Policy Research Working Paper 7892

Grow, Invest, Insure

A Game Plan to End Extreme Poverty by 2030

Indermit S. GillAna Revenga

Christian Zeballos

Development Economics Poverty and Equity Global Practice Group &International Finance CorporationNovember 2016

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Abstract

The Policy Research Working Paper Series disseminates the findings of work in progress to encourage the exchange of ideas about development issues. An objective of the series is to get the findings out quickly, even if the presentations are less than fully polished. The papers carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this paper are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent.

Policy Research Working Paper 7892

This paper is a joint product of the Development Policy Department, Development Economics Vice Presidency, the Poverty and Equity Global Practice Group, and the International Finance Corporation. It is part of a larger effort by the World Bank to provide open access to its research and make a contribution to development policy discussions around the world. Policy Research Working Papers are also posted on the Web at http://econ.worldbank.org. The authors may be contacted at indermit.gill@duke.edu, arevenga@worldbank.org, and czeballos@ifc.org.

As global extreme poverty has fallen—by one measure, from close to 2 billion people in 1990 to about 700 million today—the world has learned about antipoverty strategies that work. These experiences should inform the final push to end extreme poverty. In the 1960s and 1970s, when close to half of the world was living in extreme poverty, the approach that worked best consisted of two sets of com-plementary measures: encouraging broad-based growth that is labor using, and investing in education, health, and family planning. When extreme poverty rates came down—first in East Asia and then in other parts of the developing world—it became clear that the two-point strategy to make economies grow and enable people to invest in human capital needed a social assistance sup-plement to help people with disadvantages so severe that

they could not benefit from economic opportunities and better social services. This two-and-a-half-point strategy has been working well over the past quarter century, and the end of extreme poverty is in sight. But more people are now at risk of slipping back into poverty because of eco-nomic, natural, and health-related hazards. To end extreme poverty by 2030, the approach now needs three comple-mentary components: economic growth, investments in people, and measures to insure against setbacks to families, nations, and regions due to disabilities, recessions, disas-ters, and disease. In countries that have reduced poverty a lot and those that could do a lot better, a winning game plan for putting a quick end to extreme poverty should be based on a three-point strategy: grow, invest, and insure.

Grow,Invest,Insure:AGamePlantoEndExtremePovertyby

2030

IndermitS.Gill,AnaRevenga,

andChristianZeballos*

Keywords:Poverty,Economicgrowth,Humancapitalaccumulation,SocialInsuranceJELCodes:O20,O40,H41,I38*IndermitGill(indermit.gill@duke.edu)isattheDukeCenterforInternationalDevelopmentintheSanfordSchoolofPublicPolicyofDukeUniversity,AnaRevenga(arevenga@worldbank.org)is at the World Bank, and Christian Zeballos is at the International Finance Corporation(czeballos@ifc.org).At thetimeofwriting, IndermitGillwasDirectorofDevelopmentPolicy intheOfficeoftheChiefEconomistattheWorldBank,AnaRevengawastheSeniorDirectoroftheWorld Bank’s Poverty Global Practice, and Christian Zeballos was attending GeorgetownUniversity’s Global Human Development Program. The authors thank Jim Yong Kim and JohnDonnelly for their encouragement, andOmar Arias, Kathleen Beegle, Shaohua Chen, FranciscoFerreira, Chorching Goh, Ruth Hill, Martin Ravallion, Nobuo Yoshida and colleagues in theDevelopmentEconomicsVice‐PresidencyandthePovertyGlobalPractice forsharing ideasandinformation.

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Grow,Invest,Insure:AGamePlantoEndExtremePovertyby2030

IndermitGill,AnaRevenga,andChristianZeballos

IntheRepublicofKorea,1965wasayearofreconciliation. OnJune22,afteryearsoftalks, Korea and Japan signed a treaty of reconciliation. With typical Easternunderstatement, it was called the “Treaty on Basic Relations”. The details were keptsecret by the Korean government for decades. In 2005, it became known that theagreement had involved complete and final compensation to Korea for Japanesecolonization of the peninsula between 1910 and 1945. The Japanese had given $800million in grants and loans in full settlement of the claims.Korea’s per capita incomewasonlyabout$100atthetime,sothiswasalotofmoney.1KoreagotalotmorehelpfromtheUnitedStates:economicaidtotaled$60billionovertheyears,aboutthesameaswhattheUnitedStateshasgiventoSub‐SaharanAfrica.InIndonesia,1965wasayearoflivingdangerously.InanIndependenceDayspeechonAugust 17, 1964, President Ahmed Sukarno had used the Italian phrase viverepericolosamentetodescribethecomingchallengesforhisnewlyindependentnation.Ayear later, with Indonesia engaged in hostilities on its borders with Malaysia andwrackedbyrunawayinflationathome,hecalledforasocialistrevolution.BytheendoftheyearSukarnowaspowerless.Inabloodycoup,GeneralSuhartohadtakenover.Overthenext threedecades,Suharto’sNewOrdergovernmentreceivedbillions in financialaidfromtheUnitedStatesanditsalliesintheColdWar.Aquartercenturylater,theWorldBankpublishedthe1990WorldDevelopmentReporton Poverty. The report was inspired by progress in Korea and Taiwan, China—henceforthTaiwan—bothhadby thenvirtuallyeliminatedextremepoverty.MalaysiaandThailandhadmade impressivegains inreducingpovertyand figuredprominentlytoo.ThepoliciesrecommendedinthereportwerealsosurelyinfluencedbyIndonesia,which had asmany people as these four economies combined. Under Suharto’sNewOrder,Indonesiahadreducedtheincidenceofextremepovertybyhalf.The1990WorldDevelopmentReportdistilledtheseexperiencesintoasimplestrategyfor reducing poverty:market‐basedgrowth made pro‐poor through an emphasis onagricultural reforms, openness to trade, and fiscal prudence; and large publicinvestmentsineducation,health,andfamilyplanningimplementedinwaystomakesurethatpeople invillages—especiallygirlsandwomen—gottheir fairshare.Thesewouldcreatetheconditionsinwhichthepoorbothhadtheopportunitytopullthemselvesoutof poverty and the capacities to avail of the opportunities. The report alsorecommendedmodestpublicassistanceprogramsasasupplement.Itcametobeknownasthetwo‐and‐a‐half‐pointstrategyforpovertyreduction.2

1Koreahadaskedforabout$365million—$200foreverysurvivor,$1,650foreverydeath,and$2,000eachfortheinjured.Insteadofcompensatingthevictims,thegovernmentusedmuchofitforeconomicdevelopment—buildingschoolsandclinics,anexpressway,adam,andasteelmill.2Actually, the1990reportwasnot the firstWorldDevelopmentReportonpoverty. Basedonfewerstatisticsandlessevidence,the1980WorldDevelopmentReporthadproposedasimilarstrategy. Themaindifferencebetween the1980and1990strategieswas that the formerhadalmostnodiscussionofsocialinsuranceprograms.

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51%

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EAP

SAS

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Between1981and1996,thenumberofEastAsianslivingonlessthan$1.90aday3hadfallenfrom1.1billionto704million.Thestrategywasworking,atleastinEastAsia.In 1999, the World Bank began working on a new World Development Report onpoverty. Prompted by setbacks in East Asia due to the 1997‐98 financial crisis(especially in Indonesia, where millions were pushed back into poverty) anddissatisfactionwiththepaceofpovertyreductionintherestoftheworld,wherepeopleliving in extreme poverty had stayed at about 1 billion between 1990 and 1999, thereport revisited the 2.5‐point strategy. WDR 2000AttackingPoverty called formoreattention to institutions, participation, and income redistribution. It outlined a newapproachbasedonincreasingempowerment,opportunity,andsecurityforthepoor.These have proved to be tougher concepts to translate into policy, so the strategyadvocated in the2000WDRhasbeendifficult to operationalize. During thenext twodecades, with the possible exception of Indonesia and the Philippines, East Asiancountrieshavegenerallystayedwiththe2.5‐pointstrategypioneeredinNortheastAsiainthe1960sand1970s.Eventhecountriesthathadbeencommunist—China,Vietnam,CambodiaandLaoPDR—haveusedthe2.5‐pointstrategytogoodeffect.Justlookatthenumbers(Figure1). In1990,ofthe1.9billionpeoplelivinginextremepoverty,abouthalf,996million,wereinEastAsia,575millioninSouthAsia,and288million inSub‐Saharan Africa. Today, 25 years later, the global sum is estimated to be about 700million.4EastAsiahas83millionpeoplelivingonlessthan$1.90aday,SouthAsia231million,andSub‐SaharanAfrica347million. Putanotherway,duringthelast25yearsEastAsiancountriesreducedextremepovertybymorethan30million—eachyear!Figure1:Wheretheextremepoorare,byregion–1990and2015Withaquartercenturyofexperience,itisreasonabletoasksomequestions:Doesthe2.5‐pointplanworkeverywhere?Ifitdoesnot,whatshouldbedoneinstead?Ifitdoeswork, have we learned to implement it efficiently in places where the incidence ofextremepovertyisashightodayasitwasinChinaandVietnamin1990,sayinNigeriaand the Democratic Republic of Congo?Where it hasworked, should the strategy bechangedasextremepovertyisreducedtolowlevels?

3Theinternationalpovertylinesof$1.25and$2.00wereupdatedto$1.90and$3.10in2015toreflect improvements in themeasurement of purchasing power parity conversion factors. Thenewlinesmaintaintherealpurchasingpoweroftheearlierlinesinpoorcountries,andassuch,therevisedpovertyestimatesdonotchangedrasticallyasaresultofthisupdate.SeeFerreiraetal.(2015)foradetaileddiscussiononthetopic.4This number is statistically projected from the 2012 global poverty figures. The latest actualestimateofglobalpovertyis897millionpeoplelivinginextremepovertyin2012.

1990Numberofextremepoor:1.9billion

2015Numberofextremepoor:702million

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This paper provides answers to these questions. The 2.5‐point plan has workedreasonably well where it has been implemented. Over the last 25 years, we havelearned how to implement it better. We have also learned that it should be refinedwherethereisprogressinreducingpovertyandwheregovernmentshavebecomemorecapable. Countries that have reduced extreme poverty to low levels should considerexpandingsocialinsurancetomakeitafullthirdcomponent—toexpandthestrategytothree full points. But social insurance, the third component of the strategy, has to bechanged from a supplement to a full component inways that strengthen rather thansubstitute the first two components of the strategy. This is not easy, but it is easiertoday than it was 25 years ago. We knowmore about what interventions work andunderwhatconditions,andwenowhavebettertechnologiestoaidtheseinterventions.The lessons learned inEastAsiaandEastAfrica, inSouthAsiaandLatinAmerica—incountries as diverse as Bangladesh, Brazil, China, Ethiopia, Ghana, India, Indonesia,Mexico,Peru,Pakistan,Rwanda,SouthAfrica,andVietnam—willhelpindeployingthe3‐pointstrategytoputaquickendtoextremepoverty.These are cryptic answers, but they should give the reader an idea of the generalconclusionsofthepaper.Itisthedetails,however,whichwillbeusefulinformulatingaworkableplantoendextremepoverty,byfirstreducingthenumberofpeoplelivingonlessthan$1.90dollarstolessthan250millionby2030.Thisisanambitioustask.Givenpopulationgrowth,itentailsengineeringareductionofabout110millionpeoplelivinginextremepovertyeveryyearforthenext15years.EvenEastAsiacouldonlyachievereductions of 53 million a year between 1981 and 1996, the 15 years of quickestreductioninpovertyonrecord.Theinternationalcommunitycanhelp,butthistaskwillhavetobedonecountrybycountry—especiallyinthe30‐40countriesthathavealmostalloftheworld’sextremepoor.ButgovernmentsinSub‐SaharanAfricaandSouthAsiashouldtakeheart.Korea(withapopulation of 47 million) and Taiwan (with 23 million) showed that with the rightpoliciesathomeandsomehelpfromabroad,poorpost‐conflicteconomieswithhostileneighbors where nearly everybody was living in abject poverty could 40 years laterbecomepost‐industrialeconomieswherealmostnobody ispoor.For theKoreansandTaiwanesetoendextremepovertyinlessthanfourdecadesmustsurelyrankamongthemost impressive accomplishments inmodernhistory. Ending global extremepovertyless than 40 years after Korea andTaiwan eliminated theirs couldwell bemankind’sgreatestachievement.

1965‐1990—EastAsiatakesthequickerrouteForallthesereasons,anyexplorationofthepoliciesneededtoendextremepovertyby2030shouldbegininNortheastAsia.RepublicofKoreaandTaiwan(China)Inthe1960s,theRepublicofKorea(henceforthSouthKoreaorKorea)wasstillanationofpoorpeople,ravagedbycolonizers,devastatedbyconflict,andtornintwo.By1990,South Korea had virtually eliminated extreme poverty. Fifteen years later, havingweathered a serious economic crisis, it had become an advanced economy. How didKoreans make this miracle? Advocates both of state‐led development and marketcapitalism claim credit for its successful economic transformation, and the debatecontinuestothisday.

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LessdebatableperhapsishowSouthKoreaendedextremepoverty.It startedwitha comprehensive landreform. Between1946and1955,60percentoftillable land was bought by the government from large landlords and sold to smallfarmers. Landownership became more equal—by one measure the Gini index oflandownership fell from 0.63 before the reforms to less than 0.50 after.Productivityshotup.Ruralfamiliescouldsendtheirchildrentoschoolinsteadofworkingforlargerlandowners.Atthesametime,thegovernmentmadeeducationtoppriority,secondonlytodefense. By1960, literacywasclose touniversal.By themid‐1980s,more than90percentofmiddleschoolstudentsweregoingontohighschool.Atthesametime,morethan1,300healthcentersweresetuptoprovideprimarycare,medicalaid,andfamilyplanning services. A national health insurance scheme was introduced for urbanworkersinthe1970sandwasthenextendedtoruralareasinthemid‐1980s.After experimenting with import substitution for a decade, in the early 1970s SouthKorea switched to export‐led development. The payoff was immediate. The economygrew by double digits annually and unemployment fell to less than 5 percent.Productivityinagriculturecontinuedtorise,aidedbygovernmentprogramstostabilizerice prices and introduce new technologies. A rural development scheme that helpedvillagers build roads and other infrastructure was started in 1971. By 1990, theeconomywascompletelytransformed:betweenthemid‐1960sand1990, theshareofagricultureinemploymentfellfromalmost60percenttolessthan20,andinindustryitincreasedfrom10tomorethan25percent.SouthKoreahad socialwelfareprograms,but theyweredesigned to strengthen—notsupplant—thefamily.So,forexample,peopletakingcareoftheirelderlyparentsgottaxbreaksandwereexemptfrommilitaryservice.Apublicassistanceprogramwasstartedin 1965, but it covered only about 5 percent of Koreans. Those classified as poorreceivedsocialassistancebutat leastuntil theEastAsianCrisis in the late1990s thiswasnevermorethan1percentofthepopulation.By1990,extremepovertyratesatadollar‐a‐daywereprobablybelow3percent. WecannotbecertainbecauseSouthKoreahasnothadanofficialpovertyline.Ithasneverhad poverty targets. SouthKorea followedwhat economists have called the ‘indirectroute’ to poverty reduction—the use of resources to accelerate growth and generalcapacitiesofthepopulation. At leastuntil theAsianCrisis, itrelied littleonthedirectroutetoreducingpoverty—cashtransfersandthepublicprovisionofhousing,food,andhealthcaretargetedspeciallyforpoorpeople.AftertheAsianfinancialcrisis,Koreaexpandedsocialwelfarebothtoaddressthesocialconsequences of its rapid transformation and the effects of the crisis. Some changeswere also made to institute business‐friendly labor regulations. Today the Koreanwelfare state has five social insurance programs: the Industrial Accident Insuranceintroducedin1961,whichcoversabout45percentofallworkers;theNationalHealthInsurance program that wasmade universal in 1989; the National Pension Program,which becamenear universal in 1999 (three separate public pensions schemes covercivilservants,teachersandthemilitary);theEmploymentInsuranceProgramstartedin1995—thosewhoreceivedunemploymentbenefitswere33percentin1999;andLong‐termCare Insurancestarted in2008. Korea’s socialassistanceprogram isnowcalledthe Minimum Living Standard Guarantee, an expanded version of the previousassistanceprogram.Thisprovidesbenefitsforpeoplewithincomesbelowthepovertyline but prime‐aged recipients must enroll in training, public works, or communityservices.

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Taiwan’s development andpoverty reduction effortsmirrored those of Koreaboth intheirnatureandtiming.Korea’sefforts,e.g.,inlandreforms,wereinpartmotivatedbydevelopmentsincommunistNorthKorea.ChinamayhavemotivatedTaiwan’sreformsevenmore.Taiwanbeganwithaphasedbutcomprehensivelandreformbetween1949and1963,which involved anorganized transfer ofownership to the tillers. By1965,more than 90 percent of the land was tilled by tenants. Agricultural productivityincreasedquickly,puttingabigdentinextremepoverty.While the populationmore than doubled between 1950 and 2000 (the population isabout23milliontoday),massiveinvestmentsineducation,health,andfamilyplanningresulted in declining fertility, rising school attainment, and greater longevity. Anaggressivepolicytoattractforeigndirectinvestment(FDI)resultedinTaiwanbecomingamajorexporterbythe1990s.By2005,agriculturewasjust3percentofGDPandtheislandwashometoathirdoftheworld’scomputerindustry.Despiteminimalspendingonsocialwelfare,extremepovertyappearedtohavebeeneliminated.Becausestatisticsonpovertyhaveonlybeenmaintainedsince1981,itisimpossibletobesure.Eventoday,Taiwan’ssocialwelfarespendingislessthan4percentofGDP,lessthan half the ratio in South Korea and one‐fifth the average in the OECD. Welfarerecipientsarefewerthan2percentofthepopulationandgetlessthan$150amonth.MalaysiaandThailandMalaysia followed SouthKorea andTaiwanwith a lagof about a decade. Malaysia isunusualinEastAsiainthatithashadanofficialpovertylinesince1970,whentheNewEconomic Policy was introduced as a response to social unrest. Steps to increaseagricultural productivity and attract manufacturing‐related foreign direct investmentwereaccompaniedbyprogramstoprovidehealth,housing,andotherservicesinruralareas.As inothercountries, ruralpovertyratesarehigher inMalaysia: threetimesashigh as those in urban areas. The civil unrest had its roots in ethnic disparities. Atindependence, almost 90 percent of the Malay population was rural, compared withabout70percentforIndiansand50percentfortheChinese.Thepolicyobjectivewasasmuchthereductionofethnicinequalityaspoverty,asmuchnationalunityaseconomicprogress.It turns out that Malaysia’s record in reducing poverty is more impressive than ineliminatingethnic inequalities.InpeninsularMalaysia,ruralpovertyratesfell from58percentin1970to19percentin1990;urbanpovertyfrom21to7percent.In1970,thepovertyrateswereabout65percentamongMalays,40percentamongIndians,and25percent for the Chinese. In 1990, the official poverty rates for Malay, Indian, andChinesegroupswere21,8,and6percent,respectively.After1990,somewhatmoreattentionwaspaidtothealleviationof“hardcore”poverty.Povertyratesusingthenational line fell fromabout50percent in1970to less than3percentby2005,despiteasetbackin1997‐99duetothefinancialcrisis.Thisdeclineinpovertywaslargelytheresultofannualeconomicgrowthratesthataveraged8percentinthe1970s,6percentinthe1980s,and9percentinthefirsthalfofthe1990s,andasuccessful effort to provide basic services such as education, health, housing, andsanitationinruralandurbanareas,andinlaggingandleadingstates.WhileMalaysia’srecordofpovertyreductionisimpressive,itisnotasstellarasthatofKoreaandTaiwan.Withmorenaturalresourcesandbetterinitialconditions,Malaysiatookadecadelongertoendextremepoverty.Malaysia’staskwascomplicatedbyethnicheterogeneity;inTaiwan,bycontrast,95percentofthepopulationisHanChinese.But

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thereareotherreasonsaswell:aweakerbureaucracy,non‐transparencyinmonitoringthe effects of development programs on poverty, and an overemphasis on heavyindustry at the expense of investments in agriculture and rural development. Itmayalso be because Malaysia chose to redistribute assets differently, eschewing landreforms that would have benefited rural Malays and preferring programs that favorMalayownershipofnewcompanies.Thailand,Malaysia’s neighbor to the north,was at the same time engaged in povertyreductioneffortsofitsown.Unliketheothers,Thailandhadneverbeencolonizedandhadnohesitationinadoptingpoliciestointegrateintotheworldeconomy.Itbeganbybecoming theworld’s biggest exporter of rice, a position it held formore than threedecades until surpassed recently by India and Vietnam. In the 1970s and 1980s,ThailandbecameanimportantpartoftheEastAsianproductionnetworksforgarments,computers, and automobiles, attracting FDI and generating exports. Tourism has alsobecomeabigpartofitseconomy.ItsexporttoGDPratiohasclimbedto75percent.Butdespite an outward‐oriented strategy based on exporting commodities and cyclicallysensitive services such as tourism, Thailand did not have even one year of negativeoutputgrowthbetween1958and1996—afour‐decaderunduringwhichGDPgrowthaveraged4percent.Productivitygrowthwas80percentoftheincreaseinvalueaddedinagriculturebetween1980and2002.Agriculturestillaccountsforalmost40percentofemployment.During this time, Thailand taxed agriculture—especially rice and rubber—heavily,extractingmore than 40 percent of value added during the 1970s. But spending oninfrastructure and servicesmadeup for someof this. Malaysiahad taxed agriculturehalfasmuch.Thailand’s education and health systems have not been as efficient in reaching ruralareas. Its approach to social protectionhas beenminimalist. But its family planningprograms—oneof themosteffectivepublic‐privatepartnershipsever—areviewedbymanyasbestpractice. Fertility fell from6birthsperwomaninthemid‐1960sto lessthan2by1996,apatternthatissimilartoChina’s.Between1981and1996,the$1.90‐a‐day extreme poverty rate fell from 19.6 to 2.3 percent. Despite being late inaddressingweaknessesinruraleducationandhealth,$1.90‐a‐daypovertyhasbeenlessthan1percentsince2010.Thailandshouldbefamousforendingextremepoverty.Instead,itisinfamousforstartingtheEastAsianfinancialcrisisin1997.Theeightyearsbeforethecrisiswereactuallythebestforpovertyreduction.Usingtheofficialpovertyline, the number of persons living in poverty fell by 11million, from 18million to 7million.Duringthecrisis,theranksofthepoorincreasedtoabout8million;thatis,thecrisis reversed less than 10 percent of the poverty reduction during the eight‐yeareconomic boom preceding the bust. Today, Thai exports span all sectors: agriculture(especially rice), industry (including garments, light manufacturing, and foodprocessing), and services (especially tourism). It is difficult to thinkof amore labor‐intensivesetofeconomicactivities.In effect, Thailand compensated forweak social services and frugalwelfareprogramswithperhapsthemostpro‐pooreconomicgrowthpatterninallofAsia.Thismeantthatconsumption poverty fell across the country. But it has led to a growing educationbacklog.Inthemid‐1990s,forexample,fewerthanhalfofThaichildrenaged12‐18hadcompletedsomejuniorsecondaryeducation(grades7‐9).ThiswasclosertoathirdinthepoorerNortheast. Even today,Thailanddoespoorly in education, rankingbehindevenLaoPDRinsomemeasures.

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Bycontrast,Thailand’shealthoutcomes—maternalandchildmortality, forexample—areamongthebestinthedevelopingworld.Sincethecrisis,Thailandhasintroducedanationalhealthinsurancescheme,anditappearstohavebeenabigsuccess.5Itiscalledthe“30bahtscheme”—visitstothedoctoraresupposedtocostlessthanadollar.Thescheme costs the government about 4 percent of GDP, but the coverage is nearlyuniversal.IndonesiaDespitetheseastoundingsuccessesintheneighborhood,itisIndonesiathatgetsmuchof the attention. This is understandable. Its population is asmuch as those inKorea,Taiwan, Malaysia, and Thailand combined. At $3.10‐a‐day, there are as many poorpeople in Indonesia as in the rest of East Asia outside China. In addition, itsperformanceinthethreedecadesbeforethecrisiswasspectacular.The formulawas essentially the same: labor‐using growth and investments in humancapital. Green Revolution technology and investments in rural infrastructure led tohigher and higher farm productivity for a quarter century: agricultural total factorproductivitygrowthonfarmswas2.5percentannuallybetween1968and1992.Later,high commodity prices helped farmers, and 40 percent of workers in rural areasescaped povertywhile staying in agriculture. This dynamism spilled over to nonfarmruraljobs,whichopenedanotherpathwayoutofpovertyformillions.UsingIndonesia’snationalmeasure,povertyfellfrom56percentto11percentbetween1968and1996.Economic growth between 1967 and 1987 averaged almost 5 percent; between1988and1997itwentupto6percent. Indonesia’sliteracyratesclimbedfromlessthan60percenttomorethan90.Thecountryalsoachievedvirtuallyuniversalprimaryschoolenrollment. In the three decades since 1968, life expectancy increased by 20 years.Fertilityratesfellfrom6to3birthsperwoman.ButIndonesiawasgettingmoreattentionforrampantcorruptionthanforrapidpovertyreduction.Indonesiagotevenmoreattentionwhenthefinancialcrisistriggeredpoliticalupheaval,andpovertyrosebyathird.Amassiverestructuringofgovernancetookplaceasdemocracy tookhold. Socialservicesweredecentralized,but itwasnotdonewell.Geographic and social disparities in the quality of education, health, and sanitationwidened. Under pressure to stem the increases in poverty after the crisis, Indonesiaexpanded social protection programs. The growth rate fell by about a third—from6percentbeforedemocracytoabout3.8percentafter.Butitisthepovertyratesthataremost disappointing. Extremepoverty has been coming down since the crisis, but at adiscouragingly slow pace. It took Indonesia more than a decade to get back to thepovertyratesbeforethecrisis.6In2011,therewere33millionIndonesianslivingonlessthan$1.90aday.

5Theprogramwas introduced in2001. No individualwouldberequiredtopaymorethan30baht(aboutUS$0.84atthetime)pervisitforeitheroutpatientorin‐patientcare,includingdrugs.Some costly procedures are not covered—cosmetic care, obstetric delivery beyond twopregnancies,organtransplant,chemotherapy,andrenaldialysis.Eachpersonmustregisterwithapublichealthunit—ahealth centeror communityhospital—anduse it as aprimarypointofcontactbeforegettingareferralforsecondarycareataprovincialhospital.6In 1996, Indonesia had revised the method for calculating poverty. While the old methodyielded a headcount of 11.3 percent for 1996, the revised figurewas 17.6 percent. By 1999,povertyhadclimbedto23.4percent.Sevenyearslater,thepovertyratewas17.8percent.Anywayyoulookatit,Indonesiatookmorethantenyearstogetbacktopre‐crisispovertyrates.

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By1990,withtheexceptionofthePhilippines—whereat30percent,extremepovertyrates at $1.90‐a‐day were essentially unchanged in the fifteen years before the EastAsian crisis—the larger countries in the region had all engineered impressivereductions in poverty. China and Vietnamwere latecomers to economic reform andpoverty reduction, but they were making quick progress. Between 1981 and 1990,China’s extreme poverty rate at $1.90 a day had come down from 88 to 67 percent,Vietnam’sfrom71to61percent.Atthetime,though,thesestorieshadnotbeentold.In any case, until the 1980s, poverty reductionwas almost exclusively an East Asianphenomenon.InSouthAsia,onlySriLankahadmadeadentinpoverty,halvingextremepovertyfrom19.3to9percent.InIndiaandPakistan,theranksofthepoorhadswelledbymillions;inconflict‐riddenBangladeshandNepalthestorieswereevenmoredismal.InLatinAmerica,theonlypoorcountrythathadmadeanyprogresswastinyCostaRica,whichhadreducedextremepovertyat$1.90‐a‐daybyhalf.Brazil,wheremorethan15percentofthepopulationlivedonlessthanthis,wasthebiggestdisappointment.InSub‐SaharanAfrica,extremepovertyrateshadgoneupinmostcountriesbetween1981and1990. In the Middle East and North Africa, led by the Arab Republic of Egypt andMorocco,povertyrateswerecutfrom8to6percent.Itwouldbefairtosaythatbefore1990,onlyEastAsiahadmadeprogressinreducingpovertyatapacethatisremotelyconsistentwithwhatisneededtogetto3percentby2030.

WDR1990—Thetwo‐and‐a‐half‐pointstrategyWhile the high‐performingEast Asian economies—Korea, Taiwan,Malaysia, Thailand,and Indonesia—werebecoming expert in getting rid of poverty, development expertsweredebatinghowbesttodoit.Thereweretwocompetingviews:theindirectroutetoreducingpoverty, andamoredirectone.7Thedirectapproachrequires redistributionwithinacountryunlessthefundscomefromdonors. Theindirectorgrowth‐orientedroutecanalsoinvolvepoliciesthathelpthepoor,buttheemphasisisonincreasingtheircapacity to earnwith the assets they alreadyhave. Thedistinction is oneof creatingincomeversusprovidingconsumption.The popular view has swung back and forth. In the 1950s and 1960s the indirectapproachwasinfashion.Inthe1970s,astheranksofthepoorswelled,proponentsofthedirectapproachbegantobeheard. Butbythe1980s,becauseof thesuccesswiththe indirectapproach inEastAsiaandthe lackofsuccess in therestof theworld, theindirectapproachwasinfashiononceagain.Perhaps the clearest and most practicable treatment of poverty is the 1990 WorldDevelopment Report Poverty. WDR 1990 provided a systematic account of theexperience of countries that had engineered big reductions in poverty during 1965‐1987 and, based on their experience, proposed a strategy for reducing poverty. Itreflectedtheconsensusofthetimes,andemphasizedtheindirectroute.Countriesthat

7Bhagwati (1988) provides a summary: “With the amelioration of poverty as the target, thepolicyinstrumentsdesignedtoachievethattargetcanbedividedintotwomainclasses:(i)theindirectroute,i.e.,theuseofresourcestoaccelerategrowthandtherebyimpactontheincomesandhencethelivingstandardsofthepoor;and(ii)thedirectroute, i.e.,thepublicprovisionofminimum‐needs‐orientededucation,housing,nutritionalsupplementsandhealth,andtransfersto finance private expenditures on these and other components of the living standards of thepoor.” Bhagwatimakes it clear that effective antipoverty policywould likely involve amix ofthesetwoapproaches.

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made the most progress had done so with a strategy with two equally importantelements:

“Thefirstelementistopromotetheproductiveuseofthepoor’smostabundantasset—labor. It calls for policies to harness market incentives, social andpoliticalinstitutions,infrastructure,andtechnologytothatend.

Thesecondistoprovidebasicsocialservicestothepoor. Primaryhealthcare,familyplanning,nutrition,andprimaryeducationareespeciallyimportant.

The two elements are mutually reinforcing; one without the other is notsufficient.”

During1965‐1987incountrieslikeBrazilandPakistangrowthhadraisedincomesbutgovernmentshad failed toprovidesocialservices. InMoroccoandSriLanka,primaryeducationandhealthindicatorswereimpressivebuttheranksofthepoorhadswelledinstead of shrinking because income growth had been anemic. But in Indonesia andMalaysia, where both parts of the strategy were implemented, the number of poorpeople had been cut in half, along with impressive improvements in health andeducationandothersocialindicators.ThebestevidenceinfavorofthestrategycamefromTaiwanandKorea.Between1965and1987,Korea’sinfantmortalityfellfrom62to24per1,000births,thefertilityratefellfrom4.9to1.8,andlifeexpectancyatbirthrosetomorethan70years.Secondaryschoolenrollmentforgirlsrosefrom25percentin1965to86percentin1987,andforboysfrom35to88percent.Rigorousimplementationofthistwo‐partstrategy—madepotentbyaswiftreformthattransferredmorethanhalfofallcultivatedlandtopoorerhouseholds—hadslashedextremepovertytounder3percentby1990.Taiwan’sstoryissimilar.The 1997‐98 crisis would convince the Koreans that these two elements needed acomplement:socialinsurance.The1990WDRhadanticipatedthis.

“Evenifthisbasictwo‐partstrategyisadopted,manyoftheworld’spoor—thesick,theold,thosewholiveinresourcepoorregions,andothers—willcontinueto experience severe deprivation. Many others will experience temporarysetbacksowingtoseasonalvariationsinincome,lossofthefamilybreadwinner,famine, or adverse macroeconomic shocks. A comprehensive approach topovertyreduction,therefore,callsforaprogramofwell‐targetedtransfersandsafetynetsasanessentialcomplementtothebasicstrategy.”

The2.5‐pointstrategyproposedbytheWDRcanbeseenasapolicypackagetoincreasethe incomes and the assets of the poor, and to provide basic insurance to the pooragainstbadluckorthevagariesoftheeconomy.Itcanalsobeseenasapublic‐privatepartnership:privateinitiativewouldincreasetheincomesofthepoor,ablendofpublicand private actions would help them add to their assets, and government‐sponsoredsafetynetswouldaidthemostdestituteandunfortunate.Forthecountriesthathadputthisapproachintopracticeinthe1970sand1980s,itprovedtobeawinninggameplan.During the next 25 years, as global extreme poverty rates continued to fall, it woulddisplayitsdurability(Figure2).

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Box1:The1980WDR’stwo‐pointstrategyIn1973,justastheEastAsiannationswerestartingtocreatewhatwouldbecalledaneconomicmiracletwodecadeslater,theWorldBank’spresident,RobertMcNamara,wasexpressingconcernaboutwhatwashappeningalloverthedevelopingworld:

“The basic problem of poverty and growth in the developingworld can be stated verysimply.….Despiteadecadeofunprecedentedincreaseinthegrossnationalproductofthedeveloping countries, the poorest segments of their population have received relativelylittle benefit.Nearly800million individuals—40percent out ofa total of two billion—surviveonincomesestimated(inU.S.purchasingpower)at30centsperdayinconditionsofmalnutrition,illiteracy,andsqualor.Theyaresufferingpovertyintheabsolutesense….

The data suggest that the decade of rapid growth has been accompanied by greatermaldistribution of income inmany developing countries, and that the problem ismostsevereinthecountryside.Therehasbeenanincreaseintheoutputofmining,industry,andgovernment—and in the incomes of the people dependent on these sectors—but theproductivityandincomeofthesmallfarmerhavestagnated.

Onecanconcludethatpoliciesaimedprimarilyatacceleratingeconomicgrowth,inmostdevelopingcountries,havebenefitedmainly theupper40percentof thepopulationandtheallocationofpublicservicesandinvestmentfundshastendedtostrengthenratherthantooffsetthistrend.”ReflectingMcNamara’s emphasis on the living standards of the bottom40 percent ofpeopleindevelopingcountries,the1980WDRtookagoodlookatpovertyandhumandevelopmentsincetheSecondWorldWarwiththedataitcouldmuster. Itessentiallyrecommended a strategy with two important elements: policies to foster growth,especiallyinruralareas,andcomplementarypoliciesforhumandevelopment.Comparedwiththe1990WDR,ithadonemajordifference:theimpliedunimportanceofsocial insurance programs. WDR 1980 had exactly two paragraphs on transfers andsubsidies(page45).Itconcludedthatwhileinindustrializedcountriesthemainstayofantipovertypolicyisincometransfersandsocialinsuranceprograms,thescopeforsuchprogramsindevelopingcountriesislimited.Thealternativeapproachwastosubsidizegoodsandservicesthatareespeciallyimportantforpoorpeople,suchasfoodandfuel.This couldhelp thepoor raise their health and longevity, but such subsidies involvedleakages to the non‐poor and could be costly. In essence, the report discourageddevelopingcountriesfromrelyingmuch—ifatall—onsuchtransfersandsubsidies.Asubtlerdifferencelayinthe1980WDR’semphasisonfertilityandpopulationpolicies.Figure5.6onpage69ofthereport,titled“PolicyandPoverty”laidouttherelationshipsbetween five principal aspects of economic development: Income, Nutrition, Fertility,Education, and Health. The WDR referred to the debate on family planning, andconcludedthatsocioeconomicprogressandfamilyplanningbothaffectfertilityandaremutuallyreinforcing.Tenyearslater,WDR1990wouldmakeasimilarjudgment.But,influenced by the experiences in China and India, it recommended that the principalobjective of family planning programs should be improved maternal health andmortality,notreducedfertility.Sources:McNamara(1973)andWorldDevelopmentReport1980.

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0

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25

30

35

40

45

50

1980 1990 2000 2010 2020 2030

Percentageofpopulationlivingonlessthan$1.90aday

Figure2:Globalextremepovertysince1980

Source:GlobalMonitoringReport2015/16(WorldBank)Note:Numbersuntil2012areestimatedandnumbersfor2015and2030areprojections.

Post1990—PovertyreductiongoesglobalBetween 1965 and 1990, poverty reduction was almost exclusively an East Asianphenomenon. Sincethen, ithasgoneglobal. ThenextquartercenturysawcontinuedprogressinEastAsialedthistimebyChina,butmorethanadozencountriesinSouthAmerica,SouthAsia,andAfricaalsobegantorapidlyreducetheranksofpeoplelivinginextremepoverty.Themostsuccessfulones,suchasVietnam,reliedontheproven2.5‐point plan: a strategy that emphasized economic growth generally initiated byimprovementsinagriculture,biginvestmentsineducation,healthandfamilyplanning,andwell‐chosensocialassistanceprograms.Along the way, there has been innovation. Most noticeably, development specialistshave discovered ways to design large‐scale social assistance programs in ways thatreinforcepoliciestofosterlabor‐usinggrowthandinvestmentsinhumancapital.Therehave been numerous experiments, and some of them have been successful. Theespecially promising experiments are new ways to provide cash transfers, such asProgresa8inMexicoandBolsaFamilia inBrazil,extendingunemployment insurancetorural workers through programs such as the National Rural Employment GuaranteeScheme in India, and social assistance for the very poor such as China’s Dibao andEthiopia’sProductiveSafetyNetProgram.Thecostsoftheseprogramsrangefrom0.5to5percentofGDP.What some countries have also experienced is the effect of natural disasters—ofdroughts and disease, and storms and tsunamis. A major contributor to Ethiopia’ssuccessincuttingtheextremepovertyratebymorethanhalfmayjustbegoodfortune:clementweatherconditionsduringthelastdecade.Bangladeshhasbeentryingtohelp

8Mexico’sProgresaprogramwaslaterrenamedOportunidadesand,morerecently,Prospera.Forsimplicity,itsoriginalnameisusedthroughoutthispaper.

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people find betterways to copewith cyclones and climate change. In the1990s and2000s, the AIDS epidemic led to more than 33 million untimely deaths—about 22million in Sub‐Saharan Africa—along with untold human suffering and big economiclosses.Oneestimateisthatgrowthfellbybetween2and4percentagepointsduringthepeak of the epidemic in Southern Africa. The Avian Flu and Ebola viruses didconsiderabledamagetoo.Inmakingsurethatcalamitiesandpandemicsdonotreversehard‐wongainsinreducingpoverty,muchmorewillhavetobedonebetweennowand2030.Between1990and2012,thelargestreductionsinthenumbersofpeoplelivingonlessthan$1.90adayhappenedinChina,Indonesia,andVietnaminEastAsia;India,Pakistan,andBangladeshinSouthAsia;BrazilandMexicoinLatinAmerica;andEthiopia,Ghana,SouthAfrica,andTanzaniainSub‐SaharanAfrica.These12countriesaccountedfor1.1billion of the 1 billion global drop in $1.90 dollar‐a‐day poverty between 1990 and2012.9Severaloftheseexperiencesareassessedbelow.ChinaandVietnamThe biggest story in economic development and poverty reduction since 1990 is, ofcourse, thePeople’sRepublic of China. The reformsunderDengXiaoping completelytransformedChina(and,induecourse,theworld)andarenowthestuffoflegend.Whenitcomestobig,quickandsustainablepovertyreduction,thesereformshavenopeer.In1981,88percentofallChineselivedonlessthan$1.90aday;in2012,thatratioislessthan7percent.In1981,almosteveryChinesepersonlivedonlessthan$3.10dollarsaday;in2012,thenumberislessthan20percent.Themagnitudesarestunning.In1981,880millionpeoplelivedonlessthan$1.90aday.By1990itwaslessthan760million,andby2012itwaslessthan100million.Whatmakesthesenumbersimpressiveisthatbetween 1981 and 2012, China’s population grew by a third—from a billion tomorethan1.35billion.Between1990and2012,theabsolutenumberofextremepoorhasbeenreducedbyanannualaverageof30millionayear.WhatmadeChinasosuccessful?Thequickansweristhatsince1980,Chinahasimplementedthe2.5‐pointstrategyalmostaswellasKoreaand Taiwan. Economic growth has been both rapid and labor‐intensive—initiated byagriculturalproductivityincreases,disciplinedbyagrowingopenness,andfacilitatedbyinvestmentsininfrastructure;investmentsinhumancapitalhavebeenaidedbyeffortsto reduce fertility and,more recently, by targeted transfers. But the pace of povertyreduction has waxed and waned over time, and these fluctuations provide valuablelessonsforothers.Everyone seems to agree that the metamorphosis started in 1978. But then thenarrative diverges. One version emphasizes China’s sudden openness to trade—thespecialeconomiczonesalongthecoastthatattractedforeigndirectinvestmentandthedomestic investments in infrastructure in andaround these favored areas. TheotherversionhighlightsthetransformationofChineseagriculture.There were no sweeping purchases and redistribution of land, as there had been inKoreaandTaiwan(thelandhadbelongedtotheStatesincethelate1940s).Whiletherehad been investment in rural infrastructure such as canals, agricultural productivity

9The ranks of the poor swelled in many countries. In six countries—Nigeria, DemocraticRepublicofCongo,Madagascar,Kenya,Malawi,andAngola—theincreaseinpeoplelivingonlessthan1.90dollarsadaybetween1990and2015addedupto100million.

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growthwasmeasly—just2.5percentannuallybetween1952and1977.Butstartingin1979,almostallfarmlandwasallocatedtoindividualfarmers.Theoldtenuresystem—inwhichruralhouseholdsworkedtofulfillaquota forthecollective—waschangedtoallowhouseholds to sell produce above a reducedquota in localmarkets.The reformwasaccompaniedbyliberalizationofmarketsforfarmoutputsandinputs.The resultswerephenomenal. Agricultural productivity growth tripled to 7.4 percentperyearbetween1978and1994.Theannualdisposable income for anaverage ruralresidentincreasedthree‐foldfrom134yuanin1978to398yuanin1985.Chinawasanagrarianeconomyatthetime.Unsurprisingly,povertyfelldramatically.Infact,muchofthepovertyreductioninChinacanbetracedtoproductivitygrowthinagriculture.Aftertheinitialreformsintheearly1980s,though,agriculturemoveddownasapolicypriorityinthemid‐1980s,asthefocusshiftedtourbanareas.Still,townshipandvillageenterprises(TVEs)wereestablishedclosetoruralpopulations,andtheyabsorbedthegrowinglaborsurpluses.In1990‐95,astheeconomygrewbyalmost9percentperyear,the incomes of the poor rose just 1 percent annually. Poverty reduction slowedconsiderablyinthedecadeafter1985.China’s farm policies were supplemented by the “open door policy” of tradeliberalizationandforeigndirectinvestment.By1990,China’saverageimporttariffwas40percent,lessthanhalfthoseofBangladeshandIndia.In2001,ChinajoinedtheWTOandtariffsfellbelow10percent.In1970,importsandexportsaddedupto5percentofGDP;todayit istentimesthatasashareofGDPthatistentimeslargerthanitwasin1970. One study estimates that more that 90 percent of goods and services areintermediatedthroughcompetitivemarketsinChinatoday.Chinahadoneadvantageovermanycountrieswithhighpovertyratestoday:itshumancapital. Even in 1980, China’s education and health levels were quite good. Lifeexpectancyatbirthwas66years,comparedtoBrazil’s63andIndia’s56.Itsliteracyratewas 66 percent, closer to Brazil’s 75 than India’s 41 percent, but its GDP per capita(adjusted for purchasing power) in 1981was less than $550, comparedwith Brazil’s$7,000andIndia’s$900.WhiletheextremepovertyrateinChinaat$1.90adaywas88percentcomparedwithBrazil’s24percentandIndia’s49percent,itwasnotbecauseofChina’shumancapital.China’shumancapitalstockwasgoodenoughforthehundredsoftownshipandvillageenterprisestobeginprofiting fromthe liberalizationof theeconomy. Unlikethe largestateownedenterprises,TVEsdidnotreceivecreditsubsidies,sotheyusedmorelaborand less capital. Employment in these enterprises grew by more than 100 millionbetween1978and1996;theirshareinChina’svalueaddedincreasedfrom6percentofGDPto26percent.In the 1980s, the extreme poverty rate in China was high even compared with poorcountries—in1981,onlyCambodia,BurkinaFaso,Mali,andUgandahadhigherpovertyincidence.Buthealthandeducationstandardsweremuchbetter.In1990,forexample,under‐five mortality was 54 per 1,000 births compared to 87 for middle‐incomecountries, and life expectancy was almost 70 years, compared with 65 for middle‐incomecountries. Adult literacywas78percent,muchhigherthanthemiddle‐incomecountryaverage.Chinahassinceincreasedlifeexpectancyto75yearsandadultliteracyto95percent,andtheaverageschoolinglevelisnow9years.A2006revisededucation

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law made compulsory education free of charge by 2008. The gross secondaryenrollmentratiohastripledfrom31percenttomorethan90percent.10Employeesofstateownedenterprisesalwayshadaccesstomedicalcare. In1978,forexample, more than 80 percent of the urban labor force was covered by the danweisystem for state‐owned enterprises. But even 25 years later, the proportion of ruralpeoplewhohadmedical insurancewas less than13percent. In2003, the subsidizednewCooperativeMedicalServicewasestablished. Withinadecade,97percentof thefarmingpopulationwascovered.China’seffortstoimproveeducationandhealthpoliciesweremadeeasierbyrelativelyhighlevelsoffemaleliteracyinthe1970s—literatemothersareahugeplus.ButChinahasnotreliedjustonfemaleeducationtobringpopulationgrowthdowntomanageablelevels. China’s family planning programs—nicknamed the one‐child policy—wereenforcedwidely between 1971 and 1980, andmore strictly between 1980 and 2010.Theseprogramshavebeencontroversial.Whatisnotdebatableisthequickdeclineinfertilitybetween1970and1980, fromalmost6to lessthan3birthsinbothruralandurbanareas. Studieshavealso found that theeffectsof familyplanningpoliciesweregreater for lesseducatedwomen.Over time, increases in femaleeducationandwageswere combined with penalties on having more children than allowed, leading todeclining fertilityeven in thepoorerprovincesandamongboth themajorityHanandethnicminorities.Byonemeasure,Chinaaverted200millionbirthsbecauseoftheonechild policy, though this number is disputed. What is not disputed is that the policyenjoyedconsiderablesupportamongthepeople.Chinahastransformeditstraditionalsocialreliefsystemintoamodernsocialassistanceprogram.In2008,about23millionurbanresidentsand43millionruralresidentswerecoveredbyaminimumlivelihoodguaranteeschemeknownasthedibao,paying15‐20percentoftheurbandisposableincome.Sincebythelate2000s,extremepovertyratesinChinawerealmost in singledigits, thismeant sizeablecoverage, thoughbya socialassistance scheme that might be frugal by OECD standards, especially in rural areas.Nevertheless, the dibao has helped to reduce extreme poverty, and not create majordisincentivestowork.Overtheyears,Chinahasalsoadoptedmultiplesocialinsurancemechanisms,themostimportant of which are medical insurance, pensions, and unemployment and injuryinsuranceforurbanworkers. Acontributorypensionsystemcoversabout220millionurban residents; unemployment and injury insurance coversworkers in larger urbanenterprises.In2009,apilotprogramforruralpensionswasinitiated.It would be fair to say, however, that themainstay of the Chinese poverty reductionstrategy has been rapid economic growth—first in agriculture triggered by betterincentivesand the liberalizationof productmarkets, and then inmanufacturingmadepossiblebyopennesstotradeandstablemacroeconomics.Chinahasalwayshadahighsavings rate, and steady increases in household incomes led to rapid increases in the

10LifeexpectancyinChinaisnineyearslongerthaninIndia—acountrythatin1980hadahigherGDPper capita thanChina. Chinahas66percentmorenurses andmidwives and160percentmore doctors than India. In China, the literacy rate for women aged 15‐24 is 99 percentcomparedtolessthan75percentforIndia.Theinfantmortalityrateper1,000livebirthsis12inChina,lessthanathirdthatofIndia.By2005,Chinahadreducedtheextremepovertyrateto19percent,justtwiceBrazil’s9.6percentandalmosthalfofthe34percentpovertyrateinIndia.

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savingsavailableforinvestment.In1994,avalue‐addedtaxwasintroduced,givingthecentralgovernmentahealthy revenuebase. TheChineseeconomyhasgrownrapidlyandsteadily.Withtheexceptionoftheperiodofunrestinthelate1980s,growthratesaveragedalmost10percentinthe1990sand2000s.Buttherehasbeenalotofvariationaroundthisaverage.Whileeconomicgrowthrateshavebeenhighandlargelysteady,thepaceofpovertyreductionhaswaxedandwaned.This variation points to the importance of agriculture and rural development as themostpotentwaytoreducepoverty. Povertyreductionwasquickestinthefirsthalfofthe 1980s and the mid‐1990s, both of which were times of rapid agriculturalproductivitygrowthand/orhighpricesoffarmproducts.Growthofagriculturaloutputis estimated tobe four times aspotent in reducingpoverty inChina as the growth inindustry and services. Absent China’s relative neglect of agriculture and ruralinfrastructure,andpoliciesthatrestrictmobilitysuchasthehukou,thepaceofpovertyreductionmighthavebeentwiceasfast.ItwouldthenhavebeensimilartowhatactuallyhappenedinVietnam.Between1990and2012, thenumber ofVietnamesepeople livingon less than $1.90 a dayhasbeenreduced from40million to less than 3million. Poverty at $3.10 a day is less than aquarterofwhatitwasin1990,fallingfrom55millionto12million.Despiteits(brief)communistpast,Vietnam’spoliciesbeginninginthelate‐1980swereuncannilysimilartothoseofKoreaandTaiwan.ThemovetoamarketeconomybeganwiththeDoiMoi(renovation)programof1986.In1988,thegovernment introducedtheLandLaw. By1990,morethan80percentofthe country’s farmlandwas effectively privatized. The reformwas initially similar toChina’s household responsibility system, involving land allocations and productionquotas but no rights to transfer or sell their allocated land. But Vietnam soonabandonedproductionquotasandallowedaprivatemarket in agricultural output. A1993 Land Law introduced official land titles and allowed for transactions throughwhichusagerightscouldbelegallytransferred,exchanged,mortgaged,andinherited.Allthisaddeduptooneofthemostradicallandreforms:Vietnamwentfromcommunistcollectivestofamily farms in lessthanadecade.Theeffectonpovertywas immediateand immense. Between 1992/93 and 2004, the extremepoverty rate in Vietnam fellfrom49percentto27percent,andthento3percentby2012.Asapointofcomparison,inChina theextremepoverty rate fell from88percent in1981 to67percent in1990and32percentin2002.Agriculture’s share in GDP fell from about 30 to 20 percent during this time, thoughannualagriculturalgrowthrateshaveaveragednearly4percent. Vietnam’stradehasburgeonedtomorethan150percentofGDP,diversifyingtoincludemanufacturessuchasgarmentsandelectronics,farmproductssuchascoffeeandrice,andcrudeoil.Vietnamhasnotreliedmuchonsocialassistanceprograms.SocialassistanceinVietnamincluding thegovernment’s flagshipNationalTargetedProgram forPovertyReduction(NTPPR) covered just 1.2 percent of the population in 2008. Temporary antipovertyprograms cover more people, such as the roughly 4 million pupils receiving feeexemptions, 4 million households receiving government loans, and 2 million peoplereceiving help with business development and training. Total spending was just 0.2percentofGDP,withbenefitsequivalenttolessthan20percentoftheminimumwage—lessthanathirdofthepovertyline.

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ThesearemagnitudesreminiscentofKoreaandTaiwanduringthe1980s.LikeKoreaatasimilarstage,Vietnamhasalsostruggledrecentlytomaintainmacroeconomicstability.But lookingbackat itsrecordofpovertyreductionbetween1990and2015, it isclearthatVietnamisalreadyoneoftheworld’smostsuccessfuldevelopers.IndiaandBangladeshPeaceandindependencecamelatertoVietnamthantothecountriesinNortheastAsia.Itwasonly inthe1970s thathostilitiesbetweentheUnitedStatesandNorthVietnamceased.Withinadecadeofconsolidatingthecountry,Vietnamhadstartedtoengineerthe fastest decline in extreme poverty ever seen so far. At the time that the conflictended inVietnam,SouthAsiawassuffering its lastmajorwar. In1971,EastPakistanbecame Bangladesh; there has not been a war between India and Pakistan since. Adecadeorsolater,povertyreductiononthesubcontinentbeganinearnest.InIndia,thiswasinitiatedbyapickupineconomicgrowth.UnlikeChina,where1978isseen as the year in which reforms were initiated, in India it is harder to pin thewatershed. Whatisclearisthatextremepovertyratesbegantofall inthemid‐1980s,butthetotalnumberofextremepoorbegantodeclineonlyaround2000.Thenumberof Indians livingonlessthan$1.90adayincreasedfromabout400millionin1981toabout 440 million in 2002. Since then, India has seen a big reduction in thesenumbers—to about 275million in 2011 and less than 240million in 2012.11Indeed,between 2008 and 2011, India was the biggest contributor to global povertyreduction—cuttingthenumberofextremepoorbyalmost120million.There are many reasons why India’s poverty reduction has been slower and late incomingwhencomparedwithChina.ThreetopcontendersareIndia’srelativelyslowereconomicgrowth;itspatchierperformanceinimprovingagriculturalproductivity;andcritically, lower levels of and greater inequalities in human capital, especially withregard to the education of girls, the health of women, and the access to services fordisadvantagedgroups.Afterastrugglewithfiscalandtradedeficits,lowinvestment,andhighinflationratesinthe late1980s, Indiamanaged to institutemacroeconomic stabilityby themid‐1990s.Economic growth was aided by regulatory reforms triggered by the 1991 balance ofpaymentcrisis.Between1995and2004,growthinGDPwasaveragingabout5percent.Between2005and2014,withtheexceptionof2009,itaveragedmorethan8percent.WithChina‐likegrowthrates,China‐likepoverty reductionshouldhave followed. ButIndiahasnotdonenearlyaswellinmakingitsgrowthpro‐poor.Onereasonforthisisthe relative neglect of agriculture. India’s land reforms happened soon afterindependenceinthe1950s,butwereunevenacrossthestates.Landredistributionwasless extensive than the reform of tenancy laws, and studies have found both to beassociatedwith increases in agricultural productivity and poverty reduction. Indeed,thebenefits of theGreenRevolutionwentmainly to states that implemented thenewtenancylaws.Ingeneralthough,agriculturewasnotaccordedthepriorityitshouldhaveinacountrywhere,eveninrecentyears,morethanhalfofallpeopledependonfarming,andalmost

11At $3.10aday themagnitudesaremuchgreater though the trend is the same. $3.10‐a‐daypovertyrose fromabout570million in1981topeakatalmost780millionpeople in theearly2000s,andhasbeencomingdownsteadilysince.

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oneofeveryfourruralresidentsstilllivesinextremepoverty.Theeconomicreformsof1991 largelyneglected agriculture, excludingpolicyareas suchas rural infrastructurefrom the list ofpriorities. Agriculture’s share inGDPhasbeen falling rapidly since—fromabout33 to13percentbetween1990and2015—buttheshareofagriculture inemployment has barely budged. Until 2005, the employment in agriculture grew inabsolute terms. It is only since the mid‐2000s that agriculture’s share of totalemploymentfellbelowhalf,andthenumbersbegantodecline.Urbangrowthhelpedtoreduceruralpovertyintheearlyyears,buttheeffectivenessofthisindirectchannelhasweakenedovertime.OnereasonforthismaybeIndia’slagginghealthandeducationalservices,especiallyinruralareas.WhileChinahadanextensiveinfrastructureforsocialserviceprovisionatthestartofitsreforms,inIndiatheaccesstoeducationandhealthwasunequal.Despiteanimprovementintheoveralllevelsofeducationandhealth,ithasremainedthatway.Health spending by both state and central governments has remained low, andindicators of access such as immunization rates have actually deteriorated in somestates. States that have increased access to public education and health have donebetter inreducingpoverty:astudyestimatesthat increasingsocialsectorspendingbyonepercentagepointofGDPleadstoat0.5pointreductioninpoverty.Fertilityrateshavebeenslowerincomingdown.In1965,ChinaandIndiahadidenticalfertility rates of about 6 births perwoman. By 1990,while China’s fertility ratewasdown to 2.5, India’s still was about 4. The difference can be attributed to slowerimprovementsintheeducationandwagesofwomen.India’sfamilyplanningprogramshavehad their shareof controversy,but theyhavebeencreditedwithmore than150millionavertedbirths.Indiahashadalonghistoryofdirectinterventionstoreducepoverty,includingfoodandfuel subsidies, subsidies for agricultural inputs such as fertilizers and electricity,subsidizedcreditprograms,andlarge‐scaleworkfareschemes.Thegeneralconsensusis that food, fuel and fertilizer subsidies have been fiscally burdensome—by onemeasure,costingmorethan10percentofGDP—andleastcost‐effective:whilesomeofthepoor havebenefited,most of their benefits have gone to thenon‐poor. Farmoreeffective has been the big workfare program introduced in 2006: the National RuralEmployment Guarantee Scheme, which guarantees each rural household 100 days ofunskilledwageworkeachyear. TheNREGShasbeenshowntoincreaseconsumption,theintakeofproteins,andtheaccumulationofassets.Withimprovedimplementation,schemes like the NREGS can be effective in alleviating rural poverty in ways thatreinforce the growthof agriculture andnonfarmemployment. It is equally clear thatgeneral subsidies for foodand farm inputscannot. Abetterwaywouldbe toprovidetargetedcashtransfers,butthisrequiresadministrativecapacitythatthegovernmentisstillacquiring.Inshort,India’sapproachduringthelast25yearscannotbedescribedasanapplicationof the 2.5‐point poverty reduction strategy. While economic growth has accelerated,agriculturalproductivityhasnotkeptpace.Whileeducationandhealthindicatorshaveimproved, inequalities in access have widened. And while India has implementedinnovativesocialassistanceschemestohelpthepoor,ithasnotaggressivelyreallocatedresources into theseprogramsandoutof lesscost‐effectivegeneral subsidies for fuel,food, and farm inputs. As of 2012, close to 230million Indians still live on less than$1.90aday,andmorethan650milliononlessthan$3.10aday.Toeliminateextremepovertyby2030, economic growthhas to becomemorepro‐poor, and social serviceshave to bemade towork for poor people. In India, it is not yet time for large‐scaleexpansionofsocialinsurance.

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InneighboringBangladesh,thepovertyreductionstrategylooksalotmorelikethe2.5‐pointplan.Startinginthe1990s,extremepovertyhascomedown.In1990,almost75millionBangladeshis—morethanhalfofthecountry’spopulation—livedonlessthana$1.90 a day; as of 2012, it is less than 58million. How did Bangladesh get almost amillionpeopleoutofextremepovertyeveryyearbetween1990and2012?Theanswerlies in a combination of economic growth spurred by trade and investments in ruralinfrastructure, a big effort to improve the educationof girls andmaternal health, andinterventionstoimprovefamilyplanningandaccesstocredit,especiallyinruralareas.ComparedwithIndia,Bangladeshhasreliedlessonbigsocialassistanceprograms.Inthe1990s,GDPgrowthaveragedabout5percentannually. Duringthe lastdecade,aggregategrowthrateshaveaveragedmorethan6percent.Realoutputperpersonhasincreasedbyalmost4percentannuallybetween1990and2015.Agriculture’sshareofthelaborforcehasfallenslowlyfromabout52to45percent.ItsshareofGDPhasfallenfaster,asoutputinindustryandserviceshasgrowntwiceasfastasinagriculture.Buttherateofgrowthofagriculturaloutputacceleratedaround1990. Between1965and1990,agriculturaloutputgrewbyonlyabout1.6percentannually. Between1991and2011, it grew more than 3.8 annually. While farming output per person has notincreased rapidly, output per unit of land has grown rapidly, aided by greater use offertilizers, better varieties of rice, and improved irrigation. For example, rice yieldsincreased from about 2.6 to 4.2 tons per hectare. Since more than 80 percent ofBangladesh’s extreme poor depend on agriculture, the effects of higher yields onpovertywereimmediate.The governmentmade rural roads a priority; more than 2,500 kilometers have beenimproved. Inaddition,630,000ruralhomeswereconnectedtothenationalgridwhilemore than 750,000 households in remote rural areas have installed solar systems.Studies show that improved connectivity raises female employment by 50 percent,increasestheshareof farmers’nonagriculturalassetssizably,anddoublesthepovertyreductionrate.Forapopulationthatisstill66percentrural,higheconomicreturnstoimprovedruralconnectivityshouldbeunsurprising.Growingtradeandindustryhavebeenabsorbingthelaborbeingreleasedasagricultureslowlymodernizes.Exportsofgoodsandserviceshaverisenfromabout10percentofGDPin1990toabout33percenttoday.Labor‐intensivemanufacturessuchasgarmentshave been the mainstay of Bangladesh’s exports. They have also been a source ofemploymentforincreasinglyeducatedwomen.Bangladeshhasalsomaderemarkableprogressingirls’education.Today,98percentofgirlsareenrolledinprimaryschool,andtheenrollmentofgirlsinsecondaryschoolshasrisenfrom1.1millionin1991toover6milliontoday.Assisteddeliverieshavehelpedreduce maternal mortality rates by 40 percent in just the last decade. 90 percent ofBangladeshichildrenreceivevitaminAsupplementsandover80percentarevaccinated,andinfantandchildmortalityhave fallenbymorethantwo‐thirdssince1990.Duringthisperiod,fertilityrateshavefallenfrommorethan4birthsperwomantoabout2.2,close to replacement levels. Annualpopulationgrowthhas fallen frommore than2.5percentin1990tolessthan1percenttoday.Theevidencefromawell‐evaluatedfamilyplanning intervention in Bangladesh indicates that while such programs can help inincreasing awareness ofmethods available towomen, they have to be complementedwithpoliciestoincreasetheeducationofgirlsandthelabormarketprospectsofwomen.Bangladeshappearstohavedoneboth,andhastheresultstoproveit.Bangladesh’s geographymakes it vulnerable to natural disasters and climate change.Bangladeshsuffered80seriousdroughts, floods,storms,orearthquakesin1993‐2002

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and55in2003‐2012,andaccountedformorethanhalfofalldeathsfromstormsduringthe1990sand2000s.In2009,forexample,morethan50percentofhouseholdsrecalledbeinghitbyclimateorhealthrelatedshocks,but fewerthan2percentreportedsocialsafetynetsasoneof the top fourways todealwith them. Savingandborrowingwasmuchmoreimportant.Microfinanceinstitutionshadmorethan34millionmembersin2010. Evaluations have shown that long‐term membership in these programs helpssmooth consumption in light of shocks. Consumption is twice as stable for GrameenBankborrowersas forothers. In aneconomyasvulnerable to shocksasBangladesh,organizedmicrofinancethroughpublic‐privatepartnershipssuchastheGrameenBankshouldbeseenasanimportantpartofacomprehensivepovertyreductionstrategy.Thegovernmentspendsabout1.5percentofGDPonsocialprotection,thoughthisratiocanbeashighas2.6percentinsomeyears.Therearemanysocialassistanceprograms,butlessthanathirdofpeopleunderthenationalpovertylinereceivebenefits.Accesstomicrofinanceappearstobemoreeffectiveinhelpinghouseholdscopewithshocks.EthiopiaandGhanaEthiopiahasalsobeensubjecttothevagariesoftheweather.Manyofusgrewupwithimages of Ethiopian famine and starvation. During the last decade, Ethiopia has hadbetter weather. It has also instituted better policies. With economic growth ratestopping10percent,povertyreductionhasacceleratedsince2000.Theextremepovertyheadcountratioat$1.90adaywas47percentin2002.By2012,itwas29percent.ThisachievementputsEthiopiaasoneofthetopperformersinreducingpoverty.WhataccountsforEthiopia’sstellarperformanceandwhatarethebigtasksahead?Theshort answer is rapid economic growth especially through higher productivity inagriculture; quicker progress in education and health, especially that of women; andminimalbutwell‐designedincomesupportfortheverypoor—theProductiveSafetyNetProgram,thelargestsuchschemeinSub‐SaharanAfrica.Growthhas increasedandbecomemorestableduring the lastdecade. Between1990and 2004, growth averaged about 5 percent and there were four years of negativegrowth. Since 2004, growth has averaged more than 10 percent and has beenremarkablysteady. EthiopiahasalsodonebetterthanothercountriesinSub‐SaharanAfrica in converting growth into poverty reduction. Its success comes from acombination of good agricultural policies, investments in rural infrastructure, and adecade‐long run of clementweather. Agricultural prices have been high,which havebroughtadversityforthemostpoor,butwithanoverallpositiveinfluenceonpoverty.Ethiopia hasmade large investments in roads, and this has helped improve access tomarkets.Improved health (especially antenatal services for women) and education servicesduring the last fifteenyearshave resulted in life expectancy increasing from52 to63years,andstuntinghasfallenfrom56to44percent.In2000,Ethiopia’scontraceptiveprevalence rate for modern methods was only 6.3 percent, which was the lowest inEasternandSouthernAfrica.By2011,theratewas27percent,andthefertilityratehadfallen from5.5 to 4.8. But despite amassive reduction from70 to 50 percent of theshareofpeoplewithoutanyeducation,educationalattainmentremainslow.Andwhilefertilityratesarefalling,theyarestillgreaterthan4.In2005,thegovernmentintroducedtheProductiveSafetyNetProgram(PSNP),aimedat helping poor households in food insecure areas. The government spends about 1percent of GDP on the PSNP, which combines a public works scheme with an

21

unconditionalcashtransfer.Foodinsecurehouseholdswithable‐bodiedadultsarepaidtoworkonpublicworksprojects,whilethosewithoutable‐bodiedadultsaregivencashtransfers. The program has been shown to increase agricultural input use, thusincreasingoutputandhelpingtoreducepoverty.HouseholdsthathadaccessbothtothePSNPandagriculturalsupportpackageswere,accordingtoGilliganetal.(2009):“morelikelytobefoodsecure, toborrowforproductivepurposes,use improvedagriculturaltechnologies,andoperatetheirownnonfarmbusinessactivities.Forthesehouseholds,thereisnoevidenceofdisincentiveeffectsintermsoflaborsupplyorprivatetransfers.”ResearchalsoshowsthatthePSNPdirectlyreducespoverty.Thepatternofpoverty reductionhasvariedover theyears. Between1996and2000,the impactofgrowthonmeasuredpovertywas small. Between2000and2005,bothurban and rural poverty fell impressively. Between 2005 and 2011, rural povertycontinuedtofall(by20percent)buturbanpovertyappearedtostall,andtheseverityofpoverty actually increased. Ethiopia will have to remedy some deficiencies in itspoverty reduction strategy but it is clear that even if it continues to implement theeconomicpoliciesthatithasduringthelastdecade,itwillbeamajorcontributortotheglobalpovertyreductionduringthenextdecade.AsEthiopiaengagedinsignificanteffortstoreducepoverty,anothersuccessstorywasemerginginWestAfrica.Duringthepast25years,Ghanamadesubstantialprogressinpovertyalleviation.Between1990and2012, the shareof thepopulation livingunder$1.90adaydecreasedfrom61to13percent.Thisrepresentedadecreaseinthenumberof people experiencing extreme poverty from 8.9 to 3.3 million. At $3.10 a day, thenumber of poor also declined, from 12.5million to 7.9million during the same timeperiod. Ghana’s strong economic performance allowed the country to reach middle‐income status in 2010. These achievements took place despite a period of rapidpopulationgrowth,whichsawthecountry’spopulationincreaseby73percent–to25.4million–duringthesameperiod.Consistentlyhigheconomicgrowthrates,especiallyinagriculture,playedanimportantrole in reducing poverty. Annual GDP growth hovered around 4 percent during the1990s and steadily rose until reaching average rates of almost 8 percent from 2006onward. Theperformanceof the agriculture sectorwasparticularlynoteworthy:withaverageannualgrowthof5percentduringthepast25years,Ghana isamongthe topfive countries in theworldwith the fastest agricultural growth over this period. Theresurgenceof cocoaproductionwasperhaps themost significantdevelopment in thissector. An early world leader in cocoa, Ghana experienced a protracted decline inproductionthroughoutthe1960sand1970s.Nevertheless,beginninginthe1980s,thegovernmentmade an effort to reverse this trend.By the early 2000s, productionhadbrokenallrecordsandGhanabecamethethirdleadingproducerofcocoaintheworld.The improvement in the welfare of cocoa farmers was also unmistakable: using thenationalpoverty line, thepoverty rate among these farmers decreased from60 to 24percentbetween1991and2005.HowdidGhanarevitalizeitsdwindlingcocoasector?First, itachievedmacroeconomicstability andremovedeconomicdistortions, suchas theovervaluationof its currency.Second, the government introduced reforms that brought a greater role for privatemarkets along the cocoa value chain. Specifically, reforms eliminated themonopsonypowerofGhana’scocoamarketingboard(COCOBOD),whichhadpreviouslyactedasthesole buyer in the market, and allowed new purchasers to compete and offer betterpricestofarmers.Reformsalsocreatedaprivatemarketforthedistributionof inputs.Finally, targeted public programs were conducted by COCOBOD with the purpose ofboosting farmers’ productivity. Key programs include a rehabilitation project that

22

replacedinfectedtreeswithnewhigh‐yieldvarietiesandafreemasssprayingprogramtoprotectagainstcocoadiseases.AnotherimportantpillarofGhana’spovertyreductionstrategywasimprovededucation.This enabled thepoor to avail of thenewopportunities that emerged in thenonfarmeconomy as Ghana’s agricultural sector continued to modernize. To this end, thegovernmentgraduallyincreasededucationexpenditurefrom2.8percentofGNIin1991to 6.9 percent in 2004 andmaintained an average of 5.8 percent from2005 onward.Withmorefinancialresourcesavailabletoimproveeducation,thegovernmentfocusedon building school infrastructure, providing free school uniforms and textbooks, andinstitutingaschoolfeedingprogramtoprovidemealsatpublicprimaryschools.In2005,Ghana also instituted a capitation grant scheme, eliminating school fees for basiceducationacrossthecountry.Educationoutcomes improveda lot as a result of these investments.Theprimarynetenrollmentratenearlydoubledfrom45.2percentintheearly1990sto89.3percentin2013.Theshareofyoungpeoplewhoareable to readandwrite inEnglish increasedfrom17percentintheearly1990sto81percentin2012.Thismeantthat,overtime,thelaborforcebecamemoreeducated:between1991and2012,theproportionofworkerswithschoolingrosefrom59to76percent.Theprovisionofeducationwasalsoaidedbyurbanization; as a result, the greatest improvements in educational outcomes can befoundinthemaincitiesofAccraandAshanti.It ishardtooverstatetheimportanceofimprovedemploymentopportunities forpovertyreduction–astudybyAzevedoetal.(2013)estimates that growth in labor incomesaccounted foralmost50percentofallpovertyreductioninGhanabetween1998and2005.Inrecentyears,Ghanahasalsointroducednoteworthysocialassistanceandinsuranceprograms that seek to support the poor and vulnerable, while strengthening humancapitalaccumulation.In2003,GhanaintroducedtheNationalHealthInsuranceScheme(NHIS)law,mandatinguniversalenrollmentinpublicinsurance.By2012,36percentofGhanaians were actively enrolled in these schemes. The NHIS is financed throughsubsidies, and a combination of taxes and premiums. Nevertheless, vulnerablepopulations, such as children, the elderly and the indigent, are exempt from thesepayments. The program is credited with increasing the utilization of health services,especiallyamongwomen.Asecondprogram,knownastheLivelihoodEmpowermentagainstPoverty(LEAP)cashtransfer,wasintroducedin2008.Thisprovidesunconditionalcashgrantstohouseholdswith elderly and disabled individuals, and a conditional transfer to households withorphan or vulnerable children subject to meeting school attendance and health visittargets.Fromasmallpilotwith1,654beneficiaries,thisprogramhasexpandedtocover74,000households by2013. Impact evaluations suggest that LEAPhas had a positiveimpactonschoolenrollmentandattendancefigures.To date, social assistance programs have remained small‐scale and under‐utilized,reachingalimitednumberofbeneficiariesandaccountingfor1.4percentofGDP.Goingforward,aspovertycontinuestodeclineandbecomemoreconcentratedamongspecificpopulations, targeted social assistance programs should play a greater role in thegovernment’s poverty reduction strategy. While the northern regions in Ghana haveexperienced improvements inpovertyandhumancapital, theycontinue to lagbehindtherestofthecountry,highlightingtheneedforgeographically‐targetedinterventionsandmore equitable investments in health and education. Finally, Ghana will need toaddress renewed concerns about macroeconomic stability and inflation in order topreservethegainsithasmade.

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BrazilandMexicoBetween1990and2012,thenumberofpeople living inextremepoverty inBrazil fellfromalmost31milliontolessthan5million.At$3.10aday,povertyhasbeenreducedfrom54millionto18million.Thatmillionsarestilllivinginabjectpovertyinacountrythat reached upper middle‐income levels almost 50 years ago is testament to anineffective development strategy. But the progress during the last two decades haslessonsforcountries inAsiaandAfrica. Itshowsthat forcountriesthathavereducedpoverty to low levels, a combination of macroeconomic stability with more effectivesocial policies can help end extreme poverty. But it also shows that without highergrowthrates, it isdifficult to sustain thisprogress.WhatexactlyhasBrazildonewell,andwhatwillithavetodobetter?First,between1994and1997,Brazilstabilizeditseconomy.Inflationhadstayedabove100 percent annually since 1982 going up to 2,500 percent in 1993. It was broughtdown to less than 10 percent by 1998. Between 1993 and 2004, using the nationalpoverty line, the share of people living in poverty dropped by a third, from 33 to 22percent. Brazil’s experience with inflation is a reminder for others that poormacroeconomicmanagementisoneofthemostanti‐poorthingsagovernmentcando.Second, Brazil invested in agriculture. Brazil’s support for agricultural research hashelpedbothlargeandsmallfarms.Despitethepublicitythatmega‐farmshavereceived,morethan80percentofruralBrazilianscontinuetotillsmallfarms.Theirproductivityhas grown due to better seeds and farming techniquesmade available by EMBRAPA,Brazil’sagriculturalresearchagency. Butit isalsoclearthatsmallfarmersneedmoreassistance than they have received and this has led to rural poverty remaining high,promptinganexodustocities.Extremepovertyisevenlydistributedbetweenruralandurban areas in Brazil, unlike Asia and Africawhere it is largely a rural phenomenon.WhileinChinaitwasagriculturethatledpovertyreduction,inBrazilthisroleisplayedbyservices. Periodsduringwhich theservice sectorgrows fasterareassociatedwithfasterpovertyreduction.Third,Brazilhas improvededucationandhealthservicesduring the last twodecades.SpendingoneducationasashareofGDPdoubledbetween1994and1995,andhasbeenmaintainedatabout5percenteversince.Healthcarespendinghasaveragedcloseto9percentofGDP,andcoveragehasbeenimprovingsincethereformsintheearly1990s.Combinedwithsocialassistanceprogramsthaturgedpoorfamiliestotakeadvantageofthese services, these investments have resulted inmuch better outcomes. Secondaryschoolenrollmenthasincreasedfrom50percenttomorethan80percentinlessthantwo decades. Life expectancy at birth is now 74 years, up five years since 1990.Maternalandinfantmortalityratesfellbyabout4percenteveryyearbetween2000and2009. These are impressive achievements, which have helped Brazil catch up withneighborslikeChileandArgentina.TheBraziliangovernmentspendsabout1percentofGDPonnon‐contributorypensionschemes for the rural and urban elderly. But Brazil is better known for its socialassistanceprogram,BolsaFamilia,aconditionalcashtransfer(CCT)programinwhichparentsgetafixedmonthlystipendofabout$30inexchangeforenrollingtheirchildreninschoolandforhealthcheckups.Itcovers50millionlow‐incomeBrazilians,aquarterof the total population, and costs about 0.5 percent of GDP. In its decade ofimplementation,BolsaFamiliahashelpedtoreducetheextremepovertyincidencefrom12.7 to 4.9 percent—its contribution is estimated at about a quarter of the totalreduction.

24

Today,withataxtoGDPratioof36percent,rampantcorruption,andcollapsingpublicinvestment ininfrastructure,Brazil isagainflirtingwitheconomicdisasterandrisksariseinpoverty.Brazil is not the only upper‐middle income country that still has people living inextremepoverty. ItsnorthernLatinAmericanneighbor,Mexico, is facingchallengesofits own. There has been unmistakable progress in poverty reduction over the pastdecades.Between1981and2011,theshareofpeoplelivingunder$1.90adayfellfrom23 to 3 percent. This has meant a reduction in the number of people experiencingextremepovertyfrom16.8millionin1981to3.5millionin2011.Buttheprogresshasnot been consistent. This trendmasks instanceswhenpoverty reduction efforts havelanguished, including reversalsduring themid‐1990sand,most recently, in the2011‐2015period.Assuch,Mexico’sstory is illustrativenotonlyofeffectiveactionsagainstpoverty, but also of problems that can occur when the 2.5 strategy is not fullyimplemented.Mexico’s inconsistentperformance inpoverty alleviation reflects, in part, fragilities ineconomicgrowth.Untilthelate1990s,Mexicosufferedvariousformsofmacroeconomicinstability and mismanagement. The 1980s were marked by a severe debt crisis—aresultoflargefiscaldeficits,excessivedebtaccumulation(ofabout$100billion),andarapid decline in the price ofMexico’s oil exports. As creditors demanded repayment,Mexico undertook a fiscal adjustment, resulting in curtailed imports and investment.Between1982and1988,economicgrowthwasvirtuallyzero.Thepovertyratehadalsorisenfrom23percentin1981to27percentin1984.In1989,anagreementknownastheBradyDealwas finally reachedwithMexico’s creditors, slashingMexico’s debt by$12billion in discounted value terms. Debt relief broughtmanybenefits: investmentresurged,growthre‐boundedto4percent,andtheextremepovertyratedecreasedto9percentby1993.But these results were short‐lived. Mexico was headed into a new crisis in 1994.Mexico’sreformsinfinancialmarketsliberalizationcombinedwithafixedexchangerateregimeledtoarapidaccumulationofforeigncapitalinflows.Whilecapitalaccumulated,institutionsthatprovideoversightdidnotkeepup.Between1989and1992,portfolioinvestments grew from zero to $18 billion. Foreign direct investment grew from $2billion to$4billionperyearafter reforms.Nevertheless, investorconfidencebegan toerode following bouts of political instability, declining foreign exchange reserves, andconsiderationsbythegovernmenttoabandonthepeg.Theinvestorpanicthatfollowedwassevere:intwodays,$5billionwaswithdrawn.Theresultwasadeeprecessionandanincreaseintheextremepovertyratefrom9percentin1993to14percentin1996.Mexicosoonregainedstability,but itwasonly in2002thatpovertydecreasedtopre‐crisislevels.After the 2000s, growth became consistently positive, albeit slow. Between 2002 and2015,Mexico’sGDPgrewatanaveragerateof2.4percent.Duringthistime, theruralpoorhavebeenabletodiversifytheirincomesbytakingpartinthenonfarmeconomy,though productivity remained slow among smallholders. In urban areas, slowproductivity growth constrained the availability of employment opportunities inproductive, labor‐intensive sectors, such as manufacturing. Instead, the poor reliedincreasingly on the informal and self‐employed sectors of the economy. While theintroductionofNAFTA led toan initialexportsurge, lowproductivityhasconstrainedexport growth. Several factors hampered Mexico’s productivity, including inadequateinvestmentsininfrastructure,lackofcompetition,inefficienciesinthelabormarketanda costlybusinessenvironment.Despite thesechallenges,poverty reductioncontinued,aided by rapidly expanding social services, transfers, and remittances. While the

25

extremepovertyratedecreasedto3.8percentby2008,progressmighthavebeenfasterwithgreatergrowth.WiththeestablishmentoftheLawofSocialDevelopmentin2003,Mexicoincreasedtheattention to social policies and service delivery. As part of the law, the governmentstrengthened the decentralization of resources and responsibilities to municipalities,and committed to not reduce social spending in real terms in any year. As such,education spendingmore thandoubled from2.4percentofGDP in1991 to5percentfrom 2009 onward. Health expenditures also increased, albeit more slowly, from 2.1percent in 1995 to 3.3 percent in 2014. Following decentralization, access to socialservices increased, especially inpoor ruralareas.The infantmortality rate (per1,000livebirths)fellfrom35.4in1991to11.3in2015.Lifeexpectancyincreasedfrom71.2to76.9years.Completionratesinprimaryschoolgrewfrom86.4percentin1991to102.8percentin2013,whileinsecondaryschool,completionrosefrom57.3to80.1percent.These efforts were complemented with social assistance programs that specificallytargetedthepoor.ThemostrenownedoftheseisProgresa,aconditionalcashtransfer(CCT) program for poor families who receive support as long as they maintaininvestmentsinhealthandeducation.Intendedtoreplaceinefficientandbadlytargetedsubsidies, thisCCTwasdesignedwithclear targetingcriteriaandabigdatacollectioneffort.Initiallyasmallprogramwith300,000ruralbeneficiaries,Progresagrewtocoverasmanyas 5.8million families (over20percent of thepopulation) in both rural andurbansettingsby2011,distributingover$4.5billionintransfers.In2014,theprogramwas renamed Prospera as it introduced new components which link beneficiaries tovocational training opportunities and financial services. Progresahas been subject torigorous impactevaluations,which foundpositive impactson long‐termconsumption,foodintake,schoolenrollment,andhealthvisits.Sinceitslaunch,Mexicohascontinuedto develop a culture of evaluation in social programs by establishing a NationalEvaluation Council and budget laws to integrate the results of evaluations intobudgetingdecisions.It isclearthatsocialassistanceprogramshavehelpedMexicoachievegainsinpovertyreductionduringatimeofsloweconomicgrowth.Itisalsoclearthatpovertyishardtoendwhenallcomponentsofthe2.5‐pointstrategyarenotimplementedtogetherorinways that complement each other. The sustainability of social investments andinsurance rely on the resources generated through growth. In recent years, Mexico’sgrowthhas remained fragile and, not surprisingly, thenumber of people living under$1.90 rose from 3.5million to 6.4million between 2011 and 2015.12Efforts to boostproductivity and employment in labor‐intensive sectors will be crucial for endingpovertyinMexico.AquartercenturyofglobalpovertyreductionLookingbackatwhathashappenedduringthelasttwodecades,the2.5‐pointstrategyappearstohavewithstoodthetestoftime.In1990,atabout50to60percent,extremepovertyrateswereessentiallythesameinEast Asia, South Asia, and Sub‐Saharan Africa (Figure 3). Mainly because of China,extremepovertyinEastAsiawashalvedbetween1990and2002,andmorethanhalvedagainby2012.Today,justaboutoneofeverytenEastAsianslivesinextremepoverty,down from almost six of every ten in 1990. In South Asia, mainly because of India,extremepovertyrateshavefallenbutnotsomuch—fromjustoverhalfin1990toabout12Thepovertyestimateof2015forMexicoisprojectedfollowingthemethodologyofPovcalNet.

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80.6

58.1

50.8

19.7

3.1

60.6

50.7

56.8

15.5

1.9

29.2

40.8

57.1

13.2

6.27.2

18.8

42.7

5.62.1

0

10

20

30

40

50

60

70

80

90

EAP SAS SSA LAC ECA

Percentofthepopulationlivingonlessthan$1.90aday

1981 1990 2002 2012

afifth.InLatinAmerica,since2000,thesamestrategy—complementedbyexpansionsinsocialinsurance—hasledtoextremepovertybeingcutinhalf.InSub‐SaharanAfrica,extremepoverty rateshavestayedmuch the sameand the ranksof theextremepoorhavedoubledbecausethepopulationhasdoubled.In2011,24ofthe25countrieswiththehighestextremepovertyrateswereinAfrica(theexceptionwasBangladesh).ManyEastAsiancountries implemented the2.5‐point strategy tovaryingdegreesbutwithconsiderablesuccess.MostnotablyChina,witheconomicgrowthratesofcloseto10 percent, land reforms that improved the incentives for and the productivity offarmers,andsizeableinvestmentsineducationandhealth,hasreducedpovertybelow$1.90 a day from 88 percent in 1981 to 6.5 percent in 2012. Openness to trade andinvestments in infrastructurehaveledtothegrowthof labor‐intensivemanufacturing.Vietnam’smorecomprehensivelandreformsmadeitspoliciesevenmorelikethoseofKorea,andcutextremepovertyfrom49percentin1993tolessthan4percentin2012.Figure3:Extremepovertyratessince1980,byregion

InSouthAsia,ledbyagrowingtradeinservices,India’sGDPgrowthratesofbetween6and7percenthavehelpeditreducetheextremepovertyratefrom47percentin1994to less than 20 percent in 2012. This is less impressive than East Asia, in large partbecauseoftherelativeneglectofagricultureandruralinfrastructure.Itisalsobecauseofprimaryhealthcareshortfalls,andsecondaryenrollmentratiosthatbarelyreach50percent.Even in Africa, countries that have emphasized broad‐based growth (with specialattention to agriculture) and investments in human capital (especially health andeducation) have halved extremepoverty during these twodecades. InEthiopia,withannualgrowthratesofmorethan10percentsince2005,headcountpovertyrateswerealmost halved between 1990 and 2010 (from more than 60 percent to less than 40percent).Primaryschoolenrollmentratioshaveincreasedfromlessthan25percenttomore than 80 percent, and rural access to safe water is getting close to 50 percent.Ghanahasdonewelltoo.AnnualGDPgrowthhashoveredaround8percentsince2006.Under‐fivemortalityratesdecreasedfrom54to19deathsper1,000livebirthsbetween1998and2014.Childrentodayareexpectedtolivetwomoreyearsthanchildrenwho

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were born ten years ago. Extreme poverty rates have fallen from 61 percent to 13percentbetween1990and2012.The number of people living under $1.90 a day fell from almost 2 billion in 1990 toabout 700 million in 2015—a fall in the global headcount ratio from more than 40percent to less than10percent.13Besides theirnumbers, the geographicdistributionhaschanged.Backthen,morethan80percentoftheworld’sextremepoorwereinEastand SouthAsia. Today, 82percent live in SouthAsia and Sub‐SaharanAfrica. This isfamiliarstuff(Figure4).Figure4:Distributionoftheworld’sextremepoor($1.90povertyline)

Source:GlobalMonitoringReport2015/16andPovcalNetinAugust2016.Note:AllnumbersforMNAregionareprojections.

Less appreciated perhaps is that,much as it was in 1973when PresidentMcNamaraannounced the World Bank’s goal of reducing absolute poverty, 70 percent of theworld’sextremepoorstillliveinruralareas.Thisisdespitethefactthathalftheworldis now urban, up from a third back in the 1970s. In 2020, half the people in the

13The 2015 figures for global extreme poverty are statistical projections. The most recentestimateoftheglobalextremepovertyrateis12.7percentfor2012.

58%

1%

4%1%

27%

10%

1981TotalNumberofPoor:1.9billion

EAP

ECA

LAC

MNA

SAS

SSA

51%

0%

3%

1%

30%

15%

1990TotalNumberofPoor:1.9billion

EAP

ECA

LAC

MNA

SAS

SSA

12%1%

4% 1%

33%

49%

2015TotalNumberofPoor:700million

EAP

ECA

LAC

MNA

SAS

SSA

27%

2%4%

1%39%

28%

2005TotalNumberofPoor:1.4billion

EAP

ECA

LAC

MNA

SAS

SSA

28

developingworldwill be urban. But it is likely that about two‐thirds of the extremepoor will still be living in villages. For the rapid elimination of poverty, a quickerurbanizationwillbenecessary.Butitwillnotbesufficient.Evenin2030,40percentofthedevelopingworld’spopulationwilllikelyberural.Globalextremepovertycannotbecutto3percentunlessruralpovertyratesarereducedtosingledigits.Thisislikelytohappeninmanydevelopingcountries,butnotinthosemiredinconflictor fragility. By 2020,more than half of theworld’s extreme poorwill be in conflict‐affectedcountriesorrelativelyfragilestates.WiththeexceptionofAfghanistan,allsuchcountrieswillbeinSub‐SaharanAfrica.2015‐2040—Athree‐pointstrategytoendextremepoverty

Therecordofpovertyreductioninthe1990sand2000svalidatesthebroadelementsofthe strategy proposed in the 1990 WDR. But with the reduction of global extremepovertyfrommorethanhalfoftheworld’spopulationtolessthanafifth,andwiththeprofile of the global extreme poor changing rapidly, the strategy—if it is to reduceextremepovertytolessthan3percentby2030—hastoberefined. Ourcontentionisthat the third component—social insurance—should not be just a supplement to thefirst two components, but a full complement. But for this tomake the strategymorepotent rather than less, social insurancehas tobedesignedand implemented inwaysthatmake the threecomponentsof thestrategymutually reinforcing. Experiments inpublic policy and advances in information technology during the last 25 years haveprovidedtheknowhowneededtodothiswell.

Therearethreereasonsforadoptinga3‐pointstrategy.

1. Theneedforsocialassistanceineverycountry. Withpovertyreduction,those left inpoverty are increasingly those that are hardest to reach—people living in remoteareas,ethnicminorities,orotherdisadvantagedgroupswhofacemultipleobstacles.Even indynamicEastAsianeconomiesandwealthierLatinAmerica, there remainobstinate pockets of poverty seemingly resistant to the policy cocktail of labor‐intensive growth and investments in human capital. For them, additionalinstrumentsareneeded.Thiswasthesupplementrecommendedinthe1990WorldDevelopmentReport,butwenowknowhowtodesignsocialassistanceinwaysthathelpseconomiesgrowandaidsinvestmentsinhumancapital.Thinkofconditionalcashtransfers.

2. Theutilityofsocialinsuranceinsuccessfuldevelopers. The3‐point strategymaybemostneededincountriesthathavereducedextremepovertytolowlevels.Herethechallengebecomesoneof how toprotect these gains. Take Indonesia.By2011 ithadreducedpovertyto33millionpeople,abouthalfthenumberin1999.Butovertwice as many people (some 73 million) were vulnerable to falling back intopoverty—theywerelivingonmorethan$1.90aday,butlessthan$3.10aday.Andmany do indeed slip down into poverty due to poor weather, ill health, orunemployment;surveysshowthatoneofeveryotherpoorpersoninIndonesiawasnotpoortheyearbefore.Socialinsurancebecomesanecessarythirdcomponenttopoliciesthatenablelabor‐intensivegrowthandinvestmentsinhumancapital,butithas to be designed to complement (or at least not eviscerate) the first two. Ifdesignedinwaysthatdiscouragetheuseoflabor—forexample,ifsocialinsuranceisfinancedbytaxeson laboruse—itwillweakenthefirstcomponentofthestrategyby making economic growth less labor‐intensive even when labor is abundant.

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Think Italy andSpain since the crisis. If social insurance takesupsomuchof thegovernment budget that notmuch is left for education and infrastructure, then itwillnothelpinendingpoverty.ThinkBrazilsince2002.

3. The imperativeofprotectionagainstpandemicsanddisasters. A 3‐point strategy isalso desirable in developing countries that aremost vulnerable to pandemics andlarge‐scalenaturaldisasters.Thesealso tend tobe thepoorestcountries,with thelowest capacity to respond to suchmassive shocks. These events cause enormoushuman and economic loss, reversing progress in poverty reduction. A number oftrends suggest these risks will feature prominently in the future. Risingtemperaturesandclimatechangesetthestageforgreaterfrequencyandseverityofextremeweather events.Greateropenness among countries can also facilitate thespreadofdiseasethroughtravelandtrade.Theseriskscallforpolicymakerstotakeactions that increase their countries’ preparedness to shocks and enable a swiftresponseineventofacrisis.Globalrisksrequireglobalcooperation.

What does the three‐point strategy look like? First, as in theWDR 1990 strategy, itrequires that economies grow inways that raise the labor incomes of the poor. Thismeansincreasinglaborproductivityinagriculture,whichemploysalargefractionofthepoor. Itmeans investing in the right infrastructure to support labor‐intensive growth.Anditmeansopeninguptotrade tomakesurecountriesbuildontheirstrengthsandusetheirresourcesefficiently.Butnoneofthiscanhappenifthereisnofoundationofmacroeconomicstabilitytobuildon.

Second, the 3‐point strategy requires that countries invest inthehumancapitalofthepoor byproviding access tokeyhumandevelopment inputs suchaseducation,health,andpopulation programs, safewaterandsanitation. This is particularly important forchildren,astheiropportunitiesearlyinlifegreatlydeterminetheirfuturelivesasadults.Moreover, improving opportunities for the poor is not just about the coverage ofservices, but also about quality of services. It is not enough to get kids to school:teachersneedtoshowup;textbooksneedtoarrive;andkidsneedtobetaughtinawaywheretheylearn. Healthclinicsneedtobestaffedwithtrainedpersonnel,andabletoprovideadequateservicesifpeoplearegoingtousethem.Allthisrequiresafoundationofeffective,accountableandtransparentservicedeliverymechanismsandinstitutions–inotherwords,effectivegovernance.

Third, the 3‐point strategy requires programs that insureandprotectpeople from theworst of destitution and from falling (deeper) into povertywhen hit by shocks. Theseprogramscanhelp familiesavoid irreversible lossesandprevent themfromhaving tomakedecisions,suchaspullingachildoutofschool,withcostlylong‐runconsequences.Buttheyhavetobedesignedinwaysthatcomplementthefirsttwopoints.Theyneedtobeconsistentwith labor‐intensivegrowthand theyneedtosupport investment inthehuman capital of the poor. After twenty years of learning from the use of socialprotectionprograms indevelopingcountries,wenowknowhow to so this.Therearethreedifferentsetsofprogramsthatareneeded:

Non‐contributory socialassistanceprograms (or social safety nets) targeted to thechronicorextremepoortoprotectthemfromdestitutionandpromoteinvestmentsintheirchildren’shumancapital.

Socialinsuranceprogramsaimedatprotectingabroadersegmentofthepopulationfromfallingbackintopovertyasaconsequenceofshocks.Thesemaybeindividualshocks,suchasillnessorunemploymentortheriskofpovertyinoldage,ormoresystemicshocks,suchasdroughtsoreconomiccrises.

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Global insurance mechanisms that can help countries cope with the impact ofmassive natural disasters that affect more than one country (such as the 2004Indian Ocean Tsunami) or pandemics (such as SARs or more recently the Ebolaepidemic).

In order to make effective use of these programs, governments need to developinformation systems that permit the timely collection and analysis of relevant data.Information systems enable governments to obtain a thorough and dynamicunderstanding of poverty, making it possible to identify populations experiencingchronicformsofpoverty,aswellasthosethatarevulnerabletorisk.Thisisessentialforthe effective implementation of social assistance and social insurance programs.Informationsystemsalsoenablegovernments tomonitor forpotentialpandemicsandnatural disasters, identify areas that are at high risk, and take preventative action inresponse to theseglobal shocks.Asasummary,Box2 lists thecomponents,priorities,andprerequisitesofthe3‐pointstrategy.

Box2:Components,priorities,andprerequisitesofthethree‐pointstrategy1.Grow—Policiestofosterlabor‐intensivegrowthObjective:PromoteproductiveuseoflaborPriorities:Agriculture,Trade,InfrastructurePrerequisite:MacroeconomicStability2.Invest—PoliciestocatalyzeinvestmentsinhumancapitalObjective:DeliverbasicsocialservicesPriorities:Education,Health&Population,Water&SanitationPrerequisite:Good(enough)Governance3.Insure—PoliciestoreducevulnerabilitytoriskObjective:HelpthedestituteandprotectthevulnerablePriorities:SocialAssistance,SocialInsurance,ClimateAction&PandemicResponsePrerequisite:InformationSystemsGrow—Policiestofosterlabor‐intensivegrowthThemost importantdriverofpoverty reduction isgrowth in labor incomes.ThiswasclearfromtheexperienceoftheEastAsiantigersinthe1970sand1980s,anditisclearfromtheexperienceofmostdevelopingcountriesduringthe1990sand2000s.Astudyofsuccessfulpovertyreductionepisodesindevelopingcountriesduringthe2000s, forexample, finds that labor income growth—due to the combined effect of growth ofemployment and earnings—accounted for more than 50 percent of the povertyreduction in themajority of the countries studied (Figure 5). In some cases, such asPeru, itaccountedformorethan80percentofallpovertyreductionduringthe2003‐2013decade.Ifpovertyistobereducedattherateneededtoreachthe3percenttargetby2030,governmentsneedtoinstitutepoliciesthat,firstandforemost, leadtohigherlaborincomesforpoorpeople.Raisingthelaborincomesofthepoorrequiresthesametrueandtestedapproachthatwas used in China, India, Vietnam, Thailand, and other countries that have reducedpoverty: foster agricultural growth through the combination of good policies andinvestments, encourage economic discipline throughopenness to trade, andbuild theinfrastructureneededtoincreaseproductivityandfacilitateaccesstomarkets.

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Agriculture.Despitegrowingurbanization indevelopingcountries,povertycontinuestobea largely ruralphenomenon.Three‐quartersof thepoor indevelopingcountriesare located in rural areas.14Among the 3 billion rural inhabitants in developingcountries,86percentrelyonagriculturefortheirlivelihoods.Consequently,thissectorhas a critical role toplay inpovertyalleviation efforts.The2008WorldDevelopmentReport found thatGDP growth in agriculture is at least twice as effective in reducingpovertyasnon‐agriculturalgrowth.

Agriculturalproductivity increases arenot only a sourceof economicgrowthbut alsocatalyzethedevelopmentofrelatedindustries—accounting, insomecases,foraboutathirdoftheGDP—andthebroadernonfarmeconomy.Thelinkagesbetweenagricultureand industry illustrate the importance of agricultural growth as a labor‐intensiveprocess. Productivity growth in agriculturekeeps foodprices from rising, resulting inlow wages that contribute to the competitiveness of non‐agricultural sectors.Agricultural growth is also known to generate multiplier effects on the rest of theeconomy. It isnotsurprisingthatthemostsuccessfuldevelopmentstoriesbeginwithagriculture.

Atthesametime,thestateofagriculturalmodernizationvariesgreatlyacrosscountries.Accordingly,inordertoleveragetheagriculturalsectorforlabor‐intensivegrowthandpovertyreduction,itisimportanttotailorpoliciestoalignthemwithacountry’scontext.The2008WDRprovidesausefultypology:

14The2008WorldDevelopmentReportAgricultureforDevelopmentcalculatespovertybasedonaninternationalpovertylineof$1.08in1993purchasingpowerparitydollars.

Figure5:Risinglaborincomeisthemaindriverofpovertyreduction

Source:Figure1.1(page3)inInchausteandJ.Saavedra‐Chanduvi,(2014);usingDatafromSEDLAC,variousyears;FAOn.d.;andnationalhouseholdsurveys

-40

-20

0

20

40

60

80

100

120

140

Ban

glad

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200

0–10

Gha

na, 1

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2005

Nep

al, 1

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2003

Cam

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10

Mon

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11

Phi

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Sri

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Vie

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Arg

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10

Bra

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200

1–09

Chi

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Col

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10

Cos

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200

0–08

Ecu

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, 200

3–10

Hon

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2009

Pan

ama,

200

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Par

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2010

Per

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Tha

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Mol

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US$1.25 a day US$4 a day US$5 aday

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Decomposition of Changes in Moderate Poverty, by Income Level, in Selected Developing Countries, 2000s

Share of working-age family members Employment+earnings Nonlabor income Consumption-to-income ratio

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In agriculture‐based countries, agriculture is a significant contributor to aneconomy,accountingfor29percentofGDPand65percentofthelaborforce,onaverage. In these countries, a majority of the poor (about 70 percent) areconcentrated in rural areas. This group of countries accounts for 417millionruralindividualslocatedpredominantlyinSub‐SaharanAfrica.

In transforming countries, the significance of agriculture in an economy isdiminished, representing13percent of a country’sGDPand57percent of thelabor force, on average. Nevertheless, poverty continues to be highly rural,accounting for82percentof thepoor.The ruralpopulation in these countriesamountsto2.2billionindividuals,whoaremostlylocatedinSouthEastAsiaandtheMiddleEastandNorthAfrica.

Inurbanizedcountries,agriculture plays an even smaller role in the economy,contributing,onaverage,to6percentofGDPand18percentofthelaborforce.Inthesecountries,povertyismostlyurban;however,aconsiderablefractionofthepoor(about45percent)remaininruralareas.Theruralpopulationamountsto 255million individuals, locatedmainly in LatinAmerica and the CaribbeanandEuropeandCentralAsia.

For agricultural‐based countries, agriculture must act as the principal engine ofeconomicgrowth.Consequently,thepolicyobjectiveforthesecountriesistoboosttheagricultural productivity of their smallholder farmers. Experiences across countriesrevealarangeoflessonsfordoingthis.First,itisimportanttoexpandaccesstoassets,whichactasthemaindeterminantofparticipationinagricultureforrural inhabitants.Thisincludesstrengtheningthefunctioningoflandmarkets,rampingupinvestmentsinirrigation, and enhancing the delivery of health and education for rural areas. Korea,Taiwan,andEthiopiatooksuchstepstogreateffect.Second,improvethefunctioningofmarkets.Thisincludesreducingtransactioncoststofacilitatefarmers’accesstomarkets,improvingtheefficiencyofinputdeliverymechanisms,bringingcreditmarketstoruralareas,andsupportingproducerorganizationstoachievegreatermarketpower.Ghana’ssuccess with cocoa illustrates how valuable market‐oriented reforms can be. Third,agriculture has to bemoved to the top of the policy agenda. Burdensome taxation ofagriculture (as in Thailand) limits its potential,while greaterR&D investments (as inBrazil)arerequiredtodevelopnewtechnologiesthatboostproductivity.Intransformingcountries,theobjectiveistofacilitatethere‐allocationofsurpluslaborfromagricultureintootheractivitiestoreduceruralpoverty.Therearemanypathwaysthatareavailabletotheruralpoortoescapepoverty,includingemploymentintheruralnonfarm economy, movement toward higher value agricultural activities, and rural‐urbanmigration.Severalactionscanbeundertakentounlockthesepathways.Fosteringavibrantnonfarmeconomyisatthecenterstageofanystrategy.Experienceshighlighttheimportantroleofconnectingruralareastourbaneconomiesbyreducingtransactioncosts, through investments in infrastructure or the provision of market informationservices.Chinahasbeensuccessfulinthisregardthroughtheestablishmentoftownshipandvillageenterprises,whichbroughtindustryclosertoruralpopulations.Atthesametime, maintaining agricultural productivity is important for the emergence of relatedindustries,includingfoodprocessingandtransport.Finally,additionalinterventionscansupportpeopleastheyexitagriculture.Laborpoliciesthatrestrictmovementfromthefarm to towns and cities (such as China’s hukou) should be avoided. Instead,investmentsoneducationandvocationaltrainingcouldbeemphasizedtoequipfarmerswiththeskillstoaccessnonfarmemploymentopportunities.Safetynets,suchasmodestpensions,canalsoplayarolebyencouragingthetransferoflandownership.

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For urbanized countries where agriculture has been largelymodernized and povertyhasbecomemostlyurban,agriculturecontinuestoplayavaluableroleinreducingtheentrenched poverty that remains in rural pockets. The policy goal for urbanizedcountriesistoconnecttheruralpoortotheopportunitiesthathavebeenunlockedbythemodernizationinfoodmarkets.Ontheonehand,ruralfarmershavetheopportunityto become suppliers to supermarkets; this involves helping producer organizationsmeet the scale and the standards required by modern food markets, and helpingsmallholdersparticipateinsuchorganizations.Ontheotherhand,theruralpoorcanoptforwageemploymentopportunitiesatlarge‐scaleagribusinessesthatcatertodomesticorexportmarkets.Chilehasbenefitedfromjustsuchanapproach,takingadvantageofanexportboominagro‐processingtocreatejobsanddecreasepoverty.Trade.Agricultural productivity ignites a process of economic growth and industrialdevelopment that offers countries new opportunities for augmenting income growththroughtrade.Themostsuccessfuldevelopmentexamplessince1965,especiallyinEastAsia, relied heavily on trade through labor‐intensive, export‐oriented manufacturing.This would not have been possible without a prior revolution in agriculturalproductivitythatkeptfoodpricesincheckandwagescompetitive.Itisnosurprisethatrapidly‐growing economies in East Asia, including Korea, Taiwan, and China,implementedpolicies toboost agriculturalproductivity throughvarious formsof landreform, which preceded their industrial revolutions. These conditions helped set thestage foreffective tradestrategiesthatprovedtobea fundamental ingredientof theirsuccesseswitheconomicdevelopmentandpovertyreduction.There are several mechanisms through which trade contributes to economicdevelopment.Exportsareacrucialsourceofforeignexchangeand,hence,arenecessaryforthepurchaseofvaluableimports,suchasnewtechnologiesandinputs,whichboosta country’s overall productivity. Openness to trade also increases domestic firmproductivitythroughthecompetitionthatstemsfrombringinginmoreimports,aswellasthecompetitionthatexportersfaceinforeignmarkets.Theopportunitytoreachlargeexportmarkets, in turn, leads to economiesof scale, specialization inproduction, andinnovation.Theseeffectssetthestageforfirm‐levelefficiencies,growth,andultimately,employmentgeneration.The experiences over the last 50 years provide us with several valuable lessons onsuccessful trade strategies. First, it is clear that the impressive performance of EastAsian economies rested on the development of effective export platforms. Theseplatformsoftentookthe formofenclaveswithinaneconomy,creatinganappropriateenabling environment for foreign multinational companies and exporters. Reducingproduction costs is an imperative for competitive exports and enclaves offer aconvenientwayofdoingso,as it istypicallyeasiertoimproveinfrastructure, increasesecurity, and reduce red tape within a narrowly defined area. China was active inpursuing this approach to trade, creating special economic zones along the coast,leadingtoasurgeinexportsandcreatingmillionsofnewjobsintheprocess.Second, East Asia was also successful in exploiting the synergies between access toworldmarketsandforeigndirectinvestment.WithinEastAsia,anincreasingnumberofregional trade agreements were negotiated (as many as 24 between the 1997‐2007decadealone),removingrestrictionstotheflowofforeigninvestment.Thisprovedtobecritical for the formation of regional production networks, inwhich the bulk of tradebecameincreasinglymadeupofcomponentstobeassembledinaneighboringcountry,with foreign affiliates playing a substantial role in driving this process. RegionalproductionnetworksbroadenedtheopportunitiesfortradethatwereavailabletoEastAsiancountries.ThiswasusedtogreateffectinThailand,forexample,whereopenness

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to FDI enabled the country to take part in production networks, spanning industriessuch as garments and even automobiles. Today, more than half of East Asia’s tradetakesplacewithintheregion.Third, experience shows that successful trade strategies are also supported bycomplementarytradepolicies.Maintainingastableexchangerateisbeneficialfortradeasiteliminatescurrencyrisk,whileavoidingexchangerateovervaluationsiscrucialforkeepingexportscompetitive.Furthermore,reducingtariffsonimportsisalsobeneficialto exporters, as this keeps the cost of inputs in check. Imports may also embodytechnologicalfeaturesthatresultinproductivitygains.EastAsiawasnotentirelyopentoimportsattheoutsetofitsexport‐orientedstrategy.Forexample,duringthe1980s,tariffsapproached30percentinKoreaand50percentinThailand.Nevertheless,theseprotectionistmeasureswere largelyreversed in the1990s to thebenefitofexporters.Finally,exportpromotioninEastAsiawasfacilitatedthroughabroader frameworkofinstitutional support. Most governments that engaged in export‐promotion activitiesrelied on a system of export targets and incentives as a means of expanding trade.Rewards–oftenintheformofpreferentialaccesstocreditandgovernmentsubsidies–were distributed through a system of contests to best‐performing exporters. Thesesubsidieswereoftenmarket‐testedandgovernmentsupportwasgrantedtotheextentthat a firm continued to perform well in export markets. Other institutions, such asgovernment boards, were established to facilitate market development in foreigncountriesinanefforttogivegreatervisibilitytoacountry’sexportsandboosttrade.Itisworthnoting that someof theseactionsmaynotbeviable in thecurrentglobal tradecontextasgovernedbytheWTO.Nonetheless,thelessonremainsthatcomplementaryinstitutions, suchas inclusive financial intermediaries,arean importantcomponentofaneffectivetradestrategy.Infrastructure.Investmentsininfrastructurearecriticalforfacilitatinggrowthinbothagriculture and trade. For smallholder farmers that are located in rural areas,infrastructureisvitaltoreducethedistancetomarkets.Themagnitudeofthechallengeremains significant to this day, as almost 900 million rural inhabitants in the worldcontinue to lack access to all‐weather roads within two kilometers. Similarly, poorinfrastructureactsasaconstraintontradethroughtransactioncosts.Itisestimatedthatpoorinfrastructureaccountsforanywherebetween40and60percentoftransportationcosts.Consequently,improvinginfrastructureisanimperativeforcountriesthatseektoinitiateandsustainaprocessoflabor‐intensivegrowth.Bysomeestimates,a10percentincreaseininfrastructurespendingisconducivetoonepercentofGDPgrowth.Whatcanbedonetoeffectivelyimprovethequalityofinfrastructureacrossdevelopingcountries?Greaterinvestmentis,ofcourse,partofthesolution.Thisentailsimprovingaccess not only to roads, but also to electricity, water, and information andcommunication technologies (ICT). For the remainder of this decade, developingcountrieswillneedtospendabout7percentofGDPininfrastructure,accordingtosomeestimates, to meet their needs. For Sub‐Saharan Africa, the required investmentamounts to 15 percent of GDP – a figure that exceeds the annual infrastructureinvestment of East Asian economies during their period of high growth.With limitedpublicresources,thereareopportunitiestoleverageprivatesectorinvestmenttomakeupforthegaps infinancingthroughpublic‐privatepartnerships.Targetingruralareasfor infrastructure investments is a particularly sound policy for achieving gains inagriculturalproductivity,aswesawinthecasesofKorea,Bangladesh,andEthiopia.Inaddition, itwill be important to improve the governance of infrastructure in order toyield thegreatest returns to these investments.Thismeansmoreefficient regulationssurrounding border management, streamlined logistics, and reduced red tape. The

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governance aspects of infrastructure are significant: import delays, for instance, areequivalenttoatariffof11.2percentinSub‐SaharanAfrica.Macroeconomicstability.Macrostability—reflectedinlowinflationandstablepublicfinances—isaprerequisiteforpromotingtheproductiveuseoflaborthrougheconomicgrowth. For agricultural productivity growth, it is essential to implement soundmacroeconomicpolicies thatprovidetheright incentives for farmersto invest in theirfarms and engage in commercial activities. Moreover, in order to leverage trade inagricultureaswellasindustry,themacroeconomicenvironmentmustalsobefavorablefor exporters. An effective policy packagewould likely include, but not be limited to:independentmonetarypolicy, low inflation targets,prudent fiscalpolicy thatdoesnotdiscriminate against agriculture, exchange rate policy that favors stability and avoidsovervaluations, and financial development to raise savings and facilitate the flow ofcapital.Invest—PoliciestocatalyzeinvestmentsinhumancapitalForindividualsandfamiliestoescapepoverty,theymustnotonlypossessphysicalandhuman assets, but also be able to use them inways that yield high returns. Labor isalwaysthemostimportantassetofthepoor.Thefirstcomponentofthe3‐pointstrategyhighlights the importance of creating income‐generating opportunities for the poorthrough growth. But to avail themselves of the opportunities created by growth, thepoor also need human capital in the form of decent education and good health thatallows them to participate in productive employment. The poor are frequently in theweakestpositiontodeveloptheirhumancapital,preciselybecauseoftheirpoverty.Considerthecaseofeducation.Thepoormaylackthemeanstomakeinvestmentsintheschoolingof their children. Evenwhenschool is free, theopportunity costof sendingchildrentoschool—their laborathomeor in family farmsandenterprisesearnings—maybetoohighapricetobear.Thepoormayalsonotknowthereturnstoinvestmentsin education. They may be disadvantaged due to the inferior quality of educationalservices that typically affects poor areas and villages.Healthmatters evenmore thaneducation. Theabilityofpoorchildrentogotoschoolandlearnisoftencompromisedbecausetheyaremorelikelytobehungry,malnourishedorsickduetolackofaccesstosafewaterandsanitation.Elevenyears ago, the2004WorldDevelopmentReportMakingServicesWorkforPoorPeople noted: “Toooften, services fail poorpeople—inaccess, inquantity, inquality.”Althoughwehaveseenanimprovementinaccesstobasicservicesinmanydevelopingcountries,thisstatementis,unfortunately,stillvalidtoday.Manyoftheworld’spoordonothaveaccesstogoodschooling,orproperhealthcare,electricity,waterorsanitation,especially in Sub‐Saharan Africa. As such, an imperative objective for policy makersseekingtoendextremepovertyistoimprovethedeliveryofbasicsocialservices,withanemphasisoneducation,health,andwaterandsanitation.Education.Therehasbeenprogress in improvingaccess to educationservicesacrossdevelopingcountriesinthelast25years.Since1990,thenumberofprimaryschoolagechildren not attending schools has halved. Nevertheless, almost 59 million primaryschoolchildrenagearestilloutofschool.Sub‐SaharanAfricaaccountsfor30millionofthem. Rapid population growth creates further strains in expanding the reach ofeducation services, and by some estimates, up to 40millionmoreAfrican youthmaydropoutofschoolinthenextdecade.

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Gendergapshavealsopersistedthroughoutthepastdecades.Theglobalout‐of‐schoolrate forprimaryschool is10percent for girlsand8percent forboys. In Sub‐SaharanAfrica, girls make up 55 percent of the large out‐of‐school children population.Uneducated girls are also more likely to marry at an earlier age, give birth to morechildren,andhavefeweropportunitiestoearnanincome,thushavingadiminishedroleinhouseholddecision‐making.Thishasgenerationalconsequences,astheirchildrenaremorelikelytorepeatthecycle.Averages can mask big differences between the rich and the poor. For example, inMozambique, 60 percent of children in the top 60 percent complete primary school,whileonly20percentofthebottom20percentareabletodoso.What can be done to achieve greater improvements in educational outcomes indevelopingcountries?Thedisparitiesdescribedabovesuggest that governmentshavetoinvestmoretoclosethegapsinaccesstoeducation.Itisnotenoughtojustimproveaverages:disadvantagedchildren—suchasgirls,ethnicminorities,andfamiliesinpooror remoteareas—musthave thesameopportunities tobecomeeducatedaswealthierfamilies.MalaysiaandBangladeshintroducedpoliciestoreducedisparitiesineducationby investing in laggingstatesandgirls’ education, respectively.Bothbenefitedgreatlyfromlargegainsinpovertyreduction.It isalsoincreasinglyclearthatinvestmentsaremost effective when made in early childhood—for cognition, schooling achievement,and long‐term earnings. Investing in education between birth and 3 years of ageproducesthehighestratesofreturnperdollarinvested,exceeding14percentinsomecases.Tomake lasting improvements ineducationoutcomes, it isnotenough toaddress theproblem of access to education; it is also critical to focus on issues of quality. Poorcountriessystematicallyunderperforminlearningoutcomesincomparisontowealthycountries. Compounding the problem, learning outcomes are consistently weakeramong children from poor households in relation to children from wealthierhouseholds. In Indonesia, forexample,PISAscoresarenotonlyweakat theaggregatelevel,butarealsoespeciallylowamongchildreninthebottomquintile(Figure6).Thesame observation can bemadewith regard to Latin America and Africa, where largegapsexistinbothreadingandnumeracyskillsbetweenchildrenofhighandlowsocio‐economicstatus.Figure6:LearningoutcomesbyquintileinIndonesia

 

Source:PISADatabase

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Improvementsinthequalityofeducationrequireastrongemphasisonaccountability.That is, teachersandprincipalsmustbeoffered the right incentives forstrengtheningquality,whilealsoreceivingthenecessarypreparationtodeveloptheirskillsaswellasotherinputstoperformtheirtaskseffectively.Itissimilarlycriticalforschoolstoadoptresults‐measurement systems to assist with management decisions. Investing moreresources in schools is part of the solution. However, the quality of spending alsomatters, and in this regard, parental voice can be a powerful ally. Recent evidencesuggests that parental voice can enhance accountability, leading to better learningoutcomes.Forinstance,arecentexperimentinKenyagaveParent‐TeacherAssociationsresources tohire locally‐contracted teachers inasubsetof randomlyselectedschools.This intervention led to a clear improvement in learning outcomes as teachers facedstrongerincentivestoshowupandteachwell,andtheparentalinvolvementimprovedteacher accountability and school governance.Most countries that have succeeded ingreatly improvingboth access to andquality of educationhave followed these simpleprinciples.Health.Thedeliveryofbasichealthserviceshasalsoseengreatimprovementsduringthe lastquartercentury. Under‐fivemortalityrateshavedroppedby53percent from91 deaths per 1,000 live births in 1990 to 43 in 2015. The pace of progress has alsoquickened:whiletheannualrateofreductioninchildmortalitystoodat1.8percentinthe1990s, it rose to3.9percent in the last15years. Several low‐andmiddle‐incomecountriesperformedremarkablyandreducedunder‐fivemortalityratesbytwo‐thirdsormore. This includes countries such asEthiopia,Uganda, Tanzania,Bangladesh, andIndonesia.Despitethisprogress,5.9millionchildrenstilldieprematurely.Overhalfofthesedeathsareeitherpreventableortreatablethroughsimpleinterventions.ChildreninSub‐SaharanAfricaareathighestrisk:theyare14timesmorelikelytodieprematurelythanchildreninotherdevelopedcountries.Withincountries,therearebigdisparitiesbetweenchildreninrichandpoorfamilies.Under‐fivemortalityratesinthebottom40percent tend tobe twiceashighas theratesamongthe top60percent. Insomecountries, suchasMali, thedifference isevenmorepronounced:mortality ratesforthebottom40percentarecloseto120per1,000livebirths,threetimestherateof40forthetop60percent.Addressing the gaps in health outcomes requires, in part, greater and smarterinvestmentsinpublichealthservices.Itisparticularlyimportanttoexpandthecoverageofhealthservicessuchthattheyreachpoorandunderservedareas.Theprivatesectorand community‐based providers can be important partners in increasing coverage.Decentralization,as inthecaseofMexico,canbeaneffectivestrategytoreachremoteareaswhen coupledwith good governance. Aswith education, investments on healththat focus on early childhood should be a priority for policymakers. This is becausehealthdeficienciesatanearlyagecarrynegativerepercussionsforanindividualinthelong‐run.Indevelopingcountries,asmanyas200millionchildrenunderfiveyearsoldare exposed to nutritional and infectious disease risk factors that compromise theirdevelopmentpotential.Thisultimatelyhinderstheirabilitytoparticipateinproductiveemploymentopportunities.Byitself,greaterspendingisunlikelytosolvetheproblem.Healthsystemsindevelopingcountriesarefrequentlysubjecttosevereinstitutionalconstraintsthatlimitthedeliveryof quality service. Absenteeism of health professionals is a phenomenon that is,unfortunately, too common in developing countries, ranging from 20 percent inMozambique to an overwhelming 74 percent in rural Bangladesh in the early 2000s.EvidencefromIndiaalsosuggeststhat,whendoctorsshowup,theyexertalowlevelofeffort. In order to counter these problems, it is essential for public health systems to

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align incentives with performance. Experimental research from Brazil suggests thatgranting greater autonomy to public hospitals – in the form of managerial authorityregardinghiring, firing, andwage‐setting decisions – has led to improvements on thequalityandefficiencyofhealth serviceprovision. Anotherway to improveproviders’responsiveness to users is through user supervision. In Uganda, for example,community‐basedmonitoringimprovedboththequalityandquantityofprimaryhealthcareservices.Finally, complementary investments in a range of public services are needed. InMalaysia, investments in public hospitals and training of maternal health providerswere coupled with additional investments in rural infrastructure and women’seducation, leading to dramatic reductions in maternal mortality. Family planningprogramsare also importantdeterminantsofmaternalhealth, asbothpregnancyanddelivery tend tocarryhealth risks indevelopingcountries. Inparticular,non‐coerciveinterventionsthatseektoincreasehouseholdknowledgeofandaccesstocontraceptiveoptions—suchasthefamilyplanningprogramimplementedinBangladesh—areknownto be effective in boosting contraceptive use and reducing fertility rates, thuscontributingtoimprovedmaternalhealth.Theavailabilityofsafewaterandsanitation(discussedbelow) isanothercomplementarypublicgoodthathasastrongbearingontheachievementofbetterhealthoutcomes.Water and sanitation. Investments in improved water sources and sanitation arevaluable complements to a government’s policies in health and education. Safewaterand sanitation provide: health benefits by reducing the incidence of water‐bornediseases; education benefits by raising school attendance and completion rates(especiallyamonggirls);andeconomicbenefitsintheformofproductivitygainsintheworkplaceandreducedhealthcarecosts.Globally,theuseofimproveddrinkingwatersourcesrosefrom76percentin1990to91percentin2015,representingagainforover2.5 billion individuals. Still, 663 million individuals lack access to improved watersources,with half of them located in Sub‐SaharanAfrica andone‐fifth based in SouthAsia.Acrossregions,Sub‐SaharanAfricacontinuestolagbehindothersas32percentofits population relies on unimproved water sources. Within regions, access is highlydifferentiated between urban and rural households, and is strongly correlated withwealth:inSub‐SaharanAfrica,90percentoftherichestquintilehasaccesstosafewater,butonly35percentofthepoorestquintiledoes.The progress in sanitation has been slower. Between 1990 and 2015, the globalcoverageofimprovedsanitationfacilitiesrosefrom54to68percent.However,asmanyas2.4billionpeople continue to lackaccess today: these individuals are concentratedprimarily in South Asia (accounting for 40 percent of this subset) and Sub‐SaharanAfrica (accounting for 29 percent). In Africa less than a third of the population hasaccess to improved sanitation facilities. As with safe water, access to sanitationcontinuestobeunequalwithincountries:inIndia,thericharetentimesmorelikelytohave proper sanitation than the poor. In many Sub‐Saharan African countries, thepoorest fifth has near‐zero coverage rates, with only a handful of countries (such asCameroon,Rwanda,andSenegal)havingraisedcoverageratesabove20percentforthepoorestquintilegroup.These investments are vital in the poorest countries where the burden of infectiousdiseaseremainshigh.Providingcleanwater,sanitation,wastedisposalanddrainagecango a long way to improve health outcomes and reduce early childhood mortality.IncreasingpipedwaterinurbanArgentina,forexample,reducedtheburdenofdiseasesassociatedwithunsafewater and reduced childmortalityby8percent. In theUnitedStates, improvedaccess to cleanwater in theearly20thcentury led to a reduction in

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infant mortality by three‐quarters and under‐five child mortality by two‐thirds.Investments incleanwaterandsanitationalsohelpsupport cognitivedevelopmentofchildren by providing a disease‐free environment, reducing instances ofmalnourishment and increasing learning. Unlocking these benefits requires devotinggreater resources to water and sanitation, specifically in rural areas, which tend toreceivelessthan10percentoftotalfinancing.Moreemphasisshouldalsobeplacedinimprovingwaterandsanitationinschoolsandhealthcenters,wheretheriskofdiseaseoutbreaksisgreatest.Finally,governmentsmustadoptmonitoringsystems,settargets,anddeveloptheirhumanresourcestodeliverservicesefficiently.Goodgovernance.Theprerequisiteformakingeffectivepublicinvestmentsinhealth,education, and water and sanitation is good governance. In the absence of adequategovernance,theefficiencyofgovernmentspendingisdecreasedaspublicresourcesmaybedivertedfromtheirdevelopmentalobjectivestowarddubiousalternativeuses.Goodgovernance enables a government to set goals and monitoring systems to track theperformanceofinvestments,andenablespolicymakerstoallocateresourceswheretheyaremost needed. Governance also needs to be fostered at the level of social serviceproviders. As discussed above, the quality of service delivery is enhanced whenproviders facetheright incentivestodotheirworkwell,adoptmonitoringsystemstotrack theirownperformance, collect input from thepeople theyserve,andundertakeactionswiththegoalofachievingimprovementsinhumandevelopmentoutcomes.The key to better governance is accountability. Mechanisms that strengthen: theaccountability of the government to citizens (such as elections); the accountability ofproviders to government (for example, performance‐based contracts); and theaccountability of providers to citizens (such as community participation in serviceprovision)canall lead tobettergovernanceandmoreeffective investments inhumandevelopment. Theupcoming2017WorldDevelopmentReportonGovernanceandtheLawassessestheapproachestoinstitute“goodenoughgovernance.”Insure—PoliciestoreducevulnerabilitytoriskThefirsttwocomponentsofthe3‐pointstrategyfocusongeneratingopportunitiesforthepoortoutilizetheirmostabundantasset–labor–andimprovingthereturnstothisassetthroughinvestmentsinhumancapital.Butthisisoftennotenoughtoendextremepoverty. Toomanyof theworld’s poor are stuck in circumstanceswhere they cannottake advantage of the opportunities brought by labor‐intensive growth. This includesindividuals who are old, sick or disabled; those who are stuck in remote and poorregions;andalsoindividualswhofacediscriminationduetogenderorethnicity.Evenincountriesthathavemanagedtogreatlyreducepovertythroughgrowth,likeChinaandThailand, deeppockets of poverty remain amongminority populations and in remoteareas. In Latin America, one out of five people are classified as “chronically poor”, aconditionthatoftenspiralsintointergenerationalcyclesofpoverty.Moreover,countriesthat have made significant strides in poverty reduction can experience setbacks.Householdsmayfaceadverseshocks–suchasillness,poorweather,ornaturaldisasters–pushingthembackintopoverty.

Asaresult,theobjectiveforthisthirdcomponentistoassistthedestituteandprotectthe vulnerable, through an emphasis on three priorities: social assistance, socialinsurance, and protection against pandemics and large‐scale natural disasters. Theextentofadoptionoftheseprioritiesshouldmatchacountry’sspecificsituation.Socialassistancewillbemostvaluableforcountriesthatcontinuetoexperiencedeepformsofchronicpoverty;socialinsuranceismosthelpfulforsuccessfuldevelopersasameansofpreserving theirgains; and finally,protectionagainstpandemicsandnaturaldisasters

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needstobeemployedinregionsthataremostvulnerabletotheseshocks.

Socialassistance.Directtransfers to the poor in the form of non‐contributory socialassistance can help all countries end cycles of chronic and intergenerational poverty.Thisisachievedby:first,ensuringthatthosewhoaretrappedinpovertyandunabletoaccess opportunities in the labor market have the means to meet their basic needs;second, by encouraginghouseholds toundertake investments in thehuman capital oftheirchildrensuchthat theyareable toexitpoverty in the future throughproductiveemployment;andthird,byhelpingthepoorwithstandthesetbacksofshocks.Conditional cash transfers have a proven record in helping to reduce poverty boththrough their direct impacts on household income, and indirectly by building humancapitalassets.Theseprogramsareparticularlyattractiveastheyaddressbothpresentandfuturepoverty, inamannerthatsupportsthefirsttwocomponentsofthe3‐pointstrategy.RigorousevaluationsofearlyCCTprograms,suchasMexico’sProgresa,showincreasesonsecondaryschoolenrollment(a24percentaverageincrease),especiallyforgirls.ParticipationinProgresawasalsoassociatedwithanincreaseduseofpreventivehealthservices,areductionof22percentagepointsintheprevalenceofstuntingamongchildrenundertwoyearsofage,andareductionofalmost12percentagepointsintheprevalence of anemia in young children. Comparable results have been found forprogramsinBrazil,Colombia,Honduras,JamaicaandNicaragua.OverallCCTshavebeenwelltargeted,withthelargestshareofbenefitsgenerallygoingtothepoor.Comparedtoother transferprograms,CCTsarebetterat concentratingbenefitsamong thepoorestsegments of the population, with the added benefit of supporting human capitalinvestments.The success of first‐generation CCTs in numerous countries (especially in LatinAmerica) has led to a set of second‐generation challenges. These range from how tooperate CCTs successfully in more complex urban settings to how to link CCTbeneficiaries to programs that support their productive integration into the labormarket,andhowtocombineCCTswithpsychologicalsupportforthechronicallypoortohelp them exit poverty. Programs like ChileSolidario, a CCT that links households tosocialworkerservices,areexperimentingwiththesediverseangles,withsomeriskthattheincreaseincomplexityandsizeoftheprogramsmaybringaboutadilutionoffocusandeffectiveness.Nevertheless,CCTsremainapreferredinstrumentwithinthe3‐pointstrategy because they complement and reinforce the impacts of the first twocomponents.ImplementingandmanagingaCCTrequiresanadequate levelof institutionalcapacityas well as good service delivery mechanisms. After all, there is no real benefit inencouraging attendance at schools and visits to primary health clinics if these do notexistorarenotproperlystaffed.Inpoorercountrieswithweakerinstitutionalcapacity,direct cash ornear‐cash transfers, such as vouchers,maybe easier to implement andmay still deliver substantial benefits. These transfers can be targeted using self‐targetingmethods, suchas throughpublicworks.This is thecase, forexample, of theEthiopiaProductiveSafetyNet,whichhasbeenshowntohaveadirectpovertyreducingimpact.Alternatively,cashornear‐cashtransferscanbetargetedusingproxymeanstests(thesame method that is typically used for CCTs) or other needs‐based mechanisms toidentify the poor. Or they can be targeted to specific vulnerable groups, such as theelderly.Non‐contributoryoldagepensionsareimportantpovertyalleviationprogramsinbothpoorandmiddle‐incomecountries(aswellasinrichercountries).UnlikeCCTs,theseprogramsdonothavethepositivespilloverofbuildinghumancapitalassets.But

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theycanbeeffectiveindirectpovertyalleviationiftargetedproperlyanddesignedinawaythatdoesnotaffecttheincentivesorabilityofthepoortowork.Other common social assistanceprograms include food stamps, vouchers or coupons.Thesedonotgrantthebeneficiariesthesamefreedomofchoiceinhowtouseabenefit.But they are known to increase food consumption and can also have a self‐targetingaspect if limited to certain baskets of food. Unconditional cash transfers (UCTs) ortransfers involving ‘soft conditions’ and ‘social marketing’ can be another usefulalternative,particularlyincountrieswithloweradministrativecapacity.Whatdoesnotworkwellasaformofsocialassistancearefoodtransfersorfoodpricesubsidies,whichcanbeeasilycapturedandoftenexcludethepoor.Evenworseareuniversalsubsidies(on food, electricity orkerosene), as theyarehighly inefficient, costly, and regressive,benefittingthenon‐pooratleastasmuchasthepoor.Social insurance. Countries that are successful in greatly reducing the number ofpeople living in extreme poverty soon have to face another challenge: preserving thegainsinpovertyreductionbyprotectingvulnerablehouseholdsfromshocksthatcouldpush themback into poverty. Some of these shocksmay be individual in nature. Theillness of a family member, especially a working member, is a common cause ofimpoverishment due to loss of income. Other shocks are more systemic in nature.Macroeconomic crises (such as the financial crisis in 2008‐2009) lead towidespreadunemployment, pushing many working households into poverty. Droughts andinclement weather conditions create risks to income generation, especially whenhouseholdearningsaretiedtoagriculturalactivities.Duringthefinancialcrisisof2008,manyindividualswhowereaffectedwerenotamongthe ranks of the extreme poor, but rather among those employed in sectors thatexperienced large contractions. This means typically urban residents, employed inservicesormanufacturing,whoeithersawtheirjobsdisappearortheirworkhoursfallsharply. InMexico,theywerepartofthebottom40percentof thepopulation,butnotamongthosetargetedby traditionalsocialassistanceprograms. Thiswasalsotrue incountries like Indonesia and Thailand. The realization that many families hit by thefinancial crisis couldnotbe reached through traditionalpoverty safetynetsmobilizedmany middle‐income governments to start thinking about broader social insurancetargeted not at the poor, but at broader segments of the population vulnerable topoverty.Puttinginplaceprogramstoreachthesepopulationsrequiresadifferentapproachthanwhat is used to target the extreme or chronic poor. The vulnerable and non‐poorpopulation ismuchmore diverse than the chronic poor,more likely to be urban andmobile,andtheirvulnerabilitytodifferenttypesofrisksalsovariesdependingontheirparticular situation. Hence, the usual approach is to design programs that target thetypeofrisk,notthetypeofbeneficiary.Designingeffectivesocialinsuranceprograms,however, is complex. Benefits need to be designed in away that does not introducemoralhazard(whichencouragespotentialbeneficiariestoengageinmoreriskbehaviorthan theywould otherwise); they need tominimize disincentives (towork effort, forexample);andtheyneedtobefundedinanadequateandsustainablemanner.Theyalsoinvolvesupportingthedevelopmentofdomesticprivateinsurancemarkets,asitisoftennotfeasibleforthestatetomeetalloftheinsuranceneedsofitscitizens.Addressingthemissing market of insurance also results in efficiency gains for the economy, whichmaterializeeveryyearregardlessofwhetherashocktakesplace.Healthrisksareofprimeimportanceamongtherisksthatoftenleadtoimpoverishment.Countries provide health coverage in many ways: some rely on insurance‐based

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schemes,typicallytiedtoalaborcontract.Thishasthedisadvantageoftypicallymakinglabormoreexpensive(whichweakensthefirstcomponentofthe3‐pointstrategy),andfailingtocoverthosewhoareoutofwork.Tomakeupfortheseissues,somecountries,like Mexico, operate parallel systems: a contributory system of health insurance forformalworkers,andanon‐contributoryschemeforthosenotcoveredbyinsurance.Yet,thisintroducesitsownsetofdisincentives.Manyhavearguedthattheprovisionofnon‐contributory benefits, which rival the quality of contributory ones, discouragesformalization in the Mexican labor market. As an alternative, other countries havechosentofinancenearuniversalhealthcoverageoutofgeneralrevenues.Globalexperiencesuggests thatexpandinghealth insurancecoveragefor thepoorandnear‐poor does increase utilization rates. It also reduces out of pocket payments,although it does not eliminate them entirely. How have countries managed tosuccessfullycovertheirpopulations,especiallythosegroupswhoarenotunderformalemployment? One approach has been to finance coverage through general revenues.This is the approach thatThailand tookwhen it implemented its 30baht scheme, forexample.Asecondapproachhasbeentousedonorfundingtofinancecoverage.Thisisthe case of Cambodia,which introduced health equity fundswith donor assistance toprovide free services at select government health providers and offer access to freematernalcarethroughtargetedvouchers.Bothapproachesarecompatiblewiththefirsttwo components of the 3‐point strategy by supporting household health withoutdissuadingindividualsfromworking.Unemploymentandmacroeconomiccrisesareanothertypeofriskthatcanpushafamilyintopoverty.CountriesthathaveCCTsorotherformsoftargetedcashtransferinplacecanusethemtoprotectthepoorfromspellsofunemployment;butsuchprogramswillbelesseffectivewhenthefamilyaffectedwasnotidentifiedaspoorpriortotheshock.Workfare or labor‐intensive public work schemes can provide an alternative. Theseprograms are often a good choice in a post‐crisis situation when unemployment iswidespread,asinKoreafollowingthe1997economiccrisisandinArgentinafollowingthe peso crisis in 1999. They are also usefulwhen infrastructure reconstruction andemploymentgenerationarebothprioritiesasinSriLankafollowingthe2004tsunami.Middle‐incomecountrieswithgood institutionalcapacityandsufficientlydeepprivatecapital and insurancemarkets can also look to private‐public solutions for providingunemploymentinsurance.Chile’sexperiencewith individualUnemploymentInsuranceSavingsAccounts(UISA)isoneexample.Theseaccountsaremanagedbyprivatefundsbut regulatedby thepublic sectorwith a subsidy forpoorworkers (froma SolidarityFundbasedonrisk‐pooling).Thisapproachhasallowedforgreatereconomicmobilityand better protection than the severance pay scheme that was used prior to reform.Countrieswithlowerinstitutionalcapacitycanoptforasimpler,yeteffectiveworkfareprogram,suchasIndia’sNationalRuralEmploymentGuaranteescheme.Variation in income tied to weather patterns is a major source of risk for ruralhouseholds. Increasingvariability inweathernotonlyposesapovertyrisk to farmersbutalsooftenreduces livelihoodoptionsasrisk‐averse farmersmaybe lesswillingtoinvest in improved seeds or other agricultural inputs when faced with substantialweather uncertainty. Weather index‐based insurance is one option that can helpfarmersmanagethistypeofrisk.Throughthisinstrument,aninsuredfarmerreceivesapayment whenever rainfall falls below a pre‐determined threshold. This insurancescheme overcomes challenges of moral hazard given that weather is unrelated to anindividual’s behavior. In addition, the scheme is easier to administer andoffers fasterpaymentsthantraditionalformsofcropinsurance.Nevertheless,thisformofinsurancefacessomelimitations,astheindexmaynotalwaysadequatelyreflecttheexperienceoffarmers.Asaresult,basisriskremainsachallenge.

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Area yield indexes offer an alternative to overcome some of these issues. Area yieldindexesuseaverageyieldsinagivenareaastheindexthatdeterminespaymentstothefarmer. The index provides a better reflection of farmers’ actual experience, as itaccountsfortheentireimpactofweatheronyields(notjustrelatedtorainfall)andnon‐weather risks, such as crop disease. This form of insurance has been adoptedextensively in many states of India, receiving much support from the public sector,whichprovidessubsidiesonthepremiums.Adoptinganeffectiveindex‐basedinsuranceschemerequiresadegreeofsophisticationonpartofthe insurertooperateata largescale and diversify its risk exposure. It also needs accurate historical data on rainfallpattersandyieldstopricetheserviceappropriatelyanddeterminepayouts.Inaddition,it is important to note that these instruments do not eliminate basis risk. For thesereasons, weather insurance – while promising – should be complemented withadditional strategies. Other financial services, such as microcredit and savings, areviable alternatives: they have been used to great effect in Bangladesh to protecthouseholds against weather shocks. Social assistance programs can also addressagriculturalrisk.AnexampleisKenya’sHungerSafetyNet,whichofferscashtransferstovulnerablehouseholdsandscalesupineventofadrought.Global insurance.Some shocks transcendnational borders and threaten populationsfromseveralcountriesatonce.TheseverityoftherecentEbolacrisis,whichextendedacrossGuinea,Liberia,andSierraLeoneandcausedeconomiclossesof$2.8billion,isareminder that pandemics pose a serious threat to the prosperity of developingcountries,especiallytothepoorest.Large‐scalenaturaldisastersthatafflictmorethanone country are another form of a global shock. The Indian Ocean Tsunami of 2004affected 14 countrieswith close proximity to the IndianOcean, causingmajor loss oflife—close to 230,000 deaths—and substantial economic damages amounting to $10billion.Themagnitudeandfrequencyofextremeweatherislikelytobeexacerbatedbyclimatechange.Acommon featureofglobal shocks is thesubstantial strain that theseeventsplaceonacountry’scapacity torespond.Theburdenofaglobalshockextendsbeyond the ability of a single country to cope. As a result, national and internationalactionisrequiredtoadoptpreventionmechanismsandensureatimelyresponsetotheshock.Pandemics,suchastheEbolacrisis,wreaksubstantialsocialandeconomichavocinallaffectedcountries.Acombinationofweakpublichealthsystems,whichfailtodetectanemerging threat, andgreater integrationamongcountries throughmobilityand trade,setsthestageforthefastspreadofdisease.Thepoorestcountriesandcommunitiesareathighestriskfrompandemics.Poorcountriesnotonlyexhibitthegreatestdeficienciesinpublichealthsystems,butarealsopredominantlyruralandreliantonagriculture.Asmostpathogensthatcanleadtoapandemicareanimal‐borne,thismeansthatthepoorare in a particularly vulnerable position. The economic toll on a country thatexperiences apandemic is staggering: by someestimates, a severe flu outbreak couldcost$3trillion,representingacontractionof4.8percentinglobalGDP.Endingextremepoverty will require vulnerable countries—together with the support of theinternationalcommunity—toadoptprotectivemeasuresagainsttheseseriousthreats.Protectingavulnerablecountryagainstpandemicsrequiresafocusonbothpreventionand preparedness. This means undertaking greater investments to strengthen publichealthsystems,aswellasveterinarysystems.Itisestimatedthatanannualinvestmentof$3.4billionisrequiredtoraisethequalityofdevelopingcountries’healthsystemsupto a minimum standard. The economic return to these investments, however, issignificant and ranges from50 to 123percent. In addition, the strengtheningof earlywarningsystemsiscriticaltodetectadiseaseontime.Publichealthauthoritiesaswellas providers of crucial services, such as electricity and transport, must develop

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contingency plans that can be implemented during a pandemic. Once a pandemic isunderway, financial resourcesmust be readily available to help contain the outbreak.The international community has an important role to play in supporting vulnerablecountriesbeforeandduringapandemic.Tothisend,theWorldBankhasestablishedaPandemic Emergency Facility, which functions as a global insurance mechanism forpandemics,providingexpediteddisbursements tocountriesduringacrisisalongwithinvestmentstoavoidacrisisinthefirstplace.Naturaldisastersandextremeweathereventsalsothreatentheeconomicprosperityofcountriesandtheirabilitytoendextremepoverty.Aswithpandemics,naturaldisastersposethegreatestthreattodevelopingcountries,especiallythosethatareleastpreparedfor the shock. In fact, three out of four deaths associatedwith natural disasters takeplace in developing countries and small island states. The economic consequences ofnaturaldisastersaresevereandrangefrom$10billionto$15billioninlow‐incomeandmiddle‐income countries. Climate change adds an extra layer of complexity to thechallenge of managing and responding to natural disasters. Rising temperatures areexpected to increase both the severity and the frequency of extremeweather events,elevate theriskof floodsnear thecoasts,andexacerbate the threatofdroughts inthetropics.Developingcountrieswillonceagainbearthebruntofthecostsassociatedwithclimatechange.InSub‐SaharanAfrica,evena2‐degreetemperaturerise isforeseentogenerateapermanentreductionofalmost5percentinannualGDPpercapita.Theserisksare,unfortunately,notentirelyavoidable.Assuch,countries thataremostexposed to the risks of extreme weather events must take action to enhance theirpreparedness and ability to respond during a time of crisis. This includes developingearlywarningandclimatemonitoringsystemsto identifythreatsearly.Publicofficialsmustalsohaveresponseplansinplacetoimplementifacrisisoccurs.Countriesthataremostvulnerablewillalsoneedtoconsiderclimaterisksintheirurbanplanning.Cities,suchasTunis,arepreparingagainsttheriskof floodsbyimprovingdrainage,buildingseawalls, and relocating new infrastructure developments away from high‐risk areas.Countriesthatarereliantonagricultureandareathighriskofdroughts,suchasinSub‐Saharan Africa, will need to adapt by investing in drought‐resistant crops, irrigationsystems,andeffectivemarketsthatfacilitatetheadoptionofnewtechnologies.Movingaway fromarainfall‐dependentagriculturaleconomywillhelp thesecountries reducetheir exposure to risk. Finally, governments must have access to funds that can beimmediatelydeployed for reconstruction andas safetynets if adisaster strikes.Here,international cooperation is imperative. To assist in this effort, the World Bank hasworkedwith donors and the private sector to develop a Disaster Risk Financing andInsurance(DRFI)facilitytoquicklyfundemergencyresponses.Informationsystems.Aprerequisite tohelping thedestitute andvulnerable throughinsuranceistheavailabilityofinformationsystems.Thesesystemstakedifferentformsand play different roles depending on a country’s situation. The provision of socialassistancerequirespolicymakerstogainagoodunderstandingofpoverty inordertoidentifythepoorandthegeographicareaswhereaninterventionwouldhelpmost.Thisrequiresperiodicdatacollectionthroughhouseholdsurveys.Inaddition,panelsurveysare especially helpful for identifying the chronic poor. By shedding light on povertydynamics and identifying vulnerable, yet non‐poor, populations, they also helpdesignsocial insurance systems that complement the growth and investment components ofthe three‐point strategy. Some formsof social insurance require specialized formsofdata.Forweatherindex‐basedinsurance,forexample,historicalanddisaggregateddataon rainfall patterns is crucial for a functional insurance scheme. Last, informationsystemsarecrucialformonitoringtherisksofpandemicsandnaturaldisasters.Climatemodelsandsatellitetechnologycanbevaluabletoolsformappinghigh‐riskareas.

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Thedevelopmentofinformationsystemsrequiresinvestmentsinthesetechnologies,aswell as complementary investments in research, education, and training. The 2016WorldDevelopmentReportDigitalDividendsmakesthiscasewell.

2030—EndingExtremePovertyThe 1990World Development Report analyzed the association between poverty andpolicies of the 1970s and 1980s and came to the conclusion that sustained povertyreduction ispossible throughacombinationof labor‐intensivegrowth, investments inhumancapital, andsupplemental socialassistanceor insurance.Aquickreviewof therecord of poverty reduction in the 1990s and 2000s validates this 2.5‐point strategy.Butwiththereductionofglobalextremepovertyfrommorethanhalftolessthanafifth,changesneed tobemade. Thequestion is: In light of thesedevelopments,where andhowmuchdoesthe2.5‐pointstrategyneedbealtered?The evidence over the last three decades (see Box 3 below for a summary of keyreforms) indicates considerable support for the2.5‐point strategy thatwaspioneeredbytheEastAsiancountries,butwithoneimportantchange:incountrieswhere$1.90adaypovertyhasbeenreducedtolowlevels,governmentsshouldconsiderexpandingthethirdcomponent fromapartialsupplementtoa fullcomplement.Thereasonshavetodowithbothnecessityandfeasibility.WithreductioninextremepovertyratesinAsiaandLatinAmericatorelativelylowlevels,therehavebeentwochangesintheprofileofpoverty.Thefirstisthatwithsuccessinaddressingextremepoverty,itisprogressivelyharder to tackle, because of demographic, geographic, and cultural reasons. It isincreasingly foundamongthemarginalizedandthedisabled,andinpartsofcountriesthatareremotebecauseofeconomicdistanceorculturaldivisions.Thesecondisthat,asof 2012, more than 1.2 billion people are living on between $1.90 and $3.10 a day:around600million in SouthAsia, about 300million inEastAsia, over 200million inSub‐Saharan Africa, and almost 40 million in Latin America. This segment of thepopulation is vulnerable to shocks—emanating from the economy, their own health,pandemics,andnature—thatcaneasilypushthembackintoextremepoverty.The2000WorldDevelopmentReporthadraisedthisconcerndirectlybyemphasizingtheproblemofinsecurity:

“Actions are needed in three complementary areas: first, promoting economicopportunities for poor people through equitable growth, better access tomarkets, and expanded assets; second, facilitating empowerment by makingstate institutionsmoreresponsivetopoorpeopleandremovingsocialbarriersthat excludewomen, ethnic and racial groups, and the socially disadvantaged;finally, enhancing security by preventing andmanaging economy‐wide shocksand providing mechanisms to reduce the sources of vulnerability that poorpeopleface.”

For these reasons, successful countries should consider gradually increasing socialinsurancecoverage.Butforthistobedoneinamannerconsistentwiththeambitionofendingextremepovertyby2030,thiscomplementhastoshareafeaturewiththefirsttwo:itshouldreinforce,notweaken,theothercomponentsofthestrategy.Examplesofsocial assistance programs that qualify are cash transfers conditioned on privateinvestmentsineducationandhealth—theinvestmentcomponentofthe3‐pointstrategy.Anexampleofsocialinsuranceschemesthatdonotmeetthistestarethosefinancedby

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high taxes onwages and employment—which would weaken the labor‐using growthcomponentofthe3‐pointstrategy.Box3:SelectedReformsandEstimatedImpactCountry Period Reformandimpact

Korea,Rep.

1946‐55 Landreform.Morethan60percentofarablelandwastransferredtoowner‐farmers.Productivityshotup,asdidschoolachievement.

Taiwan 1949‐63 Landreform.In1949,64percentoffarmingpopulationweretenants;and rent was 50 percent of the income from harvests. Reform inthreephases:(1)rentreduction;(2)saleofgovernmentlandtotillersand (3) land‐to‐the‐tillerprogram.By1965,only10percentof landoperatedbytenants.

Indonesia 1968‐96 Green Revolution. Agricultural total factor productivity grew at 2.5percent annually between 1968 and 1996. 40 percent of ruralworkersescapedpovertywhilestayinginagriculture.

China 1979 Household responsibility system. Agricultural productivity growthrose from 2.7 percent annually between 1970‐78 to 7.1 percentbetween1979‐84.Extremepovertyfellfrom88percentin1981to76in1984,orfrom878millionpeopleto785million(andthento660millionby1987).

Vietnam 1988‐99 Landreform. In1986Vietnamimported0.5million tonsof rice. By2009, itexported5million tons.Nowonethree largestexportersofrice(othersareThailandandIndia).

Thailand 1968‐96 Family Planning: Mechai program. Thailand’s fertility declines asrapid at China’s (from 6 in 1966 to less than 2 by 1996), withoutcoercionandwith relatively low femaleeducation levels.Oneof themostsuccessfulpublicprivatepartnershipsever.

Thailand 2001 30 Baht Program. Universal health insurance—most visits cost lessthan$1.By2005,coveredmorethan85percentofpopulationatcostoflessthan4.5percentofGDP.

Brazil 1994‐97 RealPlan. Inflationhadstayedabove100%ayearsince1982;2500percent in 1993. 1993‐2004 is the time of restoration of macrostability. Extreme poverty ratewas cut by half: from 20 percent in1993to10percentin2005.

Mexico 1990s Progresa conditional cash transfers. By 1999, covered 2.6 millionrural families.Increasededucationattainmentofpoorruralchildrenby 10 percent (0.66 years), improved under‐five morbidity by 12percent, increased prenatal visits by 8 percent, and adultmorbidityfellby17percent.

Ghana 1990s Reforms to cocoa marketing board. Allowed new purchasers tocompeteandofferbetterprices for farmers’products; establishedaprivatemarketforthedistributionofinputs.Between2001and2010,landproductivitygrewat5.5%peryear.

Sources:Seeearliersections.The 3‐point strategy should be considered after a country develops adequateadministrative capacity. It may also require developing countries to consider policydesignthatisdifferentfromwhattoday’sdevelopedeconomieshaveinstituted. Wheninstitutingsocialinsuranceprograms,forexample,developingcountriesmightconsiderfinancingtheschemesthroughtaxesonenergyuseinsteadoflaboruse.

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Ourassessmentalsoshedslightonthreeadditionalquestionsthatcomeupinpoverty‐relateddebates:first,howmuchpovertyreductioncaneconomicgrowthgenerateandhowmuch will have to be done through redistribution? Second, does focusing on amoney‐basedpovertytargetjeopardizeprogressinothermeasuresofwellbeingsuchaseducation, longevity, andhealth? Third, is a focusonextremepoverty—measuredbythepovertylinesofthepoorest15countries—settingthebartoolow?Ourviewis:

Thesuccessofastrategythatreliesongrowthinprivateeconomicactivityandrapid improvements in essential public services—two mutually reinforcingelements—complemented by targeted interventions to help the most needy,shoulddiscourage“growthversusredistribution”extremism.

Evidence in support of this strategy should reassure those who worry that a“narrowfocus”onmonetarypovertyrisksneglectofnon‐monetarymeasuresofhumanwelfare.Infact,quickandsustainedprogressinachievingthe3percentextremepovertygoalisnotpossiblewithoutaugmentingtheassetsofthepoor,principallythroughpublicsupportforinvestmentsineducationandhealth.

Byrecognizingthatindividualswhoescapeextremepovertyarestillvulnerabletofallingbackintodestitution,andproposingpolicyactionstopreventthisfromhappening,thestrategyshouldatleastpartiallyaddressthecriticismofsettingthebartoolow.

TheevidencefromChina,Vietnam,India,andothercountriesthathavereducedextremepoverty rates to relatively low levels supports the three‐point strategy. If endingextremepovertyisthegoal,thegrowthversusredistributiondebate,anddoubtsaboutthe adequacy of the consumption‐based poverty as a development goal are not theissuesthatpolicymakersshouldworryabouttoomuch.Instead,policymakersshouldbe trying to figure out how this strategy can be implemented in countrieswhere theincidenceofextremepovertyisstillhigh.Theywilllikelyfindthatthe2.5‐pointstrategyisbettersuitedforsuchcountries.Whenimplementedwell,extremepovertyrateswillfallquickly,andthe2.5‐pointplanshouldgivewaytothe3‐pointstrategy.Whatever the conclusion of these debates, finishing off extreme poverty will soonbecome much the same thing as ending extreme poverty in Sub‐Saharan Africa andconflict‐affected countries elsewhere. Just as progress in East Asia required rapidprogress in China and poverty reduction in South Asia is almost the same thing aseliminating extremepoverty in India, progress in Sub‐SaharanAfricawill not happenunlessEthiopiaandotherstrongperformers inEastAfricakeepdoingaswellas theyhave in the last decade, and Nigeria, the Democratic Republic of Congo, Madagascar,Angola,andothersinWestandSouthernAfricastartdoingalotbetterthaninthepast.

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