December 12, 2012 | Contribution by
GABRIELA INCHAUSTE By Gabriela Inchauste, Senior Economist, Poverty Reduction and Equity Group, the World Bank For the first time since the World Bank began monitoring progress against poverty, 2008 data indicate a decline in both the poverty rate and the number of poor in all six regions of the developing world. Moreover, within each region, poverty has fallen over the past decade in the vast majority of countries, whether one uses national or international poverty lines. This progress represents a substantial step in reaching the Millennium Development Goals, as by the latest estimate, this goal of halving absolute poverty by 2015 has already been reached. Even so, a great many people remain desperately poor and vulnerable across the world.
Man working at wood mill. Ecuador. Photo: © Edwin Huffman / World Bank
In this context, the past decade affords us an excellent opportunity to better understand the most significant factors at work in the poverty battle. In Brazil, for instance, it is acknowledged that more effective social policies have played a role, but how much so? What about East Asia, where the policy focus has been on growth? How about some countries in South Asia and Eastern Europe, where remittances from abroad have become significant sources of resource transfer to local poor people? To try to answer these questions, we recently examined a sample of 16 countries of different regions and per capita income levels where there had been a substantial drop in poverty — like Moldova, Thailand, Colombia, Honduras, Ghana, Bangladesh, Nepal, and Paraguay. Our findings suggest that better labor market conditions are key — even in a highly diverse set of economies using a wide range of policies. Forces Behind Reducing Poverty Our study began with verifying a commonly held theory these days that economic growth is the biggest contributor to poverty reduction. Here we found that in 14 of the 16 countries, growth accounted for most of the reduction in moderate poverty over the past decade — with redistribution more important only in Argentina and Paraguay. Next we asked to what extent demographics, labor income, and non-labor income enabled growth to perform this function. As our recent paper reports, we found that:
Labor income matters most for poverty reduction
- • Labor income matters most. In 10 out of 16 countries with substantial poverty declines, labor income explained more than 50 percent of the change in moderate poverty, and in another 4 countries, it accounts for more than 40 percent of the reduction in poverty (see figure). In most of the countries, there was also higher employment growth, in some cases related to higher female employment.
- • Second, non-labor income. Remittances — private transfers from migrants abroad — helped countries like Nepal, Moldova, and Honduras. Public transfers — government spending on subsidies and transfers to the poor — helped to reduce poverty not only in Latin America but also in Romania and Thailand, where social protection systems target the bottom of the distributional pyramid.
(Percent contribution to the change in moderate poverty)
Source: Azevedo and others (2012) and Inchauste and others (2012).
Notes: "Labor income" refers to the change in employment and earnings per adult; "Non-labor income" refers to transfers, pensions, capital and other non-labor income. Consumption-based measures of poverty are used in the case of Bangladesh, Ghana, Nepal, Peru, Thailand, Moldova, and Romania. Income-based measures of poverty are used in the case of Argentina, Brazil, Chile, Colombia, Costa Rica, Ecuador, Honduras, Panama and Paraguay.
Forces Behind Reducing Poverty The next logical question is what accounts for the increase in labor income for workers in the different parts of the distribution? Was it the result of more people working, or higher earnings per worker? Was it the result of changes in the occupational structure, or changes in the sectoral composition of employment? Were these changes the result of improved human capital characteristics (education or experience), or higher returns to those characteristics? To answer these questions, we focused in on Bangladesh, Peru, and Thailand — all of which had rapid poverty reduction and high growth (above 4 percent yearly between 2002 and 2008). Our findings — reported in a companion paper — show that of the key labor market factors, it was the increase in the returns to endowments (signaling an increase in the marginal value of work), rather than changes in these endowments that counted: returns to land and experience in Bangladesh, returns to land in Peru, and returns to education and experience in Thailand. While increases in farm incomes were mostly responsible for poverty reduction in Bangladesh and Thailand, nonfarm income made the biggest difference in Peru. The bottom line is that ultimately, ending poverty and boosting shared prosperity hinge on creating better labor market conditions for the poor.  Moderate poverty refers to the share of the population whose income or consumption is below a moderate poverty line, and includes the extreme poor. For comparability across countries, we set the moderate poverty line to the international poverty line that is closest to each country’s national moderate poverty line. National moderate poverty lines are typically around US$1.25 dollars-a-day in low-income countries, while in middle-income countries they are between $4 and $5-dollars-a-day.
- • Third, demographic change. As a consequence of birth-rate declines some years ago, falling dependency rates — that is, a higher proportion of employable adults among all household members — have made it easier to increase income and consumption per person in those countries. Indeed, dependency ratios have declined by about 20 percent in Costa Rica, Honduras, Moldova, and Bangladesh over the past decade. For the sample as a whole, this factor explained more than 20 percent of the poverty reduction.