The Poverty Problem

By year's end, the impact of the global financial crisis of 2008 was starting to be felt in the developing world, with slowdowns expected in all emerging economies. These growth declines could have significant effects on the world's poorest populations. The World Bank estimates that a 1 percent decline in developing country growth rates traps an additional 20 million people in poverty. Concern centers on slowing growth in India and China, the world's two most populous nations and the largest contributors to reductions in global poverty in the last two decades, according to many academic studies. Reduced economic growth in both countries could reverse poverty alleviation efforts and even push more people into poverty, say some experts. The financial crisis has also likely made the achievement of the United Nations' Millenium Development Goals (MDGs) on poverty—to halve the proportion of people in extreme poverty by 2015—more difficult.

The Poverty and Hunger Challenge
With an average annual growth rate of 10 percent, China has lifted over 600 million of its 1.3 billion citizens out of extreme poverty—those who earn less than $1 a day—since 1981. In the same time period, India's 6.2 percent average annual growth rate has brought an estimated 30 million out of its 1.1 billion people out of extreme poverty. But an estimated 100 million Chinese and more than 250 million Indians remained under the extreme poverty line in 2005, according to the latest World Bank poverty estimates (PDF). Roughly 470 million Chinese and 827 million Indians earned less than $2 a day, the median poverty line for all developing countries. Though some economists say World Bank figures understate the true extent of poverty, there is broad agreement that a slowdown in China and India will harm poverty alleviation goals. The administrator of the UN Development Program (UNDP), Kemal Dervis, warned in October 2008 that together with volatile food and fuel prices, "current global economic conditions threaten the gains that have been made to reduce poverty and advance development for large numbers of people."

In the developing world as a whole, economists say that soaring food and fuel prices were already placing strain on the poor prior to the onset of the financial crisis. The UN World Food Program estimated in September 2008 that there are 850 million chronically hungry people in the world, a tally that could increase by 130 million this year (PDF). The World Bank estimates that the number of poor increased by at least 100 million as a result of the food and fuel crises. It argues that declines in food and fuel prices in late 2008 have not solved the problem. According to its November 2008 report, the poorest households were "forced to switch from more expensive to cheaper and less nutritional foodstuffs, or cut back on total caloric intake altogether, face weight loss and severe malnutrition."

The poor in India and China, like the rest of the world, have also been affected by the rise in fuel and food prices. For India the problem is especially vexing. The 2008 Global Hunger Index of the International Food Policy Research Institute says India already suffers from alarming levels of hunger, and is one of  three countries with the highest prevalence—more than 40 percent—of underweight children under five.

The Specter of Growing Inequality
The financial crisis could worsen the existing high levels of inequality in China and India, say experts. As this Backgrounder points out, despite unprecedented levels of economic growth in India and China, there is increasing geographic, sector-based, and income inequalities within each country. Benefits from growth have failed to trickle down to significant segments of each population, especially in rural areas. Biplove Choudhary of the UNDP's trade program says growth does not directly translate into poverty alleviation. Experts say gains from growth in India and China should be better channeled into areas that most uplift the rural poor, such as spending on health, education, and infrastructure.

Yet sharply tighter credit conditions and weaker growth are likely to cut into governments' abilities to invest to meet education, health, and gender goals, hitting the poor the hardest, says the World Bank. An October 2008 report on global income inequality by the International Labor Organization says income inequality, on the rise in most regions of the world, is expected to increase due to the global financial crisis.

China, with its current account surplus and nearly $2 trillion in foreign reserves, is better placed than India to continue long-term investments in infrastructure and social-welfare initiatives. In November 2008, the Wall Street Journal reported that as many as half of India's planned highway-improvement projects, valued at more than $6 billion, could be delayed as much as two years. India is especially hard-hit, it says, because it had expected private investment to fund around half of the more than $100 billion a year in planned infrastructure development.