Inclusive Growth

Advancing Inclusive Growth to End Extreme Poverty

Two of the Center's experts weigh in on the implications of a new World Bank report on the state of poverty and shared prosperity around the world.

Advancing Inclusive Growth to End Extreme Poverty

Bangladeshi workers at a garments factory in Gazipur outskirts of Dhaka on February 17, 2018. (Photo by Mehedi Hasan/NurPhoto via Getty Images)

October 22, 2018

Key Takeaways
  • World Bank says poverty reduction happening unevenly, with East Asia and Pacific and South Asia leading the way
  • One of the best ways to tackle extreme poverty is advancing inclusive growth, leading to more sustainable poverty reduction
  • Self-employment through entrepreneurship is critical for inclusive growth and reducing poverty
  • Digital transformation is a powerful driver of inclusive growth

In its annual assessment of global poverty, the World Bank has stated that two regions in particular – East Asia and Pacific and South Asia – have been successful in raising incomes and creating shared prosperity for large numbers of their people.

However, the World Bank has also said this progress contrasts sharply with the much slower pace of poverty reduction in sub-Saharan Africa. “Extreme poverty is increasingly becoming a sub-Saharan African problem,” it concludes in its Poverty and Shared Prosperity 2018: Piecing Together the Poverty Puzzle report.

When looking at the successes in the East Asia and Pacific region, China has experienced a massive migration of rural populations to urban areas, giving people better access to higher-paying jobs and vital networks, including financial services. In South Asia, the income of the bottom 40 percent of the population grew by 4.5 percent and 3.1 percent per year between 2010 and 2015 respectively. It also noted that in South Asia, the total number of people living in poverty fell to 216 million in 2015, a large drop from around half a billion in 1990.

On the other hand, the bottom 40 percent of the population in the dozen sub-Saharan African countries covered by the report, which suffer from a significant lack of connection to networks and a lack of economic diversification, saw their incomes rise by an average of 1.8 percent per year between 2010 and 2015 – slightly below the global average of two percent per year.

Five years ago, the World Bank laid down a pair of ambitious goals to end extreme poverty by 2030 and promote shared prosperity by boosting the incomes of the bottom 40 percent of the population in each country. This year’s report concludes that these targets are unlikely to be met. It adds that “in some ways the fight against poverty is getting harder” in some areas with violent conflicts and weak institutions and that it is “increasingly clear that the benefits of economic growth have been shared unevenly across regions and countries.”

We spoke with two of the Center for Inclusive Growth’s leading experts, Arturo Franco, Vice President, Data and Insights, and Payal Dalal, Vice President, Global Programs, about the report’s findings and its implications for inclusive growth.

What’s your reaction to the disparity in terms of shared prosperity and poverty reduction and what can be done about it?

Arturo: One key takeaway of this report is the strong link between measures of shared prosperity and the reduction of extreme poverty. These findings underline how crucial inclusive growth can be for sustained poverty eradication in both developed and developing economies.

If our goal is to lower extreme poverty to a global average of three percent in a little more than a decade, sub-Saharan Africa’s poverty rate will have to fall by more than 20 percent. How do we increase the capacity for economic growth while maintaining an emphasis on economic inclusion? The international community needs to focus on both growth and inclusivity – we can’t sacrifice one for the other. 

The fact is that if we focus uniquely on poverty reduction, we might not achieve shared prosperity. But if our ultimate goal is shared prosperity, we might be able to achieve the corollary of poverty reduction. This is what the report advocates – advancing shared prosperity, or what we call inclusive growth, which should result in a reduction in poverty that is more sustainable through time.

Payal: Given that the majority of poverty going forward will be concentrated in Africa and that the growth of income levels in Africa is at less than two percent, the Center’s work on self-employment via entrepreneurship is critical for inclusive growth and poverty reduction. For example, in Nigeria, the country on tap to have the largest population of poor, we are doing really innovative programs connecting micro-entrepreneurs with digital tools for inventory management and access to finance with Grooming Microfinance.

We are also trying to address the challenge of urban versus rural highlighted in the report. We are experimenting with new modalities of digital training because we recognize some of the entrepreneurs most in need of intervention aren’t going to be in the cities.

How can financial inclusion contribute to poverty reduction?

Payal: Financial inclusion is absolutely key. Countless studies show that access to finance is positively linked with economic growth and employment. At a very basic level, access to the financial system makes people less vulnerable to unexpected losses of income. Think about the woman who hides her money under the mattress; not only is she vulnerable to things like theft, but she has less control over those finances if her husband or brother want a piece – in this scenario, she’s more vulnerable to gender-based violence, too.

It’s also more tempting to spend when it’s just sitting there. Being able to save safely, send/receive remittances or access credit or insurance – all of these things raise standards of living. I’ve seen studies that show a correlation between financial inclusion and increased investment in education and healthcare.

Arturo: I agree with Payal – financial inclusion is critical to lifting people out of poverty and placing them on a path to prosperity. The good news is that we’re making meaningful strides. As Leora Klapper, one of the Center’s Data Fellows and lead author of the World Bank’s Global Findex, points out: The number of people with access to a bank account is increasing. Globally, 69 percent of adults – 3.8 billion people – now have an account at a bank or mobile money provider, a crucial step in economic mobility. The bad news is that 1.7 billion people still remain unbanked.

Financial inclusion helps fight poverty because it reduces income and consumption volatility. This, in turn, allows people to make better decisions that ultimately help shift their income curves up. It’s this shifting of the curve where we need to focus our efforts. After all, financial inclusion is not an end in itself – it is simply a means to an end: a more inclusive world with opportunities for all.

In this sense, financial inclusion is the catalyst that helps ensure people can access a more sustainable livelihood, can withstand economic shocks such as unforeseen illnesses requiring medical treatment, have the tools to understand their financial health and are able to transact securely and seamlessly without being subject to the perils of cash. It is these forces that will shift the curve and steepen the growth trajectory for both individuals and economies.

The report concludes that a slowdown in overall poverty reduction makes it unlikely the World Bank’s 2030 targets will be met. What’s your reaction to this and what implications does it have for the role of the private sector and partnerships for achieving zero poverty?

Payal: Partnerships are key. We talk a lot about private-public partnerships in international development – partnerships that bring together the private sector with governments and civil society. Those are critical because all players bring different assets, knowledge sets and capabilities to the table.

From our perspective, the model of partnership that hasn’t been so loudly championed but which is absolutely going to be catalytic when eliminating poverty is the private-private partnership. When two companies get together to address a social problem, magic happens. I am not being hyperbolic. They not only bring unique core competencies that can complement each other beautifully, they also try to address the sustainability of the intervention.

To succeed, we need to build sustainable models to address inclusive growth and shared prosperity. We are really excited about our partnership with Unilever, which aims to grow micro and small businesses within Unilever’s supply chain. In Kenya, we have partnered with Unilever and KCB Group to use transaction history with the supplier as a proxy for a credit score, helping duka (shop) owners access credit. The finance is paired with training to maximize adoption and responsible usage.

Arturo: We also need to look at the interplay of all the variables keeping people in poverty. The report is clear, poverty is not just about a lack of income.; poverty is a multidimensional economic reality and it’s when these dimensions begin to interact with one another that the sources of exclusion begin to add up for people in vulnerable situations. For example, people in sub-Saharan Africa could be living above the poverty line, but if they lack a quality education, they probably don’t have access to good jobs. This, in turn, prevents them from having the capital they need to fund their children’s education, creating an intergenerational poverty trap.

The Center’s theory of change states that we need to connect people to the networks that power the modern economy – physical, digital and social – to increase productivity and ensure shared prosperity. Identifying how best to build robust networks and provide access to them is the task before us.

The report says that in some ways the fight against poverty is getting harder. Poverty is becoming more entrenched in certain areas, especially in those sub-Saharan countries burdened by violent conflict and weak institutions. What’s CIG’s thinking on overcoming these barriers to success?

Arturo: The areas in which poverty is entrenched are almost always rural. What are the chances that the government will provide you with running water if you live in a small hamlet two hours from the nearest town? Low. But if you live on the outskirts of the city, economies of scale and the general cost of infrastructure make it easier to deliver social services. Similarly, it’s easier to build a school in the heart of a densely populated slum than in a sparsely populated village.

The ideological foil to this challenge is planned urbanization, but we’ve seen time and time again that central planning is not a smart policy choice. We have to consider how to take solutions to scale so they reach those most in need. Technology can remove barriers to access and level the playing field – perhaps imperfectly in some areas but meaningfully in most. More specifically, digital transformation is a powerful driver of shared prosperity. If you look at Estonia, Latvia and Lithuania – the levels of shared prosperity are growing above six percent per year. It’s digital transformation that is shaping this trend.

Born out of a global technology company, the Mastercard Center for Inclusive Growth is well positioned to leverage its core assets and competencies to drive impact on this front.

Payal: I do think financial inclusion plays an important role in unlocking access to healthcare, education, etc. If we can move closer to a cashless society, we can enable greater transparency; this will lead to less corruption, which is one of the things that weaken institutions. Digital technology is going to play a huge role in terms of democratizing information and education for those in rural settings or in places where conflict has destroyed infrastructure. Technology isn’t the silver bullet, but it can help us narrow the gap.

Found Under