The Modern Decline in Extreme Poverty

The graphs below come from Our World in Data, a project headed by Max Roser. Roser is a master of data presentation and the author of Factfulness (Quillette review here).

In 1820 the First Industrial Revolution was near its end and the new technologies were becoming established on the Continent. Long-distance trade was just beginning to grow rapidly, aided by the appearance of metal-hulled steamships. As predicted by the theory of comparative advantage (set out by David Ricardo in 1817), many Third World countries began to specialize in the production of primary goods, selling them to the West in exchange for manufactured goods. The West’s industrial core grew quickly and the rest of the world grew less quickly, widening the already extant productivity gap between the industrial core and the rest. Nineteen out of twenty people lived in extreme poverty.

In 1910, almost a century later, after the Second Industrial Revolution and the integration of the world’s economies, eight out of ten people still lived in extreme poverty. And in 1970, after the first human had walked upon the moon, six out of ten people — the majority of the world’s population — lived in extreme poverty. Poverty appeared to be an intractable problem.

Then, in the forty-five years between 1970 and 2015, the incidence of extreme poverty fell from six in ten to just one in ten.

The modern decline in extreme poverty is even more startling when the total numbers are considered. The population of the world rose by 3.6 billion between 1970 and 2015 — from 3.7 billion to 7.3 billion — and yet the number of people living in extreme poverty fell by 1.5 billion. It fell by 1 billion in just the last fifteen years of this period.

The figure below shows the regions of the world in which the incidence of extreme poverty was above the worldwide incidence at some time in the last thirty years.1 Each of these regions experienced a dramatic decline in the incidence of extreme poverty between 1987 and 2013. It fell from 54 per hundred to 41 per hundred in sub-Saharan Africa, from 48 to 15 in South Asia, and incredibly, from 58 to 4 in East Asia.

South Asia is dominated by India and East Asia by China. These countries held 38% of the world’s population in 2013, so a decline in the rate of extreme poverty in either of them would have a large impact on the worldwide rate — and both countries experienced very large declines. These countries are highlighted in the figure below.

Thirty years after the establishment of the “people’s republic” in China — after between 30 and 40 million people had died in a famine that Mao refused to acknowledge, after tens of millions had their lives destroyed by the Cultural Revolution, after hundreds of millions had been deprived of their property and their civil liberties — the incidence of extreme poverty in China was 88 per hundred. China had experienced episodes of strong economic growth, particularly before the death of Stalin, but this growth had been undone by ideologically driven upheavals such as the Great Leap Forward and the Cultural Revolution.

Mao and his followers demanded adherence to doctrine, but there were others who were more concerned with outcomes. Liu Shaoqui and Deng Xiaoping held powerful positions in China’s hierarchy in the 1950s and early 1960s. In the aftermath of the Great Famine they privatized some of the agricultural land — reversing Mao’s collectivization — and allowed peasants to sell produce in local markets. Deng’s aphorism, “It doesn’t matter whether the cat is black or white, so long as it catches mice,” neatly encapsulates their pragmatism. Liu and Deng were both purged during the Cultural Revolution. Deng was rehabilitated by Zhou Enlai in 1973, and then purged again after Zhou’s death in 1976. However, when Mao died later in the same year, the reformers consolidated their power and Deng regained his influence. In 1978 the Communist Party shifted its focus from ideology to modernization. All of China’s agricultural land was privatized over the next few years, and the peasants were allowed to sell their produce in markets. State-owned enterprises were given more autonomy, prices and wages were allowed to respond to market forces, private firms were more liberally regulated, foreign direct investment was permitted, international trade was encouraged. China’s per capita output began to grow rapidly, and the incidence of extreme poverty began its unparalleled decline, reaching two per hundred in 2013.

India’s smaller but still very impressive decline was also linked to economic reform. The Indian economy was very heavily regulated from the time of India’s independence until perhaps 1991. Many industries had been nationalized, including mining, railroads, telecommunications, and power production. Firms in the private sector were governed by the “license raj,” under which permits were required for almost every action, including starting a new business, adding a new product, expanding production, and laying off workers. High tariffs were imposed to discourage imports. India’s average annual rate of growth of per capita output over the period 1960-1985 was just 1.6%.

The first reforms aimed at liberalizing the sclerotic Indian economy occurred in the late 1970s, and further reforms occurred during the mid-1980s, but the most comprehensive reforms came in 1991. These reforms reduced tariffs and removed other restrictions on imports. About 80% of all firms were exempted from extreme licensing requirements, and large companies no longer needed the government’s permission to expand their production capacity or add product lines. Some nationalized sectors were opened to private sector competition. India’s growth rate began to rise in the late 1970s and continued to rise over the next few decades. The average annual rate of growth of per capita output over the period 1990-2015 was 7.7%. The incidence of extreme poverty was cut in half over the same period.

Growth of per capita income has been emphasized here because it appears to be driving the decline in extreme poverty. The two figures below show the close relationship between per capita income and extreme poverty.2 The per capita income needed to drive the incidence of extreme poverty below one in twenty is not huge — something in the neighbourhood of $US10,000. Countries as diverse as China, the Ukraine, Paraguay and Panama had met this standard by 2014.

Comparing the figure for 1990 with the figure for 2014 shows how individual countries have raised their per capita incomes and driven down extreme poverty. China and India are conspicuous examples, but note also Ethiopia, Cambodia, Indonesia, and Burkina Faso.

The final figures show the evolution of the regional income distribution between 1988 and 2011. The distributions for India and China clearly shift to the right between these two years, as do those for several other regions.

More fundamentally, these figures show that there are very rich people in poor countries and very poor people in rich countries. This point is stressed by Our World in Data, and is the impetus for its companion site Dollar Street (here). Dollar Street contains photographic essays that detail the life styles of families of different incomes and different nationalities. Visitors to Dollar Street use sliders to choose an income range (say, US$250-500 per month) and are then presented with all of the families that fall within this range. They can then see (literally) what that income buys in Vietnam or Brazil or the Ukraine. It is a fascinating project.

  1. The other regions are Latin America and the Caribbean, Europe and Central Asia, and the Middle East and North Africa.
  2. The horizontal axes are logarithmic to obtain a greater dispersion of the data.