Editor's Note: This is a chapter from "The Last Mile in Ending Extreme Poverty," which explores the challenges and steps needed to end extreme poverty.
In 1990 approximately half of the population in the developing world lived on less than US$1.25 a day. By 2010 some 700 million people had been lifted out of poverty, dropping that rate to 22 percent, and fulfilling the first Millennium Development Goal of cutting extreme poverty in half (UN 2014). Still, a billion people continue to live below the $1.25-a-day line, and achieving the “last mile” in eradicating poverty will require a different set of instruments, institutions, and policy regimes than has been commonly used.
This chapter argues that, although much progress against extreme poverty in low- and middle-income countries has been accomplished through so-called inclusive growth, the elimination of consumption-based poverty will require greater attention to the political economy of social protection in developing nations. Since the 1990s, increases in labor-based income have been responsible for most of the achievement in poverty reduction. But for the large middle- income countries (where most of the world’s extreme poor currently live), evidence suggests that the effect of labor income on consumption will hereafter diminish considerably, with the poorest individuals remaining vulnerable to a variety of shocks, thus requiring a more effective social floor below which they cannot fall. In middle-income countries, it may be that growth has lifted all the poor out of extreme poverty who can be lifted; for the rest, social policy will be needed.
What kind of social policy mix is needed? While it is technically possible to devise precise, leakage-free, redistributive mechanisms that can raise consumption among the extreme poor and protect those on the edge of poverty, the political reality is that critical support among the nonpoor for these types of schemes is the lowest where it is needed most, namely, in countries with large populations of extreme poor. Consequently, if these countries continue their typical policy mix of “inclusive” growth strategies combined with targeted transfer programs, movement along the last mile will be slow. Instead, the last mile in poverty reduction is more likely to be sustainable through comprehensive, even universal, social policies in which the nonpoor are included.
By 2030, however, most of the world’s extreme poor will live in fragile states, many of which are low-income countries. In these countries, of course, there remains much mileage to be gained from growth. However, reforms to social policies in these countries also have their place. Here the challenge is to weave together the various strands of highly fragmentary antipoverty programs into more uniform, effective systems of social protection that preserve cohesion.
Much of this chapter draws upon the history of poverty reduction and social policy reform in advanced, industrialized economies. Of course, countries in the developing world have followed different trajectories—with respect to the timing of industrialization, reliance on service sectors, and the role of the state in the economy in the context of postcolonial development. This chapter argues, however, that the mechanisms by which extreme poverty was reduced in richer countries when those countries were much poorer—through “welfare states” financed through a tax system in which all citizens held a stake, but that also reduced the multiple vulnerabilities faced by the poor—apply with equal force in developing countries today. From Brazil to India to sub-Saharan Africa one already sees hints of these historic forces at work: a long-undermined commitment to the tax system; middle-class resentments against corruption and poor service delivery; and a political awakening that has upended long-lived alliances between ruling elites and particular constituencies in which the middle classes are sidelined. Indeed, the process of welfare-state building—much like state building itself—has not been a peaceful one. In Western Europe and in the United States in the nineteenth and early twentieth centuries, it was characterized by social unrest, political extremism, and economic turmoil. Whether countries where the extreme poor live can develop durable institutions of social protection will depend on a number of factors, including the broader macroeconomic environment, the effect of globalization on the types of risks countries face, the establishment of domestic political alliances between the poor and the nonpoor, and the ability of aid recipients to temper the strong preference for targeting among the donor community.
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