The notion of poverty varies by country. Generally speaking,
the richer a country is, the higher is its national poverty
line. To allow for international comparisons, the World
Bank has established an international poverty line of $1
a day per person in 1985 purchasing power parity (PPP) prices.
According to this measure the portion of poor people in
the world's population- those living on less than $1 a day-fell
slightly between 1987 and 1993, from 30 percent to 29 percent.
But the absolute number of poor people increased, from 1.2
billion to 1.3 billion. Another 2 billion are only a little
Most of the world's poor live in South Asia (39 percent),
East Asia (33 percent, mostly in China and Indochina), and
Sub-Saharan Africa (17 percent). South Asia also has the
highest incidence of poverty (43 percent of its population),
followed by Sub-Saharan Africa (39 percent; Figure
6.1). Countries in which more than half the population
lives below the international poverty line include Guatemala,
Guinea-Bissau, India, Kenya, Lesotho, Madagascar, Nepal,
Niger, Senegal, and Zambia (Map 6.1
and Data Table 1).
Analysts have found a strong positive relationship between
growth and poverty reduction. For example,
East Asia (excluding China),which contains the world's fastest-growing
economies, reduced the share of its population living in
poverty from 23 percent in 1987 to less than 14 percent
in 1993. But in Sub-Saharan Africa, where negative growth
of GNP per capita predominated during that period, the incidence
of poverty hardly changed.
Economists generally assume that people's willingness to
save for future consumption grows with their incomes. The
poorer people are, the less they can afford to plan for
the future and save. The same logic applies to businesses
and governments. Thus in poor countries, where most incomes
have to be spent to meet current- often urgent-needs, national
tends to be low. Low saving hinders desperately needed domestic
physical capital and human
capital. Without new investment, an economy's
cannot be increased and incomes cannot be raised. That closes
the vicious circle of poverty (Figure
6.2). So are poor countries doomed to remain poor?
Recent data on gross domestic investment in East Asia suggest
that the answer is no. Despite low initial GNP per capita,
domestic saving and gross
domestic investment in the region were high
and growing until the 1998 financial crisis (Figure
6.3). Experts are still trying to explain this phenomenon.
Generally speaking, however, many of the factors that encourage
people to save and invest are well known, including political
and economic stability, a reliable banking system, and favorable
In addition to domestic investment, foreign investment
can help developing countries break out of the vicious circle
of poverty, particularly if such investment is accompanied
by transfers of advanced technology from developed countries.
The opportunity to benefit from foreign investment and technology
is sometimes referred to as the "advantage of backwardness,"
which should (at least theoretically) enable poor countries
to develop faster than did today's industrial countries.
However, many of the conditions needed to attract foreign
investment to a country are the same as those needed to
stimulate domestic investment.
A favorable investment climate includes many factors that
make investing in one country more profitable and less risky
than in another country. Political stability is one of the
most important of these factors. Both domestic and foreign
investors are discouraged by the threat of political upheaval
and by the prospect of a new regime that might impose punitive
taxes or expropriate capital assets. As a result a country
can fall into another vicious circle, one seen historically
in some Latin American countries (Figure
6.4). Political instability scares away new investments,
which prevents faster economic growth and improvements in
people's economic welfare, causing even more dissatisfaction
with the political regime and increasing political instability.
Falling into this vicious circle of political instability
can seriously impede efforts to boost economic development
and reduce poverty.