WASHINGTON, DC – The economic geography of the world is changing. The eurozone faces the specter of another round of stagnation; Japan has slipped into recession; and the United States, despite relatively strong performance in the latter part of 2014, has raised concerns worldwide with its exit from quantitative easing. Meanwhile, emerging economies have continued to perform well. India and Indonesia are growing at more than 5% per year; Malaysia at 6%; and China by more than 7%.
The scale of the global change can be seen when purchasing power parity (PPP) – a measure of the total amount of goods and services that a dollar can buy in each country – is taken into account. According to the figures for 2011, released last year, India is now the world’s third largest economy in terms of PPP-adjusted GDP, ahead of Germany and Japan. The data also revealed that China would overtake the US as the world’s largest economy in PPP terms sometime in 2014 – a shift that, according to our estimates, occurred on October 10th.
Despite this progress, a large proportion of people in developing countries remain desperately poor. Globally, the poverty line is defined as a daily income of $1.25, adjusted for PPP – a line that many criticize as shockingly low. But what is truly shocking is that nearly one billion people – including more than 80% of the populations of the Democratic Republic of Congo, Madagascar, Liberia, and Burundi – live below it.
One reason global poverty has been so intractable is that it remains largely out of sight for those who are not living it, safely somebody else’s problem. The fact that most participants in discussions about global poverty – the readers of this commentary included – know few, if any, people who live below the poverty line is an indication of the extent of the world’s economic segregation. If poverty were communicable, its incidence would be far lower by now.
Fortunately, a chorus of voices, not just from civil-society groups, but also from international organizations, has given rise to a global movement to end poverty. There is now a growing consensus that global poverty is not just a problem of the poor. Though moral outrage is important, it is not enough when it comes to crafting policy. Policymakers need data and, equally important, the ability to analyze it.
The first task is to distinguish between what is feasible and what is not. For example, some have proposed including the provision of employment for all adults in the Millennium Development Goals’ successor framework, which is to be unveiled this year. This is an impossible target. All economies of any reasonable size will have some unemployment. In fact, a limited amount of unemployment can help to promote development. To declare “employment” a right is to divest the word “right” of its meaning.
Next, there must be recognition that economies are complex and interconnected. Consider, for example, a government policy in which subsidies, funded with newly printed money, are handed out to residents of 1,000 villages. This will not necessarily be a boon for the economy as a whole. Injecting money might improve the living standards in the villages receiving the funds, but doing so may well drive up the cost of food throughout the country, causing residents of non-subsidized villages to fall into poverty. The macroeconomic impact of micro-interventions is an important reason why poverty has persisted, despite well-meaning interventions to combat it.
Another reason poverty endures is persistent – and, in many places, widening – inequality. The current level of global inequality is unconscionable. In 2013, the World Bank, where I am Chief Economist, helped bring the term “shared prosperity” into everyday discourse by declaring, for the first time, that every society should make progress toward this goal its mission. To be sure, there will always be a certain amount of inequality in the world; in fact, as with unemployment, a limited amount is desirable as a driver of competition and growth. But the deep and pervasive inequality that exists today can only be condemned.
According to some back-of-the-envelope calculations, the wealth of the world’s 50 richest people totals $1.5 trillion, equivalent to 175% of Indonesia’s GDP, or a little more than Japan’s foreign-exchange reserves. If one assumes that this wealth yields 8% per year, the annual income of the world’s 50 wealthiest people is close to the total income of the poorest one billion – in other words, those living below the poverty line.
This is a collective failure. As 2015 begins, we must consider policies and interventions to curb such extreme inequality. We must do this not only out of a sense of justice, but also because, in a world afflicted with such extreme disparities, its poorest residents lose their voice, even when they have the right to vote. Extreme inequality is, ultimately, an assault on democracy.
Kaushik Basu, Senior Vice President and Chief Economist of the World Bank, is Professor of Economics at Cornell University.
Copyright: Project Syndicate, 2015