On 25–27 September, less than 3 weeks from now, heads of state of 192 nations will sign up for the Sustainable Development Goals (SDGs) which will succeed the Millennium Development Goals (MDGs) as the new global development agenda. Notwithstanding such an important change, poverty eradication will remain the most important goal and Asia expects to continue its dominant role in attaining this goal for the world.
However, the conventional story about Asia’s poverty is misperceived. The proportion of the extremely poor in developing Asia (i.e., Asia’s extreme poverty rate) will drop below 3% by 2030, irrespective of which projections one uses. This means poverty eradication by the technical criterion of the World Bank.
But this widely accepted story overlooks the (in)adequacy of the poverty line used and poverty-related challenges, such as rising vulnerability, food insecurity, and inequality. When these issues are considered, Asia’s poverty story has a different ending: extreme poverty will remain prevalent even beyond 2030.
The old story
Asia has made remarkable progress in poverty reduction: the extreme poverty rate declined from 54.7% in 1990 to 20.8% in 2010, lifting 745 million Asians out of poverty as measured by the $1.25 poverty line. Without Asia, the world would not have attained its first target of the Millennium Development Goals—halving extreme poverty—ahead of the 2015 deadline.
East Asia (principally the People’s Republic of China [PRC]) played the most important role in reducing regional poverty: its poverty rate fell by 48.6 percentage points between 1990 and 2010. Other sub-regions also contributed: the drop in the extreme poverty rate was 39.4 percentage points for Central and West Asia, 31.0 percentage points for Southeast Asia, 19.8 percentage points for South Asia, and 10.9 percentage points for the Pacific.
Extrapolating from these trends and under different scenarios, Asia’s $1.25 poverty rate would decline to around 5.8% in 2020 and 1.4% in 2030, meaning that extreme poverty could be “eradicated” (below 3% poverty rate) by 2025.
The untold side of Asia’s poverty story
However, the old story is misperceived. Four basic elements affecting Asia’s poor make the $1.25 poverty line inadequate: (i) updated data specific to Asia’s poor; (ii) the impact of rising costs associated with food insecurity; (iii) the adverse effects of rising inequality on the poor across much of Asia; and (iv) the region’s increasing vulnerability to natural disasters, climate change, economic crises, and other shocks.
Higher poverty rate at regional poverty line of $1.51
An estimated regional poverty line for Asia of $1.51 increases the region’s extreme poor by almost 350 million. For Asia as a region—and for many individual economies—the $1.25 poverty line is inappropriate. It was the simple average of national poverty lines from the world’s 15 poorest countries—only 2 from Asia (Tajikistan and Nepal)—and based on 1988–2005 data.
As is known, the poverty line measures the cost of basic consumption needs. But consumption needs and patterns vary by region and change over time. In fact, Asian countries—including the PRC and India—adjust their national poverty lines to make them more relevant for policy-making.
Applying the same methodology for deriving the $1.25 poverty line to updated data from Asia only, an estimate for the regional extreme poverty line was $1.51 in 2005 purchasing power parity terms. Under the $1.51 poverty line, Asia’s poverty rate in 2010 rises by 9.8 percentage points—from 20.7% to 30.5%, implying 343.20 million more poor. More specifically, India’s poverty rate rises by 15.0 percentage points, Indonesia’s by 9.9 percentage points, and the PRC’s by 4.9 percentage points.
Effect of fast rising food prices on regional poverty
Considering the impact of food insecurity, Asia’s 2010 extreme poverty rate rises by 4.0 percentage points. Food prices often rise due to both supply and demand factors. On the supply side, rapid growth and unprecedented urbanization continue to absorb arable land for food production; extreme weather, water shortages, and land degradation cut into yields; and rising ethanol production restricts food supply.
On the demand side, population expansion and rising incomes increase both the quantity and quality of food consumed, with higher quality food using up more resources. From 2000–2012, the global food price increased by an average of about 7.4% a year.
With some variations, developing Asia’s food consumer price index (CPI) increased faster than general CPI for most countries in most years, both before and after the 2008 food crisis. The difference was largest in the PRC and Indonesia, for example, while in India it remained small due to government interventions.
Rising food prices adversely affect the poor to a greater degree because most of their spending is on food. In some cases, food insecurity threatens the very survival of the poor, particularly the landless and urban poor. Adjusting poverty lines by the food CPI instead of the general CPI when the latter is smaller raises Asia’s 2010 extreme poverty rate by 4.0 percentage points, an addition of 140.52 million poor.
Impact of growing inequality on regional poverty
Incorporating rising inequality increases Asia’s 2010 extreme poverty rate by 4.3 percentage points. Asia’s rapid economic growth has been accompanied by rising inequality, with 80% of Asia’s population living in countries with widening income gaps—including the three most populous: the PRC, India, and Indonesia.
Rising inequality can damage political stability, create social tension, breed crime, and, particularly for the poor, affect health and erode educational opportunities, among others. Income can mitigate some of these effects. Therefore, factoring inequality into poverty analysis is necessary to compensate for what the poor need to maintain their welfare.
Using inequality-adjusted poverty lines increases Asia’s 2010 extreme poverty rate from 20.7% to 25.0%, adding 149.81 million to the number of extreme poor.
Effect of increasing vulnerability on regional poverty
Accounting for vulnerability to risks such as natural disasters, climate change, illness, and economic crises raises Asia’s 2010 extreme poverty rate by 11.9 percentage points. Asia—especially East, South, and Southeast Asia—has become more vulnerable to natural calamities in terms of frequency and severity. For example, the region is home to seven of the world’s ten most vulnerable countries. In addition, as one of the most globalized regions, trans-border economic shocks are seriously affecting Asia.
Poor and low-income households are particularly vulnerable to these shocks. Those living above the $1.25 poverty line but must face these risks are not necessarily better off than those receiving $1.25 with certainty. Thus, it is necessary to add a risk premium to the $1.25 poverty line. The resultant vulnerability-adjusted poverty line added about 11.9 percentage points to Asia’s poverty rate in 2010, implying a further 417.99 million considered extremely poor.
Using the $1.51 poverty line and combining the effects of food insecurity, inequality, and vulnerability would change Asia’s picture dramatically: the regional poverty rate would rise by 35.0 percentage points, from 20.7% to 55.7%. More dramatically, the numbers of extremely poor would more than double: from the commonly known 2010 figure of 733.06 million to 1,967.53 million.
Assuming the past growth trend in Asia continues, the overall poverty rate would fall from 55.7% in 2010 to 23.3% in 2030. However, the growth trend looks increasingly difficult to maintain, especially with the significant slowdown in the PRC. Thus, poverty reduction will continue to be a significant challenge in Asia for decades to come, and reducing extreme poverty will require policy actions that address food insecurity, inequality, and vulnerability—not just economic growth.