Memos From the Developing World: The End of Poverty

Define poverty as living with two dollars a day or less. Now, imagine that governments could put those two dollars in poor people's pockets with little effort and minimal waste. Poverty is finished. Of course, things are more complicated than that. But you get a sense of where modern social policy is going -- and what will soon be possible.

To start with, there is a budding consensus -- amply corroborated by the 2008-09 crisis -- on what reduces poverty: it is the combination of fast and sustained economic growth (more jobs), stable consumer prices (no inflation) and targeted redistribution (subsidies only to the poor). On those three fronts, developing countries are doing well -- or are improving.

So, where will poverty fighters focus next? First, on better jobs. What matters to reduce poverty is not just jobs, but how productive that employment is. This highlights the need for a broad agenda of reforms to make an economy more competitive. It also points toward something much closer to the individual: skills, both cognitive (e.g., critical thinking or communication ability) and non-cognitive (e.g., attitude toward newness or sense of responsibility).

Second, poverty fighters will target projects that augment human opportunity. It is now possible to measure how important personal circumstances -- like skin color, birthplace or gender -- are in a child's probability of accessing the services -- like education, clean water or the Internet--necessary to succeed in life. That measure, called the Human Opportunity Index, has opened the door for policy-makers to focus not just on giving everybody the same rewards but also the same chances, not just on equality but on equity. A few countries, mostly in Latin America, now evaluate existing social programs, and design new ones, with equality of opportunity in mind. Others will follow.

And third, a greater focus will be on lower social risk and larger social protection. A few quarters of recession, a sudden inflationary spike, or a natural disaster, and poverty counts skyrocket -- and stay sky-high for years. The technology to protect the middle class from slipping into poverty, and the poor from sinking even deeper, is still rudimentary in the developing world. To be sure, just think of the scant coverage of unemployment insurance.

But the real breakthrough is that, to raise productivity, expand opportunity, or reduce risk, you now have a power-tool: direct cash transfers. Most developing countries (35 of them in Africa) have, over the last 10 years, set up logistical mechanisms to send money directly to the poor -- mainly through debit cards and cell phones. Initially, the emphasis was on the conditions attached to the transfer, such as keeping your child in school if you want to continue receiving the cash. It soon became clear that the value of these programs is less in their conditions than in the fact that they forced us to know the poor by name. Now we know where they live, how much they earn, and how many kids they have.

That kind of state-citizen relationship is transforming social policy. Think of the massive amount of information it is generating in real time -- on costs, preferences, behaviors, impacts and needs. This is helping improve the quality of expenditures, which leads to better targeting, smarter design, less duplication, higher progressivity, closer monitoring and more rigorous evaluation. It also helps deal with shocks like the global crisis (have you ever wondered why there was no social explosion in hard-hit places like Mexico?). Sure, giving away tax-payers' money was bound to cause debate (how do you know you are not financing bums?). But so far, direct transfers have survived political transitions, from left to right (Chile) and from right to left (El Salvador). The debate has been about doing transfers well, not about abandoning them.

A final point. For all the promise of new poverty reduction techniques, just getting everybody in the developing world over the two-dollar-a-day threshold would be no moral success. To understand why, try to picture your own life on a two-dollar-a-day budget (really, do it). But it would be a very good beginning.