Will the Development Community Confront Inequality and Vulnerability?

How the developing world has changed! We used to think of the world as essentially divided into a rich developed North with one-fifth of the world’s population and a poor South with the remainder four-fifths. This is no longer the case.

After a period of sustained economic growth, most of the world’s poor now live in middle-income countries – countries such as India, China, Nigeria, Indonesia, and Philippines that have reached middle-income status and possess the resources that would permit them, at least in principle, to combat poverty with greater urgency.

The math of global poverty is simple yet surprising, as laid out by Andy Sumner in a Working Paper about “the new bottom billion”.¹ Around 960 million or 72% of the world’s poor live in middle-income countries and only a quarter live in low-income countries, largely in Africa. This is a dramatic change from just two decades ago when 93% of poor people lived in low-income countries.

With his choice of title, “the new bottom billion”, Andy Sumner challenges the development legend Paul Collier who has used the term ‘Bottom billion’ to mean the entire population in fragile low-income countries. Where Collier argues that the problems of fragile, conflict-affected, and undemocratic countries are the central problems of development, Andy Sumner argues that the problems of poverty remain central to development efforts. However, poor people no longer necessarily live in poor countries and that challenges how and why the international community delivers aid.

Aid was traditionally given by rich countries to poor ones because poor countries were seen as in need of resource transfers. This model of aid is already undergoing rapid change with the rise of non-government donors, the growing importance of global public goods, and the push to help poor people, not just poor countries. In the future, donors will need to decide if they want to help poor people wherever they happen to live or continue the model of focusing on poor countries, a model which could leave them with just 30 poor aid receiving countries by 2025 according to a recent projection by the Center for Global Development².

The case for focusing on poor people is familiar to the development community. The MDGs and the national Poverty Reduction Strategy Papers (PRSPs) emphasized delivery of basic services for the poor, in particular health and education. But now that most poor live in middle-income countries, inequality and vulnerability need to be confronted.

High levels of inequality and lack of effective social protection mechanisms are key drivers of poverty. The poor live in risky environments where unexpected shocks occur frequently. The World Bank study Moving out of Poverty³ identified high levels of churning of the poor in all study countries: every year, a lot of poor people were able to escape poverty but a roughly equal number of people descended into poverty. Shocks and lack of social protection were the most important reasons why people became poor. Several other studies have found the same thing, including my own work in Pakistan, which found that the majority of Pakistan’s poor and near-poor struggled to cope with frequent and costly shocks, health shocks in particular.⁴ Households reported very high costs of coping with these shocks, often equivalent to several years of income, and many households said they had never recovered from the shock.

Research in many countries has confirmed that health shocks – illness, death, accidents — are among the most common and most costly shocks facing low income households, and that they have little effective protection against those shocks. Health shocks most often are specific to families. Researchers long believed that community-wide shocks would be more devastating than individual shocks because traditional solidarity mechanisms are better suited at protecting against individual shocks, but growing evidence shows that frequent and costly health shocks are particularly devastating. A large number of non-poor people are so close to the poverty line that a single episode of illness, particularly of the breadwinner, can push them into poverty.

Droughts, floods, and natural disasters are also quite common and costly and render many people poor. Farmers are particularly vulnerable to this type of risk, which is set to grow quickly because of climate change.

Economic shocks related to prices and employments are also quite common and pose difficult coping challenges of their own. Research that I have been involved in recently on the food, fuel, and financial crisis of 2008-11 in 16 countries found that cutting food consumption was the first response when economic shocks hit. Families cut both quality and quantity, sometimes to precariously low levels. There are reports of food insecurity triggered by the economic crisis in nearly all 16 countries, including many middle income countries.

Coping is difficult and costly, regardless of the source of shock. Formal social protection and micro finance cover a mere fraction of the people in need. And the benefit levels of many social protection programs are far too low to make a real difference. Credit is sometimes a double-edged sword because the flipside of credit is debt; many debtors had trouble repaying when hit by economic crises. Collection practices of some microfinance institutions have been known to be heavy handed. In our research on the impacts of the economic crisis, people in Cambodia said “we fear the credit agent like we fear the tiger”. Some of them lost their homes when they were unable to repay micro credit loans taken out before the crisis.

Informal solidarity networks, based on family, friends, kinship, and occupational ties, cover far more people but tend to be of limited value to the poorest when covariate shocks such as flood, drought, and economic recession strike all their members and deplete the ability of the network to respond. Finding ways to create synergies between traditional solidarity and formal social protection mechanisms would be very helpful.

Inequality means that the poor lack the resources needed to cope with shocks—resources in the form of jobs, assets, finance, and social protection that might help bolster and smooth incomes and replenish informal solidarity. Inequality also reduces the impact of economic growth on poverty and makes the politics of development and poverty reduction more elitist. But inequality has traditionally been regarded as a domestic political issue which donors have been reluctant to engage in for fear of being seen as meddling in internal affairs.

However, inequality cannot be separated from poverty. The opportunities to escape poverty, and stay out of poverty, depend on inequality as well as on how risk and vulnerability are managed. Thus, inequality is a key issue for poverty reduction in middle income countries, where the large majority of the world’s poor live. And this makes inequality an issue which donors and development professionals need to be concerned with.

Although middle income countries have more resources and, on average, better governance than low income countries, they will not automatically combat poverty with urgency.

² http://blogs.cgdev.org/globaldevelopment/2011/03/with-success-ida-must-begin-to-reinvent-itself.php 

³ Moving Out of Poverty: Success from the Bottom Up, World Bank 2009. http://go.worldbank.org/8K2Q8RYZ10

⁴ Rasmus Heltberg, Niels Lund: Shocks, Coping, and Outcomes for Pakistan’s Poor: Health Risks Predominate, Journal of Development Studies, 1743-9140, Volume 45, Issue 6, 2009, Pages 889 – 910