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World Bank Forecasts a Rise in Poverty

World Bank Forecasts a Rise in Poverty

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General wealth levels in Eastern Europe and Central Asia have been improving since 2012 — poverty has been decreasing. But due to COVID, global poverty levels, including those of these regions, may increase considerably for the first time in two decades. Samuel Freije-Rodriguez, Lead Economist at World Bank, talked about this at the XXII April Conference organized by HSE University and Sberbank.

In economic terms, poverty refers to the inability to satisfy the basic needs, to sustain a standard of living that is considered acceptable in society. Financial difficulties also impact the individual’s communications, self-perception, and attitudes, Samuel Freije-Rodriguez says. His talk was based on a recent World Bank report, ‘Poverty and Shared Prosperity’.

Samuel Freije-Rodriguez

The borderline between poverty and wealth may differ in different societies: what is considered almost poverty in rich countries can look like a decent standard of living in poor ones.

In order to measure and compare the levels of poverty in different countries, it is necessary to develop indicators that correctly reflect the population’s standards of living. Such calculations often use a fixed amount, which is updated once every few years, such as 1.24 or 1.9 dollars a day in 2008 and 2015, but it is universal for all the countries, even though their standards of living are very different. In some cases, threshold values can be used for groups of countries — low-income, lower than average, higher than average, and high-income. But within groups, there are serious differences.

One of the possible solutions is to link the poverty threshold to the average level of consumption in the country

For example, the World Bank uses the ‘Societal Poverty Line’, which is 1.9 dollars a day for poorest countries and half of the median consumption plus one dollar for countries where this figure is higher than 1.9 dollars a day. This way an individual poverty line can be calculated for each country, while the universal formula allows comparing different countries.

‘There is a national poverty line in Russia, the definition of which changes now and then,’ noted Alexandr Surinov, HSE Director for Statistical Studies and Professor at the Faculty of Economic Sciences, after Samuel Freije-Rodriguez’s presentation. ‘We have to understand that the poverty line is a certain standard of consumption, which is eventually changing upwards. The reason is that the needs are changing and growing. That’s why we should re-visit the lines, but not by introducing brand new methods. This would harm ongoing monitoring studies,’ the Prof. Surinov said.

Alexandr Surinov

This indicator is also not ideal: it takes into account only the financial side of wealth. Economists suggest expanding it by indicators of education and medical accessibility, as well as basic infrastructure, such as water supply, wastewater disposal, and electricity, and as a result, they will get a multidimensional evaluation of poverty.

One more method that is used by economists to assess living standards is to compare changes in income of a country’s poorest citizens. This indicator — shared wealth — is taken from the income growth rates of 40% of a country’s poorest residents and the growth rate of their share in the income of all citizens. It helps assess, on the one hand, the growth in wealth of the poorest citizens, and on the other hand, the decrease of inequality in the country. There is a similar indicator — the Palma Ratio (named after its creator, Jose Gabriel Palma) — which is calculated as a ratio of the sum of incomes of 10% of a country’s richest residents and 40% of its poorest. For most countries, the ratio is from one to three, and only for countries with extremely high inequality does it exceed four.

In Eastern Europe and Central Asia, the level of poverty measured at a threshold of 1.9 dollars per day, has not risen over 10% of the region’s population, though it approached this borderline in 1998 and 1999. In the 2000s, it sharply decreased, and since 2008, the decrease has slowed down.

The Social Poverty Line similarly changed, but in absolute terms, the Eastern European and Central Asian countries appeared to be much closer to the rich countries, with almost no difference from the latter by the late 2010s. In all multidimensional indicators, particularly education accessibility and electricity, this region outperforms all others, including East Asia, South Asia, Latin America, Middle East, North Africa, and Sub-Saharan Africa, with the exception of a group of wealthy countries.

In Russia, the share of people with no access to education is particularly low — 0.2% of the population, which is lower than in Germany, Great Britain, and Norway

The level of extreme poverty has been decreasing globally since the early 1990s, by an average of 55 million people annually, except for 1997-1998, when Asia was struck by financial crisis. According to the report authors, due to COVID, poverty levels may increase considerably for the first time in 20 years. According to the forecast, 31 million people were projected to be lifted out of poverty in 2020, but today, economists expect the global poverty level to increase by 120 million people. The highest increases are expected in South Asia, East Asia, and Sub-Saharan Africa.

In Eastern Europe and Central Asia, 5.1 million people were extremely impoverished, and by 2021, according to economists’ forecasts, this number was supposed to fall to 4.3. The new forecast, however, estimates their number at 5.0-5.3 million. Almost all countries in the region are expecting rising levels of poverty, and this indicator will not return to pre-crisis levels by 2022 or 2023.

The XXII April International Academic Conference on Economics and Social Development will be held from April 13 to 30, 2021. For the first time, the conference is co-organized by HSE University and Sberbank. The programme includes a series of academic and expert discussions that will be held as part of the HSE-Sberbank Discussion Club – an expert platform that brings together academics, business representatives, and public officials to discuss critical economic and social challenges and share best practices in the sphere of business and institutional development, thereby laying out a path to the future.

Shared wealth trends have maintained a positive trajectory in almost all countries of Eastern Europe and Central Asia since 2012, and some of the region’s economies, such as Romania, Estonia, and Latvia, have been among the global leaders by this indicator. The World Bank representatives note that in countries with positive shared wealth dynamics, the level of poverty is lower than in the others. By Palma Ration, Eastern European and Central Asian countries are in the upper half of the list, which means that inequality is less acute there than in the world on average. The exceptions in the region are Turkey, Montenegro, and Russia.

‘It is hard to measure poverty, and the 2020 World Bank report is one of the many attempts to do it. Such methods are good for countries that do not have their own national metrics, and they are needed for international comparison,’ said Alexandr Surinov. ‘That’s why the suggested Social Poverty Line is interesting. We are going to work with it, to see how acceptable it is for Russia, and whether it can be used for regional estimations.’ According to Prof. Surinov, the World Bank’s forecast on global poverty expansion is also interesting, particularly since sustainable development goals pay a lot of attention at poverty elimination. ‘It is interesting to analyse poverty and the pandemic as a modern challenge that has put all of humanity in a difficult situation,’ Alexandr Surinov said.

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