We risk a lost decade for the world’s poor
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The proportion of human beings living on the margin of subsistence is estimated to have fallen from close to 80 per cent in 1820 to just under 10 per cent in 2018. What makes this decline even more remarkable is that the global population rose from 1bn in 1820 to 7.7bn in 2018. Rising prosperity has also helped double global life expectancy to 71 years. In brief, we have moved from a world in which life was, for the great majority, indeed “nasty, brutish, and short” to something altogether better.
As recently as 1970, the rate of “extreme poverty” was still 50 per cent. This extraordinarily rapid recent reduction in the proportion of people living in extreme poverty is due to the huge progress in the much reviled age of economic globalisation. I will never regret this achievement. It shows that the combination of global economic opportunity with external assistance worked. A crucial source of the latter has been credits from the International Development Association. Contrary to what many feared, ending extreme poverty was not like trying to fill a “bottomless pit”.
As a recent report from the World Bank, The Great Reversal, notes, South Korea, China and India were once beneficiaries of IDA credits: 60 years ago, IDA was even informally known as the “Indian Development Association”. Progress has been remarkable and still is: life expectancy in IDA countries rose from 58 to 65 years between 2000 and 2021. The elimination of extreme poverty from our planet is at last in sight. Yet, alas, this report’s very title tells us that this is not what is happening. The shocks of the last few years have been devastating for the world’s most vulnerable people.
Since the pandemic, average incomes per head in half of the 75 IDA countries have been growing more slowly than those of high-income economies. One out of three IDA countries is actually poorer, on average, than on the eve of the Covid-19 pandemic. Why does this matter? The answer is that just under a quarter of the world’s population, but 70 per cent of the world’s poorest people, live in the 75 IDA countries, which produce a mere 3 per cent of global output. It is in these countries that the battle to eliminate extreme poverty from the world will be won, or lost. Today, it is being lost. The succession of recent shocks — Covid, post-Covid inflation, war-induced spikes in energy and food prices and rising interest rates — has already had dire effects.
But, worse, there is a risk that the weak trajectory of recent years will become embedded in these politically, socially, economically and environmentally fragile countries, creating a lost decade, or perhaps something even worse. This threat is particularly severe in sub-Saharan Africa. Its realisation would be a human disaster, one that would also threaten turmoil far beyond the directly affected countries.
Among the salient weaknesses of IDA countries are those of finance. Mobilisation of domestic resources is extremely hard for impoverished countries, with relatively huge informal sectors (typically more than a third of the economy), undeveloped financial sectors, high dependence on unstable earnings from commodity exports, chronic shortages of foreign currency and weak and often corrupt administrations. As a result, they have come to depend on foreign lending. But, inevitably, they are also viewed as risky, which greatly increases the cost of borrowing. That in turn increases the likelihood of debt distress and default.
This turns high spreads into a self-fulfilling prophecy, vindicating the scepticism of the lenders. Not surprisingly, after all the recent shocks, net interest payments as a share of fiscal revenues have increased in IDA countries more rapidly than in other emerging and developing countries. Today, alas, about half of IDA countries are in, or at high risk of, debt distress. It was precisely to offer a way out of such a vicious circle of inadequate resources, domestic and external, that IDA was created, with such successful results. Today’s IDA countries need huge increases in investment if they are to accelerate growth and exploit the new energy technologies. These funds will not come from private sources in the immediate future. A substantial increase in ultra-low cost foreign official credit will be needed, instead.
Key to achieving this will be rapid resolution of overhangs of today’s unaffordable debts and a huge increase in IDA resources. The next replenishment, IDA21, is due to be completed in December 2024. As Ajay Banga, World Bank president, said in a speech in Zanzibar at the end of last year, “The truth is we are pushing the limits of this important concessional resource and no amount of creative financial engineering will compensate for the fact that we need more funding. This must drive each of us to make the next replenishment of IDA the largest of all time.” He was correct.
The World Bank report shows the urgency but also the potential returns on such a big replenishment. The last replenishment, in 2021, was for $93bn over 2022-25. This may seem a large sum. But it was to cover three fiscal years and amounted to a mere 0.03 per cent of annual global GDP of some $100tn. In the current crisis for the world’s poorest countries, it is essential, morally right and clearly affordable to increase this sum substantially. Not doing so would truly be unaffordable.
When I worked in the World Bank in the 1970s, the goal of eliminating extreme poverty from the world, promulgated by then president Robert McNamara, seemed unrealistic to many. Today, it is within our grasp. A run of calamities is now threatening unnecessary failure when success is so near. We must not accept this.
martin.wolf@ft.com
