The World is Winning, Not Losing, the War on Poverty

"Globalization is failing the poor." Who ever doubts this? In this era of market-driven growth, which began after 1945 and accelerated after 1980, the rich are getting richer and the poor poorer—isn't that right? International development agencies, especially those attached to the United Nations, are zealous about celebrating this bad news, and the media cannot get enough of it. Even people who believe in globalization seem to acknowledge that much of the world is moving backward on poverty and inequality, and either apologize for it or try to distract attention from it. Very few of them ever dare question this assumption.

Western governments, however dedicated they may claim to be to the cause of global economic integration, seem equally embarrassed by the record on poverty and inequality. There's only one I know of that goes out of its way to confront the subject—the government of Australia. I have just been reading one of a series of refreshingly combative papers on the merits of globalization by economists in Australia's Treasury Department. Europe could do with a few civil servants like this. America could too.

First of all, the Australians document the litany on globalism. "The time has come to write the obituary of globalism as an economic doctrine that purports to bring progress and development to international society. It has failed. The special United Nations General Assembly session in Geneva last week concluded that poverty, inequality, and insecurity have increased in the world since globalism was launched." That admirably definitive verdict appeared in the International Herald Tribune, not the most sensationalist of newspapers, in 2000. One could find countless such quotations, before and since, in equally respected publications around the world.

For this is, after all, the official view. Here is an especially oft-quoted finding on the matter, from the United Nations Development Program in 1999: "The distance between the richest and poorest country was about 3-to-1 in 1820, 11-to-1 in 1913, 35-to-1 in 1950, 44-to-1 in 1973 and 72-to-1 in 1992." Here is another statistic, which probably runs that one a close second in popularity, from the same authoritative source: "By the late 1990s, the fifth of the world's people living in the highest-income countries had 86 percent of the world GDP—the bottom fifth just 1 percent."

This suspected failure on worldwide poverty and inequality fuels much of the hostility to globalization and to the pro-market economic reforms that have gained ground across the world since the late 1970s. It has featured prominently since September 11, 2001, as an explanation for hostility in the Third World to the West in general and to the United States in particular. Even if these supposed facts on poverty and inequality were true, many of the conclusions being drawn from them might still of course be false. But the remarkable thing, given the way this picture of worsening poverty and inequality is so relentlessly peddled, is that it is not true.

The great moral failure of globalization is a myth. Difficult though these things are to measure, it is becoming increasingly clear that global poverty is falling and global inequality is narrowing. To go to the data and draw the opposite conclusion requires either statistical naivete or ideological dedication. (Obviously, many commentators have plenty of both.)

The Australian economists explain why, to begin with, you need to ignore all those comparisons of the "gap between richest and poorest": They are always grossly misleading. The main problem is that the richest and poorest countries keep changing, so the comparison is not like with like. The poorest country one year will typically not be the poorest country 10 years later; by then, it will have moved off the bottom rung, but this improvement is screened out by the comparison. The top slot changes too, so the pace of improvement at that end is correspondingly exaggerated. Also, the poorest country or countries in the world each year will usually be the ones hit hardest by temporary crises such as wars, natural disasters, or collapsing political systems—together with the economic privations they bring. If you are interested in global inequality and its trends, it is necessary to look at broader and more consistent sets of information.

Comparing income shares for the fifth of the world's population living in the richest countries and the fifth living in the poorest countries makes better sense—but here, too, it is easy to be misled. The figures behind that 86-to-1 ratio are based on market exchange rates. This is a distorted basis of comparison, because the cost of living varies enormously from country to country, especially when you compare rich countries with poor ones.

Income shares need to be calculated on the basis of "purchasing power parity" (PPP), which allows for these differences. It means that you are comparing not dollar incomes in the United States and in China, say, but the local purchasing power of those incomes. Using PPP, the 20 percent of the world's people living in the richest countries accounted for between 60 and 65 percent of global income in the late 1990s, not 86 percent, and the 20 percent living in the poorest countries accounted for about 5 percent, not 1 percent. So the ratio between the two shares was 13-to-1, not 86-to-1. In 1968, by the way, the corresponding ratio calculated on the same basis was 15-to-1—so, possibly for the first time in history, global inequality declined in the three decades to the late 1990s.

What about the absolute number of people living in poverty? The official figures show that the number of people living on less than a dollar a day (in 1993 PPP terms, the standard benchmark) has been about steady in recent years at 1.2 billion. However, as the Australians point out, global population is growing by about 70 million a year, mostly in poor countries. Against that background, it is quite an achievement just to hold the head count of poverty steady. And an obvious consequence of rising population, given that the poverty head count is stable, is that the proportion of the world's people living in poverty is falling fast: from 29 percent at the start of the decade to 24 percent by the end. By historical standards, all of this is no failure: It is an entirely unprecedented success.

These radically different conclusions follow from looking disinterestedly at exactly the same data (provided by the World Bank) used by the professional pessimists at the UNDP. If the Australians were now to look at the most recent research, they would find that their optimism may be even better grounded than they think.

In recent months, Columbia University's Xavier Sala-i-Martin has circulated two papers on the global distribution of income. He questions the methods used to work out the official data, and comes up with a new approach. To this unqualified observer, his method seems better. And what amazing results those changes yield. He finds that the number of people living on less than a dollar a day is much smaller than the World Bank believes: about 350 million, not 1.2 billion. More important, you might argue, is the finding that this figure is not static, it is falling: Sala-i-Martin reckons that the global poverty head count has dropped by more than 200 million in the past 20 years.

And he is not alone. The Institute for International Economics has just published a new book by Surjit Bhalla, a former World Bank economist now based in New Delhi, India. Bhalla, too, takes a fresh look at the global poverty data, drawing on his expertise in estimating poverty rates in India. His approach is different from Sala-i-Martin's, so his results can be regarded as another independent estimate. He also finds that global poverty is much lower than the World Bank estimate. And, also like Sala-i-Martin, he finds that the number of people in poverty has been falling rapidly in the past 20 years, with correspondingly dramatic reductions in the proportion of the world's population who are poor.

This new research by no means settles the matter. It is proving bitterly controversial. But even if you do not regard it as proof that globalization is defeating poverty, it surely confirms that the UNDP's bleak worldview needs to be questioned—although that much should have been clear on the basis of the UNDP's figures alone. The fact that the UNDP is wrong does not mean that global poverty is no longer a pressing problem, or that the West should not be trying hard to reduce poverty in the developing countries even faster. All it means is that the problem is tractable and shows signs of yielding to the forces of globalization. Shouldn't the development agencies be encouraged by that?