It was decided early last year that the World Bank Group’s mission would be driven by two goals: first, to end extreme poverty in the world by 2030; second, to promote shared prosperity in all economies. Extreme poverty means living on less than $1.25 a day. Because some frictional extreme poverty in the world is unavoidable and a literally zero poverty rate will elude us for several decades, goal one is formally defined as bringing the share of those living below this “poverty line” to 3 per cent or less by 2030.
Some critics argue that $1.25 is too low, unmindful of the fact that one-seventh of the world’s population lives below this line.
The second goal, focused on the economic wellbeing of the poorest segment of each society, aims to promote the growth rate of the income of the poorest 40 per cent of people. It takes the World Bank into “income distributional” matters more frontally than ever before.
Over the past decade or so, in 58 out of the 86 countries for which distributional data was available, the poorest 40 per cent experienced faster income growth than the overall population. Nonetheless, the bottom 40 per cent struggle in poor and rich countries alike – the former for chronic reasons, and the latter as a fallout from the Great Recession.
The shared prosperity goal requires engagement with middle- and high-income countries. Many have focused on setting fiscal policy in the light of the euro zone’s sovereign debt crisis, with polarisation mainly around the “austerity” and “stimulus” schools. This misses out on a nuanced scrutiny of who bears the costs of fiscal adjustment. Most euro zone countries face high public debt/gross domestic product ratios that will have to be curtailed, so we should ask how the ensuing pain will be distributed. Our shared prosperity goal gives a yardstick for evaluating just that.
Low morale
It is true that poverty measured in terms of people living on less than $1.25 a day will be zero for all high-income nations, be it Italy or Ireland. But during the crisis, unemployment rose in these nations and, among the poorest 40 per cent, morale has been low.
Well before the current euro-zone crisis, and with no reference to Ireland, my student, Patrick Nolen, and I had argued in a paper that it is not good enough to measure the aggregate unemployment in a society. We must measure how the aggregate unemployment is shared among the people. As it turns out, the sharing has worsened. In most countries, there has been a tendency for long-term unemployment to rise.
Interestingly, some countries have begun taking steps to specially help this segment. Ireland’s new labour policy initiatives, including the action plan for jobs, are quite exemplary; and there is some evidence that the policy is beginning to pay off. There may be lessons for other high-income countries in this remarkable Irish policy experiment.
‘Demographic dividend’
A part of Ireland’s current challenge has a longer-run root than most people realise. The nation had gained a lot in the 1980s from a rise in the relative size of the working age population or the so-called “demographic dividend”. But this implies that within a few decades of the dividend there would tend to be a rise in the dependency ratio as the working-age population becomes older. This has been visible in Ireland since 2004.
All this implies that Ireland has to tread that fine line whereby it cuts its public debt/GDP ratio, while ensuring it spends enough to have jobs growing. It is popular to think of macroeconomic policy, be it fiscal or monetary, as being large overtures with no micro-distributional implications. This is not true. There are ways to craft these policies so as to improve the sharing of prosperity and burden. That is what the shared prosperity goal is about and it is good to see Ireland pay attention to this in initiatives to promote jobs and innovation, and curtail public debt.
Shared prosperity also has a global dimension. We need to attend to problems in our own nations but, in today’s globalised world, we cannot afford to be absorbed by it. In low-income countries, people live at levels of deprivation often difficult to fathom.
It speaks well of Ireland that, despite having been in an International Monetary Fund programme and grappling with its large debt and unemployment, it has persisted with its international engagement and in terms of aid to GDP ratio ranks among the world’s top 10 nations.
Kaushik Basu is World Bank Group chief economist and senior vice president. He is speaking today at the Institute of International and European Affairs
