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AT A GLANCE:

• New estimates by the World Bank show about 1.4 billion people living below the international poverty line of US$1.25 a day in 2005¹—Estimates by the World Bank show about 1.4 billion people living below the international poverty line of US$1.25 a day in 2005 —equivalent to more than one fourth of the developing world's population. Poverty incidence declined from 52 percent of the global population in 1981 to 42 percent in 1990 and 25 percent in 2005.
  
  
• Strong economic growth in the developing countries in the past decade had put the Millennium Development Goal (MDG) for poverty reduction within reach at the global level, but the triple punch of the food, fuel, and financial crises creates new risks for achieving the goal of halving extreme poverty.
  
  
• The slowdown in economic growth in 2009, compared with what was expected before the financial crisis, is expected to result in about 50 million fewer people escaping poverty in the developing world, when poverty is defined by the international poverty line of US$1.25 a day; at $2 a day, the number rises to 64 million.
  
  

Poverty: Current Estimates and Outlook
 
Between 1981 and 2005, the share of the population in the developing world living below US$1.25 a day was halved from 52 percent to 25 percent. This resulted in a trend decline of one percentage point per year in the aggregate poverty rate, reducing the number of poor by 500 million (from 1.9 billion to 1.4 billion) between 1981 and 2005.²  As a result, as of mid-2008, the developing world as a whole was on track for attaining the first MDG of halving the 1990 poverty rate by 2015. However, that projection may now be imperiled in the wake of the financial crisis.

Global real GDP growth projected to slow down from 3.7 percent in 2007 to 1.9 percent in 2008 and to contract to -1.7 percent in 2009.³  The slowdown in growth in 2009, compared with what was expected before the financial crisis, is expected to result in about 50 million fewer people escaping poverty in the developing world, using the benchmark of the international poverty line of US$1.25 a day; at $2 a day, the number rises to 64 million. These impact estimates are relative to the pre-crisis trajectories. The aggregate $1.25 a day poverty rate will fall from 19 percent in the “pre-crisis” year of 2008 to 18 percent (1.04 billion) in 2009; the pre-crisis growth trajectory for 2009 would have instead brought the poverty rate down to 17 percent (987 million).

The decline in poverty between 1981 and 2005 varied considerably across regions. Led by China, the East Asia and the Pacific Region made dramatic progress, with poverty incidence dropping from78 percent to 17 percent, using the US$1.25 a day poverty line at 2005 prices. At the other extreme is Sub-Saharan Africa with a poverty rate of 51 percent in 2005—not much lower than in 1981. The poverty rate went down in South Asia, Latin America and the Caribbean (LAC), and Middle East and North Africa during the same period, although the number of poor has remained static (Figures 1 and 2). A less frugal standard of US$2 per person per day is more appropriate for regions such as Latin America and Eastern Europe. The share of global population living below US$2 a day (at 2005 prices) fell from 70 percent in 1981 to 47 percent in 2005, while the number of people below this line remained unchanged at around 2.5 billion.

Figure 1. Poverty incidence at US$1.25 or less a day 1981-2005

Figure 2. Poverty rates for the developing world 1981-2005

The Financial Crisis and Poverty
The nature and magnitude of the impacts of the financial crisis are expected to vary both between and across countries. The poverty impacts are likely to be caused by a combination of three main factors: (i) falling income levels; (ii) limited and already stressed coping strategies among vulnerable households due to the food- and fuel-price crisis; and (iii) inadequate safety nets. The most immediate and direct effects are expected to be on household incomes, including both labor and non-labor income.

Changes in labor income can occur through shocks to both employment and earnings. At the outset, those employed in export-oriented sectors, construction, and manufacturing are likely to be most affected, due to reductions in global demand for exports and foreign direct investment. Anecdotal evidence from some developing countries has emerged suggesting large employment losses and reduced earnings in export-led manufacturing sectors. For example, massive layoffs have been reported in India in certain sectors (like diamond polishing) and a movement towards less secure contracts in other sectors (textile/garments). In Cambodia, the garment manufacturing sector for export and construction lost 45,000 and 60,000 jobs, respectively, by the end of 2008. In the medium-term, the impacts are likely to spread to other, lower-paying sectors, as the entry of excess labor from manufacturing sectors into these sectors erode earnings of existing workers. Estimates suggest that during the 1997 Asian crisis, some 30 percent-40 percent of displaced urban workers moved to agriculture.⁴ 

Declining commodity prices can have a major impact on labor income, particularly in developing countries that rely on commodity exports for growth and employment generation. For example, in Zambia a quarter of miners lost their jobs in 2008, and the prices of Mongolia’s main export commodities dropped by close to or above 50 percent, leading to income losses and a rise in unemployment.

Declining migration outflows due to a growth slowdown in high- and middle-income countries could have a serious impact on poverty in countries dependent on external remittances as a source of non-labor income. For example, remittances to the LAC region are expected to fall by around 4 percent on average, which may lead to an estimated 125,000 and 68,000 additional poor in Guatemala and Honduras, respectively.⁵ Worsening labor markets in urban areas may also lead to fall in domestic remittances and reversal in internal migration trends. An estimated 20 million rural migrants have become unemployed in urban areas in China, leading to an increase in the number of urban-to-rural migrants from 4.5 million in early November 2008 to more than 10 million in late December. ⁶

In addition to its impact on income poverty, the crisis may also slow down the progress in human development in a number of countries, due to the combination of falling incomes, lower capacity for human capital accumulation, and limited coping mechanisms. Rising fiscal pressures in poor countries, particularly those heavily dependent on exports, may also lead to cutbacks in public expenditures on basic services. Recent estimates suggest that Bolivia and Nicaragua, for example, are likely to substantially fall short of meeting their MDGs in primary school completion, child and maternal mortality, and access to drinking water and sanitation.⁷ 

Fighting Poverty

At the heart of the Bank’s work in more than 100 countries is the focus on poverty reduction. Beyond causing hunger and malnutrition, poverty makes people vulnerable to shocks such as the financial crisis, climate change, and natural disasters. The Bank seeks to reduce poverty by supporting the design and implementation of nationally owned poverty reduction strategies through a variety of analytical and lending instruments.

These aim to expand growth opportunities, reduce vulnerability to shocks, and improve access of the poor to basic services and productive opportunities. With less than a decade to 2015, achieving the global goals is a significant challenge that has been made harder by the financial crisis. The impacts of the food, fuel, and the ongoing financial crises have underscored the importance of safety net and labor market policies and institutions in protecting the vulnerable and facilitating recovery in employment and incomes when GDP growth eventually rebounds.

Country-led Development Strategies
In order to be effective, efforts to scale up the development process must be anchored in country-led development strategies. Framed against a long-term development vision, these strategies set medium-term targets for progress toward the MDGs and related development outcomes. They also define clear national plans and priorities for achieving those targets, linking policy agendas to medium-term fiscal frameworks. As of July 2009, 67 low- and lower-middle income countries had prepared Poverty Reduction Strategies. The Bank aligns its activities to these national plans through its Country Assistance Strategies, which help development partners streamline poverty reduction efforts. Significant recent examples of working with development partners are the Bank’s close collaboration with United Nations agencies on a common strategy to confront the food crisis and coordination with other global financial institutions (such as the IMF) in assisting countries hit hard by the financial crisis.

For more information on poverty, see: www.worldbank.org/poverty and for the latest poverty research, see http://econ.worldbank.org/programs/poverty.

Media Contact:
Alejandra Viveros
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Email: aviveros@worldbank.org

Merrell Tuck
Tel: (202) 473-9516
Email: mtuckprimdahl@worldbank.org

Updated August 2009