Data released earlier this year by the World Bank indicate that for the first time the number of people living in extreme poverty declined in every region of the developing world. Every three years the Bank examines economic progress in 130 developing countries as measured by spending power, and the most recent figures are for the period 2005-2008. Never before has extreme poverty been reduced in all of the regions of the developing world simultaneously. In 2008 22% of the world’s population, or 1.29 billion people, lived below the poverty line, a significant decline from the 52% in 1981 or the 43% in 1990 that did so. As the leader of the team that compiled the data notes,
[t]he developing world has made remarkable progress in fighting extreme poverty, and it has proved resilient to recent economic shocks and rising food and oil prices,
To more accurately compare the cost of living across cultures, the World Bank used purchasing-power parity (PPP) as its yardstick, which measures the cost of a basket of goods from country to country. Other methods of comparison can distort the actual cost of goods to consumers. For example, comparisons based on exchange rates do not account for local differences in price that are affected by factors such as domestic political decisions.
Perhaps the best known example of PPP is the “Big Mac Index,” published every year by The Economist, which determines the prices of a McDonald’s Big Mac in a variety of countries throughout the world and then compares them to the average American price. In its 2012 rankings, the magazine determined that Switzerland has the most overvalued burger (it costs $6.81, as compared with the American price of $4.20), while India – which for cultural reasons does not use beef in its burgers, but prefers chicken in its Maharaja Mac – is the most undervalued, costing a mere $1.62. As The Economist notes, PPP holds that over time the exchange rate of currencies ought to adjust to equal the cost of goods in different countries.
A few important caveats need to be kept in mind. First, the figures in the World Bank report only go up to 2008. As it points out, data after 2008 from poorer countries is either hard to find or not comparable with previous estimates, but some preliminary data from 2010 do suggest that 2010 rates of extreme poverty are less than half those of 1990, which would mean that the Millennium Development Goal set by the United Nations in 2000 of cutting in half the worldwide poverty rate by 2015 has already been achieved. This result is even more remarkable given that the worldwide financial crisis reached its full force that year.
It is also important to note that the extreme poverty rate as measured by the Bank is defined as $1.25 a day per person, hardly a large sum of money by developed countries’ standards.
Finally, a substantial portion of the improvement in East Asia since 1981 is due to economic changes in China and roughly coincides with the introduction of market-based reforms.
Nevertheless, as Steve Chapman points out at Reason, the progress that has been made has been due to the dismantling of command economies in favor of free-market solutions.
Over the past two decades, poorer nations have dismantled command-and-control methods and given markets greater latitude. Economic growth, not redistribution, has been the surest cure for poverty, and economic freedom has been the key that unlocked the riddle of economic growth.