Economic Growth Will Make Poverty History

Contrary to much of the noise surrounding the United Nations’ International Day for the Eradication of Poverty on October 17th, there was actually plenty to celebrate. World poverty rates have fallen dramatically over the past three decades, lifting hundreds of millions of people out of poverty. Sadly, much of Africa has lagged behind, prompting activists and rock stars to push for increased foreign aid as the centerpiece of their campaign to “make poverty history.” But the evidence of the world’s great poverty eradication successes suggests an alternative solution.

These successes are documented in a recent study appearing in the prestigious Quarterly Journal of Economics by renowned Columbia University Professor Xavier Sala-i-Martin. Using data from 138 countries representing 93 per cent of the world’s population, Professor Sala-i-Martin measured poverty rates (the percentage of citizens facing poverty) and poverty headcounts (the total number of people living in poverty) between 1970 and 2000.

His research shows emphatically that poverty rates fell over the time period examined. For example, using the World Bank’s $1 per day poverty line, the poverty rate fell to 5.7 per cent in 2000 from 15.4 per cent in 1970. Even using the much higher $3 per day measure, the poverty rate more than halved to 21.1 per cent in 2000 from 46.6 per cent three decades earlier. Regardless of which measure of poverty is used, the conclusion is clear: world poverty rates have been cut in half during the past 30 years.

Translating these statistics into human terms, between 212 and 420 million people worldwide were lifted out of poverty during this period. This achievement is especially impressive given that the total population of the countries included in the study increased almost 50 per cent over these three decades.

These worldwide trends were strongly influenced by the success of large Asian countries like China and India. Using the $1.50 per day poverty line as a point of comparison, in South Asia (which includes India) the poverty rate fell to 2.5 per cent in 2000 from 30.3 per cent in 1970. The drop was slightly more dramatic in East Asia (including China), where poverty rates fell to 2.4 per cent from 32.7 per cent over the three decades. In total poverty rates in Asia dropped more 90 per cent.

Asia’s success in nearly eradicating extreme poverty lies in sharp contrast to the experience of Sub-Sahara Africa. The contrast is heightened by the fact that poverty rates in Africa and Asia were roughly the same in 1970. Tragically, as poverty in Asia fell, it increased nearly 40 per cent in Africa, to 48.8 per cent in 2000 from 35.1 per cent in 1970. While almost half a billion people were lifted out of poverty in Asia, an additional 200 million Africans fell into poverty over the past three decades.

This effectively changed the regional composition of world poverty. While 80 per cent of the world’s poor lived in Asia in 1970, three decades later Sub-Sahara Africa was home to 75 per cent of the world’s poor.

The worsening situation in Sub-Sahara Africa casts doubt on the proposition that current foreign aid is an effective tool for the eradication of poverty. Since 1970, a total of $400 billion in foreign aid has gone into this region, yet poverty continued to steadily climb. A wealth of empirical research such as that published in The Fraser Institute’s Economic Freedom of the World: 2006 Annual Report comes to a similar conclusion about the failure of foreign aid to end poverty. An alternative poverty reduction strategy is needed.

This alternative strategy must appreciate the impact that the adoption of appropriate economic institutions – not cash handouts such as foreign aid – has had on prosperity around the world. These institutions were central to economic reforms introduced by Asian nations such as increased trade based on comparative advantages; greater use of markets, not government intervention, to allocate resources; enforcing and respecting contracts; and protecting property. As Sala-i-Martin points out, this growth is the primary reason for the world’s progress towards eradicating poverty over the past 30 years.

Thanks largely to the economic success of East and South Asia, the world has made great strides towards eradicating poverty. Africa can catch up by learning from the experience of these Asian success stories. The lesson is clear: economic growth, not foreign aid, will make poverty history.