercise,
given major data deficits. Nonetheless, thanks
to considerable recent efforts to improve data
collection and collation, there is a clearer picture
than ever before of the global distribution of
income and of its evolution over time.


Imperfect as the data are, it is clear that
the distribution of income across the world
population is extremely unequal: the average
income of the richest 5 per cent is estimated to
be nearly 200 times that of the poorest 10 per
cent (figure 1). Based on the Gini coefficient, the
distribution of income globally is more unequal
than in the most unequal country – and much
more so than in all but a handful of countries –
while inequality of income distribution increased
significantly from 1988 to 2002, though it
levelled off in 2002–2005 (see tables 4 and 5,
Milanovic, 2012a).


To take an alternative measure of income
inequality, the Palma index (the ratio between
the total income of the richest 10 per cent of
the population and the poorest 40 per cent) for
the world as a whole in 2005 is 13.5, a figure
only exceeded by Jamaica at the country level.
In most countries, it is less than two (see annex I,
Cobham and Sumner, 2013).


Global growth has failed to
alleviate extreme poverty
This degree of inequality means that the
effect of global growth on extreme poverty, in
the absence of a progressive shift in income


U N I T E D N AT I O N S C O N F E R E N C E O N T R A D E A N D D E V E L O P M E N T


No.02
NOVEMBER  2013


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(Poorest to richest)  


Figure 1
Global income distribution, 2005
(Based on purchasing power parity)




has fallen dramatically, to just 11 per cent in
2010. Consequently, this poorest 10 per cent
is increasingly dominated by slower-growing
incomes elsewhere (sub-Saharan Africa
accounting for 45 per cent and India 27 per
cent in 2010). This compositional shift has been
a major reason for the dramatic slowdown in
income growth among the world’s poorest, from
2.4 per cent per annum in 1981–1996 to 1.5
per cent per annum in 1996–2010. However,
the lowering of per capita income growth of this
poorest 10 per cent to below the global average
also reflects a slowdown in income growth of
the poorest segment of the world’s population
relative to global gross domestic product per
capita both in China and in the rest of the world.


In the years ahead, the challenge of poverty
reduction thus looks even more daunting than
in the last three decades. In this respect, the
contrast between China’s performance and that
of the rest of the world suggests a need for other
developing countries to draw policy lessons
from China’s growth recipe – an unorthodox
policy mix sensitive to growth, inflation and
employment goals. That mix has combined
selective capital controls, countercyclical fiscal
policy and active monetary policies aimed at
stable exchange rates with managed credit
expansion and low interest rates, as well as a
full range of active industrial policies.


distribution, is very limited. If global economic
growth were distributionally neutral, the
additional output going to any income group
would be the same as its share in global income;
yet the total household income of the poorest
10 per cent of the world population was just
0.25 per cent of global gross domestic product
in 2010, while that of the poorest half (those
below about $2.50 per day) was 3 per cent.


In fact, the recent period of global growth has
been anything but distributionally neutral: despite
accelerating growth across the developing
world in recent years, the share of the poorest in
the additional income this growth has generated
has been even smaller than their average share
in income. The proportion of additional global
gross domestic product accruing to the poorest
20 per cent – broadly the 1.4 billion people living
below the $1.25-a-day poverty line in 2008 –
has actually declined from 0.9 per cent to just
0.7 per cent. Thus, for every 100 dollars of
additional income the poorest fifth are receiving
only 70 cents! Precisely how small these shares
are is starkly demonstrated in figure 2.




The role of China
Understanding the evolution of the global income
distribution in the last 30 years requires careful
consideration of the role of China, which started
from a very low level of income in 1981 but has
since experienced much more rapid income
growth and poverty reduction than the rest of
the world (figure 3). Since China accounted for
59 per cent of the poorest decile of the world
population in 1981, the relatively rapid income
growth of poor Chinese households offset
the slower income growth among the poorest
elsewhere in the developing world, allowing a
reasonably high rate of income growth for the
poorest 10 per cent of the world population.


But as incomes in China have risen, its share in
the poorest 10 per cent of the world population


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Figure 3
Household income relative to world gross
domestic product per capita: China and the rest
of the world, 5th–10th deciles


Residual
10th decile
9th decile
8th decile
7th decile
6th decile
5th decile


Figure 2
Distribution of additional income from global
gross domestic product growth, 1999–2010


Note: The lighter slice of the large pie represents the share
of the additional income generated by global growth going
to the poorest 60 per cent of the world population (5.4
per cent). The smaller pie is shown to scale and reflects
the shares of each decile within what corresponds to the
poorest 60 per cent of the world population.




Extreme poverty in a
business-as-usual scenario
A business-as-usual scenario, based on
extrapolating the 1993–2010 income growth
rate for each quintile point in each region to
2030 and on a poverty target of $1.25 per
day, suggests that extreme poverty could be
reduced to below 1 per cent in Europe and
Central Asia (0.1 per cent) and East Asia and
the Pacific (0.7 per cent). This could in principle
make it feasible to eliminate extreme poverty in
these regions through social safety nets or other
income transfer programmes (although these
overall figures mask wide variations between
countries). Extreme poverty would also be
reduced to 1.5 per cent in the Middle East and
North Africa and to 3.2 per cent in Latin America
and the Caribbean, suggesting that it could also
be eliminated in many countries in these regions
through transfer programmes.


However, South Asia, and especially sub-
Saharan Africa, would fare much less well. In
South Asia, some 12 per cent of the population
would remain in extreme poverty (down from
32.7 per cent in 2010). In sub-Saharan Africa,
the figure would be around 37 per cent, a
reduction of less than a quarter from the 2010
level (48.5 per cent) and still far above the 28.3
per cent target for 2015 set by Millennium
Development Goal 1. This level would not
be reached until 2049 – 34 years too late for
the Millennium Development Goals and 19
years after extreme poverty should have been
eradicated under a post-2015 agenda.


Beyond the extreme
poverty agenda
The $1.25-a-day poverty line only provides an
indication of the most extreme poverty: achieving
this level of income falls far short of fulfilling the
right to “a standard of living adequate for…
health and well-being” (Universal Declaration of
Human Rights, art. 25.1).


Taking $5 as the minimum daily income which
could reasonably be regarded as fulfilling this
right, poverty would remain widespread even
in those regions which might have largely or
wholly eradicated extreme poverty by 2030.
This would translate into around only 4 per cent
poverty in Europe and Central Asia, but it would
mean 15 per cent poverty in Latin America
and the Caribbean, 30 per cent in East Asia
and the Pacific and 50 per cent in the Middle
East and North Africa. In both South Asia and
sub-Saharan Africa, around 90 per cent of
the population would still live on less than $5
per day, leaving some 3 billion people below a
$5-a-day poverty line globally.


The above projections highlight serious failings
in the existing development model and the


global economic system with regard to making
growth work for poverty eradication by 2030.
Even returning to the average global growth rate
of 1993–2010 (3.5 per cent per annum), if the
proceeds of that growth were also distributed
as they were in that period, an estimated 700
million people would remain in extreme poverty
in 2030 and billions more would, by any definition
reflecting actual human needs, be poor.


The only way to make tangible progress –
particularly if the effects of the 2007/2008
financial crisis persist – is to recognize and
confront the issue of extreme global inequality
as part of a renewed development narrative.


Global inequality
in a broader context
The significance of global inequality for achieving
inclusive and sustainable growth goes beyond
poverty numbers. The collapse of Lehman
Brothers in 2008 greatly increased awareness
of the close association between growing
inequality, the rise of unregulated financial
markets and the threat to economic and social
security from shocks and crises. Inequality,
instability and incohesion have become mutually
reinforcing features of finance-led globalization
(UNCTAD, 2011). Across most countries,
the top income strata (in some cases only
the top 1 per cent) have been the biggest (or
even the only) winners from boom conditions,
capturing higher rentier incomes through capital
gains and interest payments than would have
been possible under more regulated financial
structures. Capital mobility has made these
gains hard to tax, reducing the bargaining
power of labour and increasing government
reliance on regressive taxes and bond markets,
further amplifying income divergence.


Two crucial variables for addressing inequalities
and achieving social cohesion are jobs and
wages. The tendency for wages to lag behind
productivity growth is a major source of growing
income inequality and an important factor in
households resorting to increased borrowing
and asset inflation to maintain living standards, in
the process adding to financialization pressures
and increasing economic volatility. Various
factors have been seen as explaining this trend
including skill-biased technological change
and an expanding global labour force, as well
as heightened capital mobility. However policy
choices also matter. When low levels of inflation
and labour market flexibility are given priority
over job creation and decent wages, growing
inequality is an almost inevitable outcome.


In many developing countries, in particular
where the labour force is expanding rapidly,
especially in urban areas, job creation remains
the only assured way of tackling poverty on
a sustained basis. But rising wages are also




Contact
Richard Kozul-Wright,


Director,
Division on Globalization and


Development Strategies
Tel. +41 22 917 5615


richard.kozul-wright@unctad.org


Press Office
+41 22 917 58 28


unctadpress@unctad.org
www.unctad.org


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References


Cobham A and Sumner A (2013). Is it all about the tails? The Palma measure of income inequality. Working Paper
343. Centre for Global Development. Washington D.C.


Milanovic B (2012a). Global inequality recalculated and updated: the effect of new PPP estimates on global
inequality and 2005 estimates. Journal of Economic Inequality. 10(1):1–18.


Milanovic B (2012b). Global inequality: from class to location, from proletarians to migrants. Global Policy.
3(2):125–134.


UNCTAD (2011). Report of the Secretary-General of UNCTAD to UNCTAD XIII. Development-led globalization:
Towards sustainable and inclusive development paths.


UNCTAD (2013). Trade and Development Report, 2013: Adjusting to the changing dynamics of the world economy.
United Nations publication. Sales No. E .13.II .D.3. New York and Geneva.


middle 50 per cent are clearly in poverty by a
broader definition (the 40 per cent band roughly
corresponding with a $2-a-day poverty line in
2010). While the basis of the Palma index on
observed regularities in country-level data
makes this less problematic at the national level,
these regularities do not necessarily apply to the
global economy as a whole.


However, the big change in the distribution
of income at the global level over the past
three decades has been the slower pace of
labour incomes compared with world output
(figure 4). While this corresponds with a rise
in profit share, the shift has not produced
the expected dynamic benefits in terms of
productive investment, job creation and poverty
reduction. One way of including inequality in
the post-2015 agenda, at least at the national
level, might therefore be through a measure of
functional income distribution such as the share
of wages in national income. This would have
the advantage of being more directly related to
the orientation of policy than measures such as
the Gini or Palma indices, as well as being more
readily estimated. Consideration could also be
given, following the lead of Jan Tinbergen, joint
winner of the first Nobel Prize for economics,
to setting a target rate of reduction for the
ratio between the average wage and average
remuneration for chief executives.


necessary to expand domestic demand, which
is increasingly seen as an essential component
of a more sustainable growth path (UNCTAD,
2013). Consequently, more appropriate
macroeconomic policies, along with active
labour market policies, will need to be part of
an integrated policy framework aimed at more
inclusive development.


Is a global inequality target
necessary (and feasible)?
There is an emerging consensus that existing
levels of inequality are not only morally
unacceptable, but also economically and
politically damaging. Moving beyond the
Millennium Development Goals, inequality
should therefore become a prominent part of
the post-2015 development narrative.


Where an individual stands in the global income
order still remains largely a matter of where
he or she lives: an estimated 85 per cent of
global inequality is explained by differences in
the mean incomes of countries, and only 15
per cent is due to variations within countries
(Milanovic, 2012b). However, defining realistic
targets presents some difficulties, whether at
the global or the national level.


The most widely used indicator of income
distribution is the Gini coefficient, which has
the advantage of covering the whole income
range. However, a given change in this indicator
does not give a ready understanding of what
this means for the redistribution of income,
making a Gini-based target less intuitively
appealing. It is also more sensitive to changes
in the middle of the distribution than at either
end, which is arguably where the issue is of
greater importance. And the gap between a
Gini target and policy conclusions is a wide one,
particularly at the global level.


The Palma index, a possible alternative
measure of inequality, is intuitively clear.
However, it does not take account of changes
in distribution within the top 10 per cent of
the population, the bottom 40 per cent or the
50 per cent in between. This is a significant
limitation, particularly as many of those in the


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1980 1985 1990 1995 2000 2005 2010


Figure 4
Share of world labour income in world gross
output, 1980–2010
(Percentage)




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