COVID-19 marked the end of a phase of global progress in poverty reduction. During the three decades that preceded its arrival, more than 1 billion people escaped extreme poverty. The incomes of the poorest nations gained ground.
By 2015, the global extreme-poverty rate had been cut by more than half. Since then, poverty reduction has slowed in tandem with subdued global economic growth. The economic upheavals brought on by COVID-19 and later the war in Ukraine produced an outright reversal in progress. It became clear that the global goal of ending extreme poverty by 2030 would not be achieved. Given current trends, 574 million people—nearly 7 percent of the world’s population—will still be living on less than US$2.15 a day in 2030, with most in Africa.
In 2020 alone, the number of people living below the extreme poverty line rose by over 70 million. That is the largest one-year increase since global poverty monitoring began in 1990. Looking at poverty more broadly, nearly half the world—over 3 billion people—lives on less than US$6.85 per day, which is the average of the national poverty lines of upper-middle-income countries. Using that measure, poverty persists well beyond Africa. The prevalence and persistence of poverty darken the outlook for billions of people living around the world.
The data confirm that the income losses of the poorest 40 percent of world’s population were twice as high as those of the richest 20 percent. Global median income declined by 4 percent in 2020—the first decline since our measurements of median income began in 1990. This decline represents a major setback for the goal of shared prosperity. The poorest also suffered disproportionate setbacks in education and health, with massive learning losses and shortened lifespans. These setbacks, if left unaddressed by policy action, will have lasting consequences for people’s lifetime income prospects and for development more broadly.
This latest Poverty and Shared Prosperity report offers the first comprehensive look at the global landscape of poverty in the aftermath of COVID-19 and the war in Ukraine. It outlines the limits of current fiscal policies for poverty reduction in low- and lower-middle-income economies, and points to the importance of reviving economic growth. It also shows the potential of fiscal policy reforms to help reduce poverty and support broad-based growth and development.
Strong fiscal policy measures made a notable difference in reducing COVID-19’s impact on poverty. In fact, the average poverty rate in developing economies would have been 2.4 percentage points higher without a fiscal response. Yet government spending proved far more beneficial to poverty reduction in the wealthiest countries, which generally managed to fully offset COVID-19’s impact on poverty through fiscal policy and other emergency support measures. Developing economies had fewer resources and therefore spent less and achieved less: upper-middle-income economies offset just 50 percent of the poverty impact, and low- and lower-middle-income economies offset barely a quarter of the impact.
The rise in poverty in poorer countries reflects economies that are more informal, social protection systems that are weaker, and financial systems that are less developed. Yet several developing economies achieved notable successes during COVID-19. Helped by digital cash transfers, India managed to provide food or cash support to a remarkable 85 percent of rural households and 69 percent of urban households. South Africa initiated its biggest expansion of the social safety net in a generation, spending US$6 billion on poverty relief that benefited nearly 29 million people. And Brazil managed to reduce extreme poverty in 2020 despite an economic contraction, primarily using a family-based digital cash-transfer system.
In short, fiscal policy—prudently used and considering the initial country conditions in terms of fiscal space—does offer opportunities for policy makers in developing economies to step up the fight against poverty and inequality. To realize the potential of fiscal measures, the report calls for action on three fronts:
- Choose targeted cash transfers instead of broad subsidies. Half of all spending on energy subsidies in low- and middle-income economies went to the richest 20 percent of the population, who also happen to consume more energy. Targeted cash transfers are a far more effective mechanism for supporting poor and vulnerable groups: more than 60 percent of spending on cash transfers goes to the bottom 40 percent. Cash transfers also have a larger impact on income growth than subsidies.
- Prioritize public spending for long-term growth. COVID-19 has underlined how progress achieved over decades can vanish suddenly. High-return investments in education, research and development, and infrastructure projects should be made now. Governments need to improve their preparation for the next crisis. They also should improve the efficiency of their spending. Better procurement processes and incentives for public sector managers can boost both the quality and efficiency of government spending.
- Mobilize tax revenues without hurting the poor. This can be done by introducing property taxes, broadening the base of personal and corporate income taxes, and reducing regressive tax exemptions. If indirect taxes need to be raised, their design should minimize economic distortions and negative distributional impacts, and they should be accompanied with targeted cash transfers protecting the incomes of the most vulnerable households.
Restoring progress in poverty reduction is possible when helped by strong and broad-based economic growth—not only in the poorest economies but in middle-income economies as well. The policy reforms outlined in this report can help in achieving the necessary course corrections, recognizing that it will likely require stronger global growth and focused policy adjustments.
World Bank Group