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How much economic growth is necessary to reduce global poverty substantially?

To calculate the minimum growth that is necessary one has to rely on a scenario that would allow the maximal reduction of global poverty under minim

To calculate the minimum growth that is necessary one has to rely on a scenario that would allow the maximal reduction of global poverty under minimal growth. This is what I did in the previous section.

The result of this calculation is that the total size of the global economy would need to be more than 5-times larger than currently to substantially decrease global poverty.

A minimum growth scenario for poverty reduction of course implies much lower economic growth than any realistic scenario of how the future global economy might look like. It therefore makes sense to consider in which ways a more realistic scenario would imply more economic growth than this minimum scenario.

In this scenario every country stops economic growth entirely once they reach the average income of Denmark

This calculation is based on a scenario in which every country stops economic growth once they reach the level of Denmark. The chart just above shows this: After additional economic growth of 30% South Korea would reach the average income of Denmark and in this scenario it would stop exactly there. Russia would grow until incomes are 2.8-fold higher than now and stop then. And the same is assumed for all other countries in this scenario.

The reason I went with this assumption for this scenario is to calculate the minimum growth needed to substantially reduce global poverty. Of course there is no reason to expect that countries would actually do this, which means that global economic growth would be higher before global poverty is substantially reduced.

In this scenario every country that is richer than Denmark reduces average incomes

To calculate the minimum necessary aggregate growth I assumed that the countries that are richer than Denmark would shrink their economies so that people’s incomes there would decline.10 Again, this is helpful to see the minimum growth needed, but since there is no reason to expect that countries would actually do this we should expect more economic growth before global poverty is substantially reduced.

As a consequence there is no global inequality between countries in this scenario

The consequence of the previous two features of this scenario is that global inequality between countries disappears entirely: every country in the world would have an average income of $55 per day.

You have to be extremely optimistic about the future of inequality to think this is likely. If you don’t think this will happen, then the economic growth that the world will see before any possible substantial reduction of global poverty will be higher.

In a scenario in which countries do not decrease average incomes of the population and in which average incomes of all countries increase at a rate of 2% per year, the global economy would be 7.2-times larger.11

In this scenario inequality within countries declines very substantially

The scenario assumes a massive reduction of inequality within many countries. Denmark is one of the most equal countries in the world today (see this map) so that almost all countries in the world would need to achieve large reductions of within-country inequality to reach a poverty headcount ratio as low as Denmark on an average income of $55. Since there is no inequality between countries in this scenario it is implied that the world as a whole achieves the same inequality of incomes as Denmark today.

In many countries around the world inequality did decrease over the past generation and this might give us some confidence that further reductions of inequality are indeed possible. But you need to be extremely optimistic about the future of inequality to believe that all countries will achieve the very low inequality of Denmark. Again, I assumed it here to calculate the minimum growth necessary. If you believe that this scenario is not realistic then the implication is that the necessary economic growth to reduce global poverty will in reality be higher.

An even more optimistic scenario would be to expect that perfect equality between every single person in the world could be achieved. The richest person in the world would live on $30 per day – just above the poverty line – and the poorest person too. Even then very substantial economic growth would be needed to end global poverty: the world economy would need to more than double.12

This scenario is based on Denmark rather than the richer countries where a smaller share of the population live in poverty today

In this scenario I have based all calculations on Denmark. The country that actually has the lowest share of the population living in poverty is Norway, a country that is substantially richer than Denmark. Calculating the growth required for every country in the world to reach the average income of Norway would therefore yield higher necessary minimum growth.

The required economic growth in GDP terms will be higher than in household income terms

None of the discussion and none of the calculations here relied on GDP per capita. The average incomes reported throughout this post are based on what people report in household surveys. GDP per capita is the more commonly used measure of average incomes as it is a more comprehensive measure of people’s incomes – importantly GDP per capita includes government expenditure (for more background on the differences see footnote 24 of this post).

The differences between these two average income measures matter for the calculation of the necessary minimum growth. The gap between average incomes as determined in household surveys and GDP per capita typically increases with rising income, which means that if we would consider the necessary minimum growth in GDP terms rather than household income terms the required growth would be larger.

It would not be the end of poverty – only a substantial reduction of poverty

And lastly keep in mind that this is a scenario in which there will still be people in poverty. Poverty is lower in Denmark than in much of the rest of the world, but it is nevertheless a large problem in Denmark. In the scenario here the same would be true for the world. Global poverty would be reduced very substantially, but it will nevertheless be a world in which 14% of the population live on less than $30 per day.

How much does future population growth matter?

In the calculations here I relied on the most widely used demographic projection of future population growth, the UN Population Division’s mid-variant projections. There are other projections and it makes sense to consider how different demographic scenarios would impact the calculations, in particular because the demographic research literature suggests that increases in incomes would lead to a decline of fertility rates.

On the other hand it is important to not overstate the possible impact of these changes. The number of children in the world is already close to the peak and much of the future population growth is due to ‘population momentum’.

In our entry on future population growth we discuss several global population projections, those who expect lower population growth expect a world population that is about 18-20% smaller than the UN mid-variant. Accordingly the minimum size of total incomes would therefore need to be about 18-20% lower under a lower population growth scenario.

Is it enough to reduce poverty?

This scenario here is envisaging the necessary changes to reduce poverty. A reduction of poverty is an important goal, but it is surely not the only goal a society might have, the ambition is not to lift everyone’s living standards just above the poverty line. The question of what living standards make a person or a household well off is an important one, but it is beyond the considerations in this text.13

My takeaway

The purpose of this scenario was to calculate the minimum necessary growth. I’m cautiously optimistic about the possibility that global income inequality declines further, but I’m not as optimistic as this minimum scenario envisages and I therefore think that if the world will ever substantially reduce poverty then it would be a future with more aggregate global economic growth than a 5-fold increase.