I disagree that anyone’s primary goal should be to end extreme poverty, defined as living on less than $2.15 per day. The threshold is completely arbitrary. Nothing special happens at reaching $2.16 and we should not act as though it does. Even if we shifted everyone in Sub-Saharan Africa up to $2.16 per day, that would not be a satisfactory situation. Many people above the extreme poverty line are still in serious poverty. I think the goal should be to increase living standards across the board in poor countries, i.e. we need to increase economic growth in poor countries. Direct cash transfers are not plausibly among the top ways to increase economic growth in poor countries. The main predictor of extreme poverty rates in a country is the median income of that country. No country has ever eliminated extreme poverty through cash transfers. The main driver has always been broad-based economic growth, which is primarily driven by changes in economic policy, not by direct aid.
If we abandon the goal of minimising extreme poverty, then I think it becomes clear that direct cash transfers are not the best way to improve the living standards of people in developing countries. Around $200 billion is spent on international aid each year, about $550 million per day. Around 690 million people are in extreme poverty. If we assume that all of the people in extreme poverty are on $1 per day and we spent all international development aid on cash transfers to the extreme poor, then we could increase the income of all of the extreme poor by around $1.25 per day. This would eliminate extreme poverty. However, it would also increase the income of the extreme poor to $2.25 per day. I don’t think this is an outcome we should be at all happy with, and I think it would be a misuse of resources.
Responding below, much of which are direct quotes from the original post.
Eradicating extreme poverty is not a high bar, it’s actually the lowest and one very much worth clearing.
The $2.15/day threshold is not “completely arbitrary.” It’s set by the World Bank, is an estimate of what a person needs to afford a basic basket of goods including food, clothing, and shelter. It’s a rough measure of how many live in unacceptable deprivation in our wealthy world.
While this metric is limited, it’s also quite descriptive. The many symptoms of poverty – disease, starvation, education deprivation, psychological suffering – are improved when a family is less monetarily poor, and further still when their whole community is less poor.
Cash transfers have been shown to grow the wider economy
As cash transfers are spent by recipients, the cash multiplies. Research finds that because people spend this money locally buying goods, starting businesses, visiting clinics, or going to school, the local economy can grow by as much as 2.5x what you give. In effect, the money you give grows the entire economy.
Researchers also found minimal inflationary effects: “Average price inflation is 0.1%, and even during periods with the largest transfers, estimated price effects are less than 1%.”
Many countries use cash transfers to eliminate extreme poverty, which economic growth alone will not solve. (more here)
Cash transfers alone will not eradicate extreme poverty, as countries also need essential public goods like access to healthcare, well-maintained infrastructure, and dependable institutions to foster a thriving economy. However, cash transfers are still needed to help people take full advantage of these resources.
Take Rwanda as an example:
Over the past three decades, Rwanda has maintained peace and security, with the GDP growing annually by 5-10%.
The government has invested in education and healthcare, providing subsidies to make them widely accessible.
Despite these commendable strides, over half of Rwandans still live in extreme poverty.
This is why Rwanda is now using cash transfers as part of their social safety net to help their poorest citizens take full advantage of these other opportunities.
Even China, widely recognized for its economic growth and poverty reduction efforts, is using cash transfers to lift the final ~1% of their population out of extreme poverty. For more on why we should not expect extreme poverty to “solve itself” overtime through economic growth alone, read here.
I don’t agree that the threshold is not completely arbitrary. I agree that it is set by the World Bank, but I don’t agree that means it is not arbitrary. If everyone in the world lived on $2.16 per day, I don’t think we would have reduced what you call “unacceptable deprivation” to zero, I think the world would be in dire straits.
Pretty much all measures of wellbeing, subjective and objective, increase at exactlythesameratethroughout the whole of the income distribution. Drawing an extremely low line and defining everything below that line as the problem is therefore a mistake. I agree that the symptoms of poverty decrease when people are less monetarily poor, but I don’t think that counts in favour of using life below $2.15 per day as the measure of poverty.
It is not plausible that cash transfers are the top 100 (or 1,000) ways to reduce extreme poverty in poor countries. One piece of evidence for this is historical: for all countries that have ever eliminated extreme poverty, the things that caused that were never cash transfers. Rather, they were usually caused by changes in economic policy.
On the example of Rwanda. GDP per capita in Rwanda is around $960 per person, or around $2.60 per day. You say that “Despite these commendable strides, over half of Rwandans still live in extreme poverty.” Since the average income is $2.60 per day, it is not surprising that more than half of the population lives on less than $2.15 per day. This is an argument for the necessity of economic growth, not an argument for cash transfers.
Taking your example of China. The thing that caused China to massively reduce extreme poverty was economic liberalisation under Deng, e.g. agricultural liberalisation, international trade etc. Even if they are now, as a middle income country, using cash transfers to reduce extreme poverty, that is not an argument for the claim that in poor countries cash transfers will be more effective than changes in economic policy in reducing extreme poverty, on the current margin. China is the most striking counterexample to that claim in history.
“Many countries use cash transfers to eliminate extreme poverty, which economic growth alone will not solve.” “we should not expect extreme poverty to “solve itself” overtime through economic growth”
Empirically, this is not correct. The median income in a country ~completely explains levels of extreme poverty in that country. Increasing median income is empirically necessary and sufficient for the elimination of extreme poverty. Very nearly all of the observed variation in extreme poverty rates, on any poverty line, is explained by median income—the R^2 is above 0.98 (Pritchett 2019)
Thanks John for this insightful set of comments I have enjoyed them immensely.
The $2.15 per day threshold is arbitrary yes, and it also makes me angry sometimes. The idea that for $2.15 in Uganda, you can feed and clothe your family, send your kids to school, pay school fees, pay for healthcare and buy the technology and transport needed to do OK in the world for only $2.15 a day is borderline absurd. I’m thinking of writing a post about this threshold actually as I think it misleads a lot of people. Yes life is cheaper here, but nowhere near that much cheaper.
I might push back a bit on your comment “For all countries that have ever eliminated extreme poverty, the things that caused that were never cash transfers. Rather, they were usually caused by changes in economic policy. I think this is an oversimplification. Many African countries have had very liberal economic policy for the last 20-40 years and they haven’t seen the kind of growth China and Southeast Asia have seen. I’m not saying economic policy isn’t important, but listing it as “the cause” of the development boom in China and many other countries seems oversimplified.
”The thing that caused China to massively reduce extreme poverty was economic liberalisation under Deng, e.g. agricultural liberalisation, international trade etc. “For sure the liberalisation allowed the development to happen—it couldn’t have happened without the policy changes, but many other factors were needed as well. I’m far from an expert but some of these might include a high quality education system, fortunate timing in becoming the industrial powerhouse of the world, massive investment into local infrastructure and the one child policy.
I would be interested as a side note though to hear your thoughts on why liberalising African economies seems to have achieved so little in many cases.
I agree with your first comment. The idea that living on >$2.15 is in any sense an acceptable standard of living is clearly incorrect. A world in which everyone lives on $2.16 per day might be a decent enough outcome after a nuclear winter, but it definitely should not be a core global development goal.
I agree on your second comment.
I agree on the third comment, but not on some of the specifics. In any case, the changes were driven by national level systemic policy changes, not by direct targeted aid.
I’m not best placed to speculate on the last question.
Ranil Dissanayake actually just published an article in Asterisk about the history of the poverty line concept. The dollar-a-day (now $1.25 a day or something) line was kind of arbitrary and kind of not:
rather than make their own judgment on what constituted sufficient living, they could instead rely on the judgment of poor countries themselves. They would simply take an average of the poorest countries in the world and declare this to be the global minimum of human sufficiency
noting further in a footnote that
Of course, things are never quite so pure: The bank was closely involved in the development of national poverty lines around the world, so there was some element of circularity to the development of the global line.
The whole article is very interesting, worth a read for people in this space.
I’m a bit late, but hopefully you’re still monitoring this. I’ve been donating to GiveDirectly for a number of years now, and support your work and mission.
I’d love to learn more about how Give Directly imagines these public goods will arise, however. To me, this limitation depending on public good provision is the core limitation of cash transfers. Yes, cash transfers can help people access public goods such as education and healthcare in places such as Rwanda where you mentioned (I don’t know the detailed context of Rwanda but will suppose that education and healthcare are available and of sufficient quality for the sake of argument), but there are still many countries, particularly in remote settings, where such public goods—particularly of a high quality—are not available.
At Give Directly do you view your work as providing the cash transfers only, and see it as up to others to try to fix the adequate public good provision problem? Does giving cash transfers allow you to access and influence governments in the countries you operate? Do you have any theory of change of how EAs, development agencies etc can best advance adequate public good provision, particularly in areas prone to conflict (e.g. the Sahel), and/ or corruption?
Otherwise, it seems that cash transfers could certainty reduce extreme poverty, perhaps very well, but are unlikely to end poverty. This is particularly pertinent if you define poverty also in terms of access to adequate services (as implied by the Global Multidimensional Poverty Index, for instance), or in terms of assets (Reardon and Vosti, 1995) (e.g. due to agricultural land being divided up into smaller and smaller holdings when inherited due to population growth).
Further to this, one way to visualise this is to look at this website, which has photos of homes for people in India at different levels of income. If you go through the houses, it is clear that nothing special happens at $2.15 per day. The quality of house improves slowly across the distribution. Nothing notable happens at $2.15 per day. Most of the houses for people on above $2.15 per day are of extremely poor quality
Here is a house of someone on $1.70 per day
Below is a house of someone on $3.31 per day and is therefore not in extreme poverty. The house has no windows.
Below is a house at $3 per day. The roof is held up by wooden sticks.
I disagree with a lot of your arguments here.
I disagree that anyone’s primary goal should be to end extreme poverty, defined as living on less than $2.15 per day. The threshold is completely arbitrary. Nothing special happens at reaching $2.16 and we should not act as though it does. Even if we shifted everyone in Sub-Saharan Africa up to $2.16 per day, that would not be a satisfactory situation. Many people above the extreme poverty line are still in serious poverty. I think the goal should be to increase living standards across the board in poor countries, i.e. we need to increase economic growth in poor countries. Direct cash transfers are not plausibly among the top ways to increase economic growth in poor countries. The main predictor of extreme poverty rates in a country is the median income of that country. No country has ever eliminated extreme poverty through cash transfers. The main driver has always been broad-based economic growth, which is primarily driven by changes in economic policy, not by direct aid.
If we abandon the goal of minimising extreme poverty, then I think it becomes clear that direct cash transfers are not the best way to improve the living standards of people in developing countries. Around $200 billion is spent on international aid each year, about $550 million per day. Around 690 million people are in extreme poverty. If we assume that all of the people in extreme poverty are on $1 per day and we spent all international development aid on cash transfers to the extreme poor, then we could increase the income of all of the extreme poor by around $1.25 per day. This would eliminate extreme poverty. However, it would also increase the income of the extreme poor to $2.25 per day. I don’t think this is an outcome we should be at all happy with, and I think it would be a misuse of resources.
Responding below, much of which are direct quotes from the original post.
Eradicating extreme poverty is not a high bar, it’s actually the lowest and one very much worth clearing.
The $2.15/day threshold is not “completely arbitrary.” It’s set by the World Bank, is an estimate of what a person needs to afford a basic basket of goods including food, clothing, and shelter. It’s a rough measure of how many live in unacceptable deprivation in our wealthy world.
While this metric is limited, it’s also quite descriptive. The many symptoms of poverty – disease, starvation, education deprivation, psychological suffering – are improved when a family is less monetarily poor, and further still when their whole community is less poor.
Cash transfers have been shown to grow the wider economy
As cash transfers are spent by recipients, the cash multiplies. Research finds that because people spend this money locally buying goods, starting businesses, visiting clinics, or going to school, the local economy can grow by as much as 2.5x what you give. In effect, the money you give grows the entire economy.
Researchers also found minimal inflationary effects: “Average price inflation is 0.1%, and even during periods with the largest transfers, estimated price effects are less than 1%.”
Many countries use cash transfers to eliminate extreme poverty, which economic growth alone will not solve. (more here)
Cash transfers alone will not eradicate extreme poverty, as countries also need essential public goods like access to healthcare, well-maintained infrastructure, and dependable institutions to foster a thriving economy. However, cash transfers are still needed to help people take full advantage of these resources.
Take Rwanda as an example:
Over the past three decades, Rwanda has maintained peace and security, with the GDP growing annually by 5-10%.
The government has invested in education and healthcare, providing subsidies to make them widely accessible.
Despite these commendable strides, over half of Rwandans still live in extreme poverty.
This is why Rwanda is now using cash transfers as part of their social safety net to help their poorest citizens take full advantage of these other opportunities.
Even China, widely recognized for its economic growth and poverty reduction efforts, is using cash transfers to lift the final ~1% of their population out of extreme poverty. For more on why we should not expect extreme poverty to “solve itself” overtime through economic growth alone, read here.
Hello, thanks for the response.
I don’t agree that the threshold is not completely arbitrary. I agree that it is set by the World Bank, but I don’t agree that means it is not arbitrary. If everyone in the world lived on $2.16 per day, I don’t think we would have reduced what you call “unacceptable deprivation” to zero, I think the world would be in dire straits.
Pretty much all measures of wellbeing, subjective and objective, increase at exactly the same rate throughout the whole of the income distribution. Drawing an extremely low line and defining everything below that line as the problem is therefore a mistake. I agree that the symptoms of poverty decrease when people are less monetarily poor, but I don’t think that counts in favour of using life below $2.15 per day as the measure of poverty.
It is not plausible that cash transfers are the top 100 (or 1,000) ways to reduce extreme poverty in poor countries. One piece of evidence for this is historical: for all countries that have ever eliminated extreme poverty, the things that caused that were never cash transfers. Rather, they were usually caused by changes in economic policy.
On the example of Rwanda. GDP per capita in Rwanda is around $960 per person, or around $2.60 per day. You say that “Despite these commendable strides, over half of Rwandans still live in extreme poverty.” Since the average income is $2.60 per day, it is not surprising that more than half of the population lives on less than $2.15 per day. This is an argument for the necessity of economic growth, not an argument for cash transfers.
Taking your example of China. The thing that caused China to massively reduce extreme poverty was economic liberalisation under Deng, e.g. agricultural liberalisation, international trade etc. Even if they are now, as a middle income country, using cash transfers to reduce extreme poverty, that is not an argument for the claim that in poor countries cash transfers will be more effective than changes in economic policy in reducing extreme poverty, on the current margin. China is the most striking counterexample to that claim in history.
“Many countries use cash transfers to eliminate extreme poverty, which economic growth alone will not solve.” “we should not expect extreme poverty to “solve itself” overtime through economic growth”
Empirically, this is not correct. The median income in a country ~completely explains levels of extreme poverty in that country. Increasing median income is empirically necessary and sufficient for the elimination of extreme poverty. Very nearly all of the observed variation in extreme poverty rates, on any poverty line, is explained by median income—the R^2 is above 0.98 (Pritchett 2019)
Thanks John for this insightful set of comments I have enjoyed them immensely.
The $2.15 per day threshold is arbitrary yes, and it also makes me angry sometimes. The idea that for $2.15 in Uganda, you can feed and clothe your family, send your kids to school, pay school fees, pay for healthcare and buy the technology and transport needed to do OK in the world for only $2.15 a day is borderline absurd. I’m thinking of writing a post about this threshold actually as I think it misleads a lot of people. Yes life is cheaper here, but nowhere near that much cheaper.
I might push back a bit on your comment “For all countries that have ever eliminated extreme poverty, the things that caused that were never cash transfers. Rather, they were usually caused by changes in economic policy. I think this is an oversimplification. Many African countries have had very liberal economic policy for the last 20-40 years and they haven’t seen the kind of growth China and Southeast Asia have seen. I’m not saying economic policy isn’t important, but listing it as “the cause” of the development boom in China and many other countries seems oversimplified.
”The thing that caused China to massively reduce extreme poverty was economic liberalisation under Deng, e.g. agricultural liberalisation, international trade etc. “For sure the liberalisation allowed the development to happen—it couldn’t have happened without the policy changes, but many other factors were needed as well. I’m far from an expert but some of these might include a high quality education system, fortunate timing in becoming the industrial powerhouse of the world, massive investment into local infrastructure and the one child policy.
I would be interested as a side note though to hear your thoughts on why liberalising African economies seems to have achieved so little in many cases.
Hi Nick,
I agree with your first comment. The idea that living on >$2.15 is in any sense an acceptable standard of living is clearly incorrect. A world in which everyone lives on $2.16 per day might be a decent enough outcome after a nuclear winter, but it definitely should not be a core global development goal.
I agree on your second comment.
I agree on the third comment, but not on some of the specifics. In any case, the changes were driven by national level systemic policy changes, not by direct targeted aid.
I’m not best placed to speculate on the last question.
Ranil Dissanayake actually just published an article in Asterisk about the history of the poverty line concept. The dollar-a-day (now $1.25 a day or something) line was kind of arbitrary and kind of not:
noting further in a footnote that
The whole article is very interesting, worth a read for people in this space.
I’m a bit late, but hopefully you’re still monitoring this. I’ve been donating to GiveDirectly for a number of years now, and support your work and mission.
I’d love to learn more about how Give Directly imagines these public goods will arise, however. To me, this limitation depending on public good provision is the core limitation of cash transfers. Yes, cash transfers can help people access public goods such as education and healthcare in places such as Rwanda where you mentioned (I don’t know the detailed context of Rwanda but will suppose that education and healthcare are available and of sufficient quality for the sake of argument), but there are still many countries, particularly in remote settings, where such public goods—particularly of a high quality—are not available.
At Give Directly do you view your work as providing the cash transfers only, and see it as up to others to try to fix the adequate public good provision problem? Does giving cash transfers allow you to access and influence governments in the countries you operate? Do you have any theory of change of how EAs, development agencies etc can best advance adequate public good provision, particularly in areas prone to conflict (e.g. the Sahel), and/ or corruption?
Otherwise, it seems that cash transfers could certainty reduce extreme poverty, perhaps very well, but are unlikely to end poverty. This is particularly pertinent if you define poverty also in terms of access to adequate services (as implied by the Global Multidimensional Poverty Index, for instance), or in terms of assets (Reardon and Vosti, 1995) (e.g. due to agricultural land being divided up into smaller and smaller holdings when inherited due to population growth).
Further to this, one way to visualise this is to look at this website, which has photos of homes for people in India at different levels of income. If you go through the houses, it is clear that nothing special happens at $2.15 per day. The quality of house improves slowly across the distribution. Nothing notable happens at $2.15 per day. Most of the houses for people on above $2.15 per day are of extremely poor quality
Here is a house of someone on $1.70 per day
Below is a house of someone on $3.31 per day and is therefore not in extreme poverty. The house has no windows.
Below is a house at $3 per day. The roof is held up by wooden sticks.
This is the kitchen:
Here’s the interior of another house