Halving Global Poverty

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Journal of Economic Perspectives—Volume 17, Number 3—-Summer 2003—Pages 3—22
Halving Global Poverty
Timothy Besley and Robin Burgess
I
n September 2000, the world's leaders met at the Millennium Sunim.it at
the United Nations in New York City and set an ambitious agenda for im-
proving human welfare. These goals, which are elaborated at (http://www^
developmentgoals.org), include achieving universal primary education and gender
equity; ensuring environmental sustainability; reversing the spread of HIV/AIDS;
and by 2015, reducing under-age-five mortality by two-thirds, maternal mortalit)^ by
three-quarters and the proportion of people without access to safe drinking water
by half, in comparison to the levels prevailing in 1990. The goal of central
importance to this paper is to cut in half the proportion of people living beiow $1
a day from around 30 percent of the developing world's population in 1990 to
15 percent by 2015. The latest World Bank estimates (for 1998) suggest that
1.2 billion people are below the $l-a-day poverty line. Though the fraction of
humanit)' in poverty is falling, absolute numbers in poverty have shown limited
change (Deaton, 2002).
This paper begins by discussing poverty trends on a global scale—^where the
poor are located in the world and how their numbers have changed over time. It
then discusses the relationship of economic growth and income distribution to
poverty reduction. Finally, it suggests an evidence-based agenda for poverty reduc-
tion in the developing world.
A recurrent theme of the paper will be that mainstream economic thinking on
how to reduce poverty has evolved in the last couple of decades. The traditional
economic focus in development thinking focused heavily on a neoclassical model
in which growth, was achieved by accumulating productive assets in a climate of
• Timothy Besley is Professor of Economics and Political Science, and Robin Burgess is
Lecturer in Economics, both at the London School of Economics, London, United Kingdom,
Their e-mail addresses are {t.besley@lse.ac,uk) and {r.burgess@be.ac,uU), respectively.

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4 Journal of Economic Perspectives
macroeconomic stability. This perspective has been challenged as insufficient both
inside and outside the economics profession. The primary outside challenge has
come from nongovernment organizations who have grabbed newspaper headlines
with their concerns about globalization, the environment, human rights, power-
lessness and exploitation. Inside the economics profession, the institutional and
political context in which policy and accumulation decisions are made has taken
center stage. The agenda for growth still emphasizes accumulation of physical and
human capital in a climate of macroeconomic stability, but the framework for
achieving growth places greater emphasis on institutional reforms that expand
opportunities for households, improve the climate for doing business and improve
the accountability of elected officials. The current redistributive agenda focuses less
on transfers of money and more on specific policies—particularly public services,
credit and property rights—^which can be shifted in a propoor direction. Modern
development economics lays to rest the common stereotype of economists as seeing
unfettered markets leading to economic growth as the only (or even primary) route
out of poverty. This paper builds an agenda for confronting global poverty. It
emphasizes that, even though much remains to be done, economic research
suggests a pathway of moving beyond the consensus embodied in the Millennium
Goals to identify concrete and effective pathways to global poverty reduction.
Quantifying Global Poverty
Obtaining reliable measures of poverty requires household surveys about the
distribution of income or consumption that are comparable across countries.
Improvements in such surveys represent one of the key achievements of the World
Bank Research Department over the past 20 years. In the mid-1980s, comparable
household survey data was only available for 22 countries. There is currently
comparable data on around 88 out of a total of 158 low- and middle-income
countries representing about 89 percent of the total population of the developing
world (Chen and Ravallion, 2001). The latest poverty data from around the world
can be found at {http://www.worldbank.org/research/povmonitor/). However,
even with this dramatic improvement, our picture of global poverty remains partial,
and problems of comparability across different survey instruments remain.^
Using World Bank purchasing power parity exchange rates based on price and
consumption basket data from the 1993 International Comparison Project, Chen
and Ravallion (2001) construct a poverty line of $1.08 per day, which is comparable
across the 88 or so countries for which they have primary (unit value or tabulated)
" See Atkinson and BrandoUni (2001) for a persuasive discussion of the difficulties involved in using
household surveys to make cross-country comparisons of income distributions. Deaton (2003) discusses
the different possible methods for constructing measures of global poverty. He persuasively argues that
methods based on household survey data are preferable to reliance on consumption data from national

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Timothy Besley and Robin Burgess 5
survey data. This poverty line, commonly known as the "dollar-a-day" line, is chosen
to be representative of domestic poverty lines found in low-income countries that
are located mainly in sub-Saharan Africa and south Asia. It does not correspond
well to what is judged as poverty in middle-income countries. As a result, poverty
rates based on this method should be viewed as conservative for middle income
developing countries.
Viewed from a developed country perspective, living on $1 a day (or less) is
unthinkable. Applying the dollar-a-day line to the United States would result in
virtually nobody being classified as poor. Debates about providing a decent provi-
sion for the poor in developed countries, therefore, have an altogether different
character. In low-income countries, individuals who live on $1 a day exist on the
margin in many ways, not least in obtaining adequate nutrition. For example, using
data from India's 50* National Sample Survey round for 1993-1994, we find that
households living on less than a dollar a day spent around 73 percent of their
budgets on food. The bulk of such households would be involved in subsistence
agriculture in rural areas and in the informal sector in urban areas. Well over
50 percent of children in these households would be classified as undernourished
by international standards.
Table 1 provides estimates for both the proportion and number of people
livi'ig below $1 a day for different developing regions of the world in 1987, 1990,
19&3, 1996 and 1998.^ These developing regions comprise countries that are
classified as low or middle income by the World Bank. These numbers will be used
to assess progress toward the goal of halving global poverty from 1990 to 2015. In
1990, the "headcount index"—^which measures the proportion of people below the
$l-a-day line—is 29.3 percent, which corresponds to 1.3 billion people. About
90 jaercent of the poor in the world in 1990 are situated in three regions: east /ksia,
south Asia and sub-Saharan Africa. Four-fifths of the poor in the east Asia region are
from China. In the soutli Asia region, the bulk of those in poverty are from India.
The disUibution of poverty is highly uneven across 'the globe. This perception of
heterogeneity is reinforced by the national poverty rates that underlie the regional
esrimates. For example, in. south Asia, the headcount for Sri Lanka lies well below
that, for Nepal or India.. Even within India there is pronounced variation across
states, as Distt and Ravallion (2002) explain in thisjournal. This heteroigeneity has
led economists to focus on identifying the factors that allow countries or regions to
exit poverty.
How well is the world succeeding in cutting the global poverty rate in half from
its 1990 level? Bet^veen 1990 and 1998, the headcount index of poverty has fallen
fron 29.3 percent to 24.2 percent, which represents solid progress. However, the
dec ine m absolute numbers in poverty is more modest, falling from 1.3 billion to
^ The 1993 $l-a-day line is converted to prices prevailing at each survey date using the country-specific
official Consumer Price Index to allow comparisons across time. To obtain regional estimates, it is
assumed that the average poverty rate for countries without distributional data equaled that for
countries with such data at the regional level.

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6 Journal of Economic Perspectives
Table 1
Poverty Across the Globe
Population Living Below $1.08 a day (
East Asia & FaciBc
(exclude China)
East Europe &
Central Asia
Latin America
Middle East &
North Africa
South Asia
sub-Saharan Africa
Total
Total (exclude China)
Poverty Rate
1987
26.6
22.9
0.2
15.3
11.5
44.9
46.6
28.7
29.6
1990
27.6
15.0
1.6
16.8
9.3
44.0
47.7
29.3
29.3
(% Below $1.
1993
25.2
12.4
3.9
15.3
8.4
42.4
49.7
28.5
28.5
1996
14.9
8.1
5.1
15.6
7.8
42.3
48.5
24.9
28.2
1993 Purchasing Power Parity)
08)
1998
15.3
9.6
5.1
15.6
7.3
40.0
46.3
24.3
27.3
Number of Poor (1,000,000)
1987
415
109
1
64
25
474
217
1196
891
1990
452
76
7
74
22
495
242
1293
916
1993
432
66
18
71
21
505
273
1321
955
1996
265
45
24
76
21
532
289
1207
987
1998
278
56
24
78
21
522
291
1214
991
Source: Table extracted from {http://www.worldbank.org/research/povmonitor/> on July 08, 2002.
1.2 billion. These figures have been controversial, because they are sensitive to the
data used and time period chosen. For example, if 1987 is taken as the base year,
then the numbers in poverty had actually increased by around 17 million in 1998.
This finding was emphasized in the World Development Report 2000/2001 (World
Bank, 2001a). Deaton (2002), however, points outs that another World Bank
document published in the same year. Globalization, Growth and Poverty, shows the
numbers in poverty falling by 200 million between 1980 and 1998 with no trace of
increase between 1987 and 1998 (World Bank, 2001b), and Deaton traces the
discrepancy to different underlying data sources for the years 1987-1993. What
does seem, robust is that although the proportion living in poverty is falling, the
actual numbers in poverty show more limited change.
What is even more interesting from a policy perspective is that the poverty
trajectories of different regions from 1990 to 1998 have been so different. Over this
period, the poverty rate in east Asia drops from 27.5 percent to 15.3 percent, and
numbers in poverty fall from 452 to 278 million—mainly because of the dramatic
reductions in poverty in China. These figures are startling—the region is on course
to achieving the Millennium Summit poverty reduction targets 15 or soyears ahead
of schedule. This reduction in poverty, which started well before 1990, represents
the largest fall in poverty «;erwitnessed in history (Ahuja et al., 1997). In contrast,
poverty rates in sub-Saharan Africa have remained stagnant, moving from 47.6 per-
cent in 1990 to 46.3 percent in 1998. Over this period, around 50 million people
are added to the African poverty tally. We therefore have an African tragedy to
contrast with the east Asian miracle. The situation in south Asia is intermediate—
poverty rates declined modestly from 44 percent to 40 percent, but numbers in
poverty showed a slight increase. Although the number in poverty is much lower in

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Halving Global Poverty 7
other regions, poverty rates have been stagnant in Latin America and the Carib-
bean and generally worsening in eastern Europe and central Asia. In short, nearly
all of the progress toward the goal of halving the global poverty rate that occurred
from 1990 to 1998 is due to the Chinese experience.
In historical terms, poverty has been a highly persistent and slow-moving
process (Lipton and Ravallion, 1995). These characteristics of poverty often led to
explanations based in some underlying trait that was difficult to change, such as
resource endowments, disease burden or factors relating to geography. However,
the fact that poverty did change significantly in some countries and regions
between 1990 aad 1998 calls out for explanations that reflect this change. There
seems little doubt that divergent poverty trends in, for example, east Asia and
sub-Saharan Africa, are in part a function of the policy and institutional reforms
implemented in the countries that make up those regions.
The Role of Economic Growth in Reducing Poverty
The main sources of economic growth are accumulating human capital,
physical capital and technological change. Growth from these sources can benefit
the poor both directly and indirectly. For example, the acquisition of human
capital by the poor results in their earning higher wages. Adoption of agricultural
technologies, such as higher-yielding crop varieties, may raise the incomes of the
poor. Since various forms of capital constraint (due to imperfect capital markets)
may inhibit the income sources of the poor, increasing capital formation can, in
theory, yield a disproportionate advantage to the poor (as in the model of Banerjee
and Ne-svman, 1993). Whether these optimistic possibilities characterize growth
experiences in specific countries can only be assessed on a case-by-case basis using
disaggregated data.
The relationship between economic growth and poverty is ultimately a task in
quantification. Here, we analyze cross-country poverty and national income data
from the World Bank. A key magnitude in assessing the antipoverty effectiveness of
growth is the elasticity of poverty with respect to income per capita, which we
denote by T]. Estimates of this elasticity can be obtained in a variety of ways. Here,
we present results from regressions of the form
logP;, = 6i+ T| log |X;( + e,,,
where P;^ is the headcount poverty rate for country i at time t based on the $l-a-day
poverty line, ft is a country fixed effect, /x,-j is real per capita national income for
country i at time t, and £,-j is the error term. One limitation of this approach is that
because of the fixed effect term, only countries with data on poverty and per capita
income for more than one year are included in the regression. Sixty of the
cou.ntries in our sample have data for more than one year. The first column of
Table 2 shows the estimates of TJ for the entire sample. The coefficient on the

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8 Journal of Economic Perspectives
Table 2
Growth and Poverty Across the Glohe, 1990-2015
Latin
East Asia
Eastern
America
Middle East
Sub-
Whok
and
Europe and
and
and North
South
Saharan
Sample
Pacific
Central Asia
Cambean
Africa
Asia
Africa
Elasticity of poverty
with respect to
income per capita
Annual growth rate
needed to halve
world poverty by
2015
Historical growth
1960-1990
Total growth needed
to halve world
poverty by 2015
"-0.73
(0.25)
3.8%
1.7%
95%
-1.00
(0.14)
2.7%
3.3%
70%
-1.14
(1.04)
2.4%
2.0%
61%
-0.73
(0.29)
3.8%
1.3%
94%
-0.72
(0.64)
3.8%
4.3%
95%
-0.59
(0.36)
4.7%
1.9%
117%
-0.49
(0.23)
5.6%
0.2%
141%
Source: Authors' calculations—-see (http://econ.lse.ac.uk/staff/tbesley/hgp) for details.
Notes: Robust standard errors in parenthesis.
variable for log GDP is equal to -0.73 with a (robust) standard error of 0.25. This
finding confirms that increases in income per capita are associated with reductions
in poverty. A growing body of evidence confirms this general finding (Dollar and
Kraay, 2000; Ravallion, 2001).
Using estimates of r\, it is straightforward to derive the (annual) per capita rate
of economic growth that would be needed to halve the poverty rate for the world
or for that region in a period of 25 years. For the whole sample, T] = —0.76, which
means that it would require a 3.8 percent rate of growth over 25 years to cut the
poverty rate by half. The historical per capita growth rate from 1960 to 1990 was
1.7 percent, so this expansion of growth is a fairly tall order. More than a doubling
of economic growth would be needed to halve global poverty.
However, these estimates are only illustrative, at best. There are serious issues
regarding comparability of data across countries, and the coverage of countries
within regions is partial. A wide variety of estimates of T]can be obtained, depend-
ing on the method and data used. For example, increases in national income only
partly translate into increases in household consumption. As a result, the elasticity
of poverty with respect to national income is much smaller than with respect to
household consumption (or income). If researchers are trying to look at the effect
of changes in national income on poverty, then they should use much lower
elasticities than if they are looking at the effect of consumption changes on poverty
(for example. Collier and Dollar, 2001). In the illustrative regression, we are also
not controlling for factors like income inequality and population growth in the

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Timothy Besley and Robin Burgess
9
regressions, which might affect how growth in national income maps onto poverty
reduction.
There are good reasons to expect the elasticity between national income and
poverty to vary across regions or countries. We can relax the assumption that TJ is
uniform by running the regression for different geographical regions. In this case,
there are too few observations for a fixed effects regression, although we allow the
intercept to vary across regions. Growth elasticity estimates by region are shown in
the rest of Table 2. Growth reduces poverty in all regions. Despite small sample
sizes, these effects are significant at the 5 percent level or below in all regions
except eastern Europe and Middle East and north Africa.
Again, the second row of Table 2 shows the growth rate needed if growth alone
is to reduce poverty by half over 25 years, while the third row of the table shows the
historical growth rate from 1960 to 1990. In east Asia, and also in the Middle East
and north Africa region, the historical rate of growth for the region exceeds the
rate needed to halve the poverty rate. In eastern Europe and central Asia, the
growth rate needed to halve world poverty of 2.4 percent may be compared to an
historical growth rate of 2.0 percent. But projecting from history before 1990 is
hazardous for this region. The dramatic institutional changes and collapses in
output that have accompanied economic transition in the former Soviet Union and
in central and eastern Europe transition have caused poverty to rise substantially in
this region in recent years. In south Asia and Latin America, the historical groAvth
rate is less than half of the growth rate needed to halve poverty.^ Finally, sub-
Saharan Africa is an outlier in several ways. Growth has the lowest impact on poverty
irs this region, and the historical growth rate is by far the lowest. Thus, the gro^ivth
rate needed to halve poverty in sub-Saharan Africa between 1990 and 2015 is
28 times its historical average.
These data support the view that higher growth translates into poverty reduc-
tion. However, for much of the world, the amount of growth that is needed to halve
the poverty rate is large relative to historical averages. This insight has two main
implications. First, finding ways to increase economic growth is important to
reducing poverty. To attain this aim, uncovering specific institutional and otl-ier
drivers of grov/th at the local level in different parts of the world—that is, the
microeconomics of growth—should remain one of the main research frontiers
within, development economics over the next decade or so. Second, economic
growth by itself seems unlikely to be enough to cut the poverty rate in half in much
of the world. Thus, it will be necessary to identify policy and institutional changes
that can directly reduce poverty, even if growth does not increase, or which can
improve the m:apping of growth onto poverty (that is, increase TJ). Redistribution
and institutional reforms loom large here.
' However, the situation may be more optimistic in south Asia given ongoing revisions to the poverty
numbers in India that suggest a larger fal! in poverty than was prewously believed.

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Redistribution and Poverty
Income distribution can be characterized in complex ways, such as presenting
the cumulative density function of the whole distribution. The available cross-
country inequality data are typically rather crude, with one-dimensional character-
izations of distribution, such as the Gini coefficient or the standard deviation of
incomes in logs, dominating the debate. Even though such measures can miss
important changes in income distribution, they represent the only means of
looking at the relationship between inequality and poverty for a broad range of
countries.
Changes in income per capita do reduce poverty, as argued in the previous
section, but they do not seem to be correlated with changes in inequality. Although
measures of inequality vary across countries and regions, the extent of inequality
within countries and regions changes relatively litde over time (Li, Squire and Zou,
1998). This stability could be because structural features of the economy that
determine income distribution, like ownership and social relations, change only
slowly.^ In any case, the data suggest that economic growth raises mean income,
without widening or narrowing the distribution (Dollar and Kraay, 2000).^
Countries in our data differ in their measured income distributions even as
captured by simple statistics. Table 3 confirms this using the standard deviation of
the income distribution (in logs) as the measure of inequality. These data confirm
what is widely believed—^Latin America is the most unequal part of the developing
world. Second is sub-Saharan Africa. South Asia has almost the lowest level of
inequality—this block of countries is also relatively homogenous as reflected in the
small standard deviation.
How do these variations in inequality relate to poverty diiierences, after
controlling for income per capita? To examine this, we add a measure of income
inequality to our earlier regressions, thus running regressions of the following
form:
log Pit =01+7] log ^i, + j3cri, + g;,,
where P^ is again the headcount poverty rate for country i at time t based on the
$l-a-day poverty line, 0,- is a country fixed effect, /x^j is real per capita national
income for country i at time t, cr^i is income inequality for country i at time t
measured by the standard deviation of the income distribution in logs, and e^^is the
error term. When this equation is estimated, the jS coefficient on the variable for
* This result may also occur because survey instruments for measuring household income/consumption
vary little within countries over time, while they do vary substantially between countries.
^ However, it should be remembered that surveys measure consumption inequality and not the com-
ponents of income used to measure economic growth. As a result, the finding that changes in inequality
are uncorrelated with changes in GDP cannot be taken to mean that, on average, incomes/consumption
of the poor grow at the same rate as GDP (see Deaton, 2005).

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Halving Global Poverty 11
Table 3
Inequality and Poverty Reduction
Staadard deviation of
income distributi.on
in logs
Poverty decline after a
one standard delation
reduction ie inequality
Whole
Sample
0.76
(0.24)
67%
East Asia
and
Pacific
0.72
(0.11)
31%
Eastern
Europe and
Central Asia
0.54
(0.15)
42%
Latin
America
and
Carribean
0.98
(0.16)
45%
Middle East
and North
Africa
0.67
(0.12)
34%
South
Asia
0.59
(0.06)
17%
Sub-
Saharan
Africa
0.86
(0.22)
62%
Source: Authors' calculations—see (http://ecoa.ise.ac.uk/staff/tbesley/hgp) for details.
Notes: Standard deviation in parenthesis.
income inequality is equal to 2.77 with a (robust) standard error of 0.72. This
finding suggests a positive and significant association between inequality and the
level of poverty within a country.
To get a "back of the envelope" feeling for the order of magnitude of this
effect, consider the following thought experiment. Suppose that we could lower the
level of inequality in each region of the world by one standard deviation (that is, by
the amount in parenthesis under the first row of Table 3). Then how much would
poverty fall? The answer is given in the second row of Table 3.
It is striking that a one standard deviation change in inequEility reduces poverty
in sub-Saharan Africa by more than half. It nearly accomplishes that goal in Latin
America. The one standard deviation reduction in inequality understandably
makes the least impact in South Asia, which already had a relatively low level of
inequality. Overall these results suggest that some focus on inequality reduction is
not unreasonable. This has two clear implications. First, finding feasible means of
achieving redistribution must be a priority. The potential for achieving redistribu-
tion via conventional tax and transfer systems is limited in low-income countries
(Burgess and Stern, 1993). However, other measures such as strengthening prop-
erty rights, increasing access to credit and improving the delivery of public services
do hold real promise. Working out the political economy of how these policies can
be shifted in propoor direction is now a major area of work. Besley and Burgess
(2000), for example, show for India that land reforms, which enhanced security of
tenure for poor farmers, had appreciable impacts on rural poverty in India,
vfhereas attempts to redistribute land via the imposition of land ceilings were
blocked and had no effect. Second, attention needs to be paid to the distributional
impact of growth. Growth that reduces inequality will have a larger impact on
poverty. This in turn leads to a focus on specific drivers of growth that can directly
benefit the poor. Reforms that expand opportunities for households, improve the

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12 Journal of Economic Perspectives
climate for doing business and improve the accountability of elected officials are
important in this respect.
The Agenda for Reducing Poverty
The standard approach to reducing poverty focuses principally on economic
growth. The "Washington consensus" that emerged in the late 1980s brought forth
a number of prescriptions for economic progress. These included sound fiscal and
monetary policy, greater openness, security of property rights and privatization
(Williamson, 2000). Given its political sensitivity, calls for redistribution under the
consensus were limited—focusing on broad-based taxes and public spending tar-
geted toward the poor. The most controversial parts of the consensus were its
emphasis on openness and privatization, which led many of its opponents to view
it as the handmaiden of unfettered markets. Moreover, the fact that these prescrip-
tions were depicted as consensus led it to be cast as the mantra of mainstream
economics.
It has been surprisingly difficult to find robust evidence that the policy pre-
scriptions of the Washington consensus generate growth in cross-country data.
However, some recent studies do provide encouragement on key aspects. For
example, Acemoglu, Johnson and Robinson (2001) examine the relationship
between income per capita and security of property rights in a cross-section of
countries. Using their estimated coefficient, we find that an increase in protection
of property rights across the globe of half of one standard deviation would be
sufficient to halve global poverty (see Table 4). In similar vein. Hall and Jones
(1999) construct a measure of social infrastructure that is the average of an index
of the extent to which property rights and contracts are enforced and respected in
a country and the degree of openness to international trade. This measure is
intended to capture the institutions and government policies that determine the
economic environment within which individuals accumulate skills and firms accu-
mulate capital and produce output. They find a strong association between social
infrastructure and output per worker and argue that this is an important determi-
nant of growth. Using their estimate, our own calculations show that an increase in
social infrastructure of two standard deviations would be sufficient to reduce global
poverty by half. The impact of changing either measure varies strongly across
regions, with poverty in sub-Saharan Africa being most resilient to institutional
change (again, see Table 4).
How to map from these findings into concrete policy suggestions about
property rights or social infrastructure is not immediately clear. Given issues of
comparability across countries and institutions, it is seldom, if ever, possible to
derive highly specific policy proposals from cross-country analysis. In any country,
the policies that can be selected and maintained are shaped by the political, legal
and social institutions in that country. Making real improvements often involves far
more than passing a law or a budget appropriation.

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Timothy Besley and Robin Burgess 13
Table 4
Social Infrastructure, Expropriation Risk aad Poverty Reduction
Whole
East
Asia
and
Pacific
Eastern
Europe
and
Central
Asia
Latin
America
and
Carribean
Middle
East and
North
Africa
South
Asia
Sub-
Saharan
Africa
Percentage of required poverty
reduction achieved by a one
standard deviation change in
risk of expropriation
Percentage of l-equired poverty
reduction achieved by a one
standard deviation change in
social infrastructure
240%
294%
52%
114%
28%
213%
250%
210%
118%
22%
; Authors' calculations—-see {http://econ.lse.ac.uk/staff/tbesley/hgp) for details (1999).
Plugging this gap in our knowledge is where the agenda now lies. Ten years on,
there is much more emphasis on institutional development and its role in bringiing
forward and sustaining good policy outcomes. The focus of the debate on trade
liberalization, for example, has shifted toward examining the institutional context
in which opening occurs. Aghion et a!. (2003) find that the impact of liberalization
on the productivity of industries in India depends both on their distance to India's
technological frorltier and on the industrial relations climate in a state. Moreover,
the importance of the institutional framework is based on a growng body of
concrete evidence. For example, experience with privatization, particularly in
eastern. Europe and the former Soviet Union, made clear that well-developed legal
systems and competition authorities are central to successful outcomes. Similarly,
there is an emerging consensus that making gains in education is often not an issue
of school budgets, but of finding mechanisms of delivery that work.
It is unlikely that cross-country data will be the main vehicle for progress on
these issues. Cross-country data is best at providing a signpost for more focused
work. Moreover, there is a need to square macro and micro facts that may some-
times be at variance with one another. A good example of the productive exchanges
that can take place when this is done is the recent paper by Krueger and Lindhal
(2001), Their starting point is the apparent inconsistency between the robust
evidence on the returns to education in micro data compared to the more mixed
findings from, macro data. They argue that measurement error in education helps
to explain why a number of macro studies fail to find a significant relationship
between education and income. In addition, they point out that even where we see
a significant relationship it is impossible to ascertain whether differences across
countries can be taken as a cause of income as opposed to a result of current or
anticipated income growth. This kind of debate is important.

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14 Journal of Economic Perspectives
We also emphasize that our agenda for reducing poverty needs to be built on
firm theoretical foundations. Having a more or less unified approach to assessing
the validity of theoretical arguments has set economics apart from other parts of
the social sciences for more than 50years. How theory should be accommodated in
empirical analyses is still an issue of debate. However, the importance of reasoning
about the evidence using a well-defined theoretical structure is not. Moreover, it is
only by looking for consistency between models and facts that progress can be
made.
We will argue that lessons are emerging where subnational findings are con-
sistent with the broader cross-country picture. Micro evidence provides a means of
modeling incentives at the ground level and makes more specific and applicable
the kind of knowledge available in the aggregate. Basing the analysis on solid
theoretical foundations also helps to increase the portability of findings to different
settings. We now discuss specific policy areas emphasizing the insights available
from subnational studies and the emerging consensus on what matters.
Human Capital
Literacy and other indicators of education remain woefully low across much of
the developing world. The best estimates for developing countries, from micro-
econometric studies that take issues of endogeneity and measurement error seri-
ously, find that each additional year of schooling is associated with a 6-10 percent
increase in earnings (Duflo, 2001). This evidence appears robust across both
methods and locations; in fact, the magnitude of the result is in line with results for
developed countries (Krueger and Lindhal, 2001). This suggests that investment in
education can be used to attack poverty both by encouraging economic growth and
as a method of redistribution to the poor.
But choosing the appropriate mechanism for expanding education is impor-
tant. New work in the area is paying much more attention to the market conditions
under which education is provided and the incentives faced by different providers.
This is critical to understanding how education expansion can be achieved. One
strand of research focuses on policy design. Intriguing experiments in western
Kenya, for example, used a randomized design to evaluate whether increasing the
supply of textbooks or improving child health affect attendance and attainment in
schools run by a nongovernment organization (Glewwe, Kremer and Moulin, 2000;
Kremer and Miguel, 2002). Another strand focuses on whether there needs to be
a change in the organization of how policy is delivered. Public schooling, for
example, may require a variety of monitors and competitors—including different
levels of government, community and nongovernmental organizations and the
private sector—in order to be accountable and effective (Reinikka and Svensson,
2002; Hsieh and Urquiola, 2002). The question of how social relations between
ethnic groups affect delivery is also a central theme here (Miguel and Gugerty,
2002).
Policy thinking on the way to expand human capital typifies how economists
now think about development. Institutions for delivery are a primary object of

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Halving Global Poverty 15
reform, and there is a reliance on solid micro evidence as a means for charting the
v/ay forward.
Credit
The large cross-country literature on credit shows a strong correlation between
"financial depth" and growth (for example. King and Levine, 1993). However, the
poor tend not to have access to banks and other formal financial institutions, and
so aggregate credit expansion may not necessarily deliver benefits to the most
disadvantaged groups. A recent theoretical literature emphasizes links between
inequality and development via the operation of credit markets. Even if the poor
have access to investment opportunities, it may be difficult for them to exploit those
opportunities (Banerjee and Newman, 1993; Aghion and Bolton, 1997). Finding
ways of expanding access to credit for the poor may both increase the elasticity
beayeen economic growth and the reduction of poverty and also act as a form of
redistribution,
A centra! concern in this literature is whether changes in institutional design
can overcome the problems of elite and political capture that have plagued fonnal
credit. One line of attack on this issue has been to look at the functioning of
informal institutions that, to some extent, have filled the void left by market and
state failure to reach the poor (Besley, 1995a). Another line has been to look at
whether changing the way that formal credit institutions deliver credit can affect
outcomes. Burgess and Pande (2002), for example, evaluate the impact of a massive
social banking experiment in India where licensing rules were used to force
commercial banks to open over 30,000 branches in rural areas. They find that
banking in rural India led to significant falls in rural poverty. They also find effects
on Bonagricultural output and employment, agricultural wages and on education,
which helps them to understand how the arrival of banks in rural India enabled
people to exit poverty.
One much heralded innovation as regards delivery of credit has been micro-
finance institutions like the Grameen Bank, which target the poor and rely on
peer selection and peer monitoring to overcome the need for collateral. These
schemes are typically operated by nongovernmental organizations. In the case of
the Grameen Bank, there are recent studies that shed light on the ability of credit
to affect livelihoods and poverty (Pitt and Khandker, 1998; Morduch, 1998).
However, it remains unclear whether microlenders like Grameen Bank achieve
their success in repayment through peer monitoring or through the promise of
future interacdons with the bank or simply because the bank itself spends more
time in monitoring.
There remains a gulf between the broad macro results that link credit aJid
output afld those that look at the micro level. An intriguing open question is
whether innovative institutions or mechanisms for credit delivery to the poor can
lower inequality and raise output simultaneously.^
•^ A recent theoretical literature has questioned whether there is an equity-efSciency trade-off in the case
of cieijit (Benabou, 1996) although there is, as yet, little evidence to back this view.

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16 Journal of Economic Perspectives
Property Rights and Contracts
It is sometimes implied that improving property rights primarily favors the
rich, conjuring up the image of rich owners of capital securing greater rents.
However, there is increasing evidence that secure land rights, in particular, are an
important vehicle for the poor that may promote both equity and efficiency. Lin
(1992), for example, showed that the move from collective to household farming
in China starting in 1978 led to large productivity increases in agriculture. In a
similar vein, Banerjee, Gertler and Ghatak (2002) show that increases in tenurial
security in West Bengal also had large positive effects on agricultural output. This
is in line with Besley and Burgess (2000) who utilize state-level data in India to find
that rural poverty was reduced by land reform, particularly reforms that strength-
ened property rights over land. They estimate that the sum total of land reform
legislation in India since 1958 can account for one-tenth of the poverty reduction
witnessed during that period. Obtaining property rights over land in urban areas
can also help poor households to gain access to credit, increase labor supply and
improve productivity (Field, 2002; De Soto, 2000). These micro findings are
consistent wth papers that identify property rights as a key determinant of growth
in cross-country data (Hall and Jones, 1999; Acemoglu, Johnson and Robinson,
2001).
The literature, however, also makes clear that the implementation of rights
over land needs to be managed carefully, or it can have unintended negative
consequences. Besley (1995b) suggests that in Ghana, land rights are likely to
respond endogenously to investment decisions because of the social and political
process surrounding the establishment of rights. Banerjee, Gertler and Ghatak
(2002) discuss the fact that improvements in tenurial security are likely to lead to
some tenants being fired as a preemptive measure, lest they lay claim to the land
that they are farming.
Property rights ccui be viewed as part of a broader set of mechanisms for legal
enforcement of commitments, like contracts. Improvements in the enforceability of
contracts can promote investment and the development of firms. For example,
Banerjee and Duflo (2000) emphasize the importance of reputations in enforcing
contracts in the Indian software sector. In this journal, McMillan and Woodruif
(2002) discuss how social and business networks can help with access to credit and
investment at one stage of development in transition economies, but how legal
enforcement of contracts becomes necessary for further developmient. Using a data
set on contracts between a large tractor assembler in Pakistan and its suppliers,
Andrabi, Ghatak and Khwaja (2002) study how asset specificity of a supplier may, to
some extent, compensate for quality in highly uncertain environments. These
studies have in common an emphasis on the role of social and business networks in
promoting industrial development in countries where contractual enforcement
through forma! means is imperfect.
Regulation
The postwar model of economic development was built on a raft of regulation.
Such regulation was often justified as the welfare improving actions of benevolent

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Timothy Besley and Robin Burgess
17
governments intent on fixing market failures. Insofar as such market failures are a
cause of poverty, this was closely allied to the poverty reduction agenda. However,
there is increasing empirical evidence that, noble as the intentions of the architects
of regulation may have been, many forms of regulation have been neither an
engine of economic developm.ent, nor a boon for the poor. This insight comes as
no surprise to students ofthe political economy of regulation (for example, Sdgler,
1971; Shleifer and Vishny, 1998).
This raises the specter of appropriately structured deregulation being part of
the antipoverty agenda. Economic analysis is increasingly playing a role in identi-
fying specific directions for deregulation that help the poor. One key theme is to
provide an improved climate for investment and entrepreneurship. For example,
Djankov et al. (2002) collect data on the time and number of procedures an
entrepreneur must complete to officially open a business in 85 countries. They find
that heavy regulation of entiy is associated with less democratic governments,
greater corruption and larger unofficial economies—^which supports the idea that
entry regulations are not in the public interest. Besley and Burgess (2002a) use data
for India to look at differences across states and time in legislation concerning
workers' rights in industrial disputes. They find that state-level amendments to the
Industrial Disputes Act that were intended to be proworker are associated with
lower investment, productivi.ty and output in registered manufacturing.'' Output in
unregistered manufacturing, in contrast, is increased, which is in line witli Djankov
et al. (2002), who find that countries with many entry regulations tend to have
larger informal sectors. Besley and Burgess (2002a) also find that regulating in a
proworker direction is associated with higher urban poverty. This effect can be
explained by the fact that proworker regulations hindered the growth of manufac-
turing. This finding suggests that attempts to redress the balance of power between
capital and labor can end up hurting -the poor.
/jji alternative to regulatory action is to promote better access to courts for
legal remedy, especially for the poor. Increased access to justice for the poor may
have both powerful equity and efficiency consequences.
Responsiveness and Accountability of Government
Mainstream economics has typically taken a technocradc view of government.
However, over the last decade or so political economy has moved to center stage in
term,s of identifying eiiiective routes to poverty reduction. Many states in the developing
world are democratic only in a formal sense. Even if they hold elections, the poor and
disadvarttaged are poorly represented and, in any case, are largely uninformed as
regards the actions of their representatives. Recent research has begun to look at how
governments can be made more responsive and accountable for their actions.
The role of mass media in acting as a check on the actions of politicians has
recently been emphasized. Besley and Burgess (2002b) show that state governments
' Registered manufacturing refers to firms with more than ten employees with power or more than 20
employees without. Firms below these sizes are referred to as unregistered jmanufacturing and are not
subject to regulation governing indtistrial relations.

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18 Journal of Economic Perspectives
in India are more responsive to falls in food production and crop flood damage via
public food distribution and calamity relief expenditure where newspaper circula-
tion is higher. They also find that higher political competition and electoral
turnout are associated with greater responsiveness to food production shortfalls
and floods. Djankov et al. (2001) focuses more directly on the effect of media
ownership patterns on avariety of outcomes. They develop a remarkable data set on
media ownership patterns in 97 countries to do so. Their main finding is that state
ownership of the media is, on the whole, negatively correlated with good govern-
ment. Using this data, Besley and Prat (2001) find that countries with more press
freedom (and private media ownership) tend to have shorter tenure by politicians.
These findings suggest that the formal institutions of political compefition (such as
open elections) are not sufficient to deliver a responsive government unless voters
have the real authority to discipline poorly functioning incumbents.
A basic tenet of representative democracy is that all those subject to policy
should have a voice in making policy. There are many reasons, both social and
historical, why certain groups may not obtain the full attention of politicians.
Affirmative action programs which mandate representation of disadvantaged
groups can be used to counter this problem. India, for example, has mandated
representation of women and low-caste groups in different levels of government.
Chattopadhyay and Duflo (2001) exploits the fact that an amendment to the Indian
Constitution implied that one-third of village councils in India were randomly
selected to have female heads. Comparing across reserved and unreserved village
councils in West Bengal, she finds that having a female head is associated with
greater investments in infrastructure that is directly relevant to the needs of rural
women (water, fuel, roads). Pande (2002) exploits the fact that the Indian consti-
tution provides political reservation for disadvantaged castes and tribes in state
elections. She finds that reservation has increased spending on welfare and em-
ployment programs that are targeted at the groups that benefit from the mandate.
These finding highlight the importance of political representation in shaping
public policy.
Assessment
Empirical approaches based on subnationai data provide the most credible
base for economists to infiuence the debate about global poverty reduction. The
evidence-based approach to policy has proven effective in a range of industrialized
countries, and its expansion into the developing world is long overdue. The scope
for expanding the use of policy evaluation is enormous. At present, our knowledge
is patchy and specific to the countries and policies that have been studied. Whether
successful policies can be replicated elsewhere is moot.
It is clear that expanding the scope of properly evaluated policy experiments
provides an exciting practical agenda. To appreciate its im^portance one need only
contemplate the alternatives. The broad-brush policy prescriptions from cross-
country studies rarely lead to reliable and specific policy prescriptions. It also seems
unlikely that pure theory will be much of a guide. But more worrying is the

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Halving Global Poverty 19
possibility that bald assertion, intuition and ideology dominate the debate about
global poverty reduction.
Even in the absence of firm evidence on the antipoverty effectiveness of a wide
variety of programs and institutional changes from all parts of the globe, studies
that emphasize the role of institutional change are able to shift the climate of
opinion. They undermine the cynicism that often surrounds debates about global
poverty, suggesting that little or nothing can be done. Even if there are political
constraints to adopting good policies and institutions, it is still important to know
when the poor have benefited from such change elsewhere.
Cofflcliisions
The recent development economics literature has both bolstered traditional
themes as well as putting a fresh gloss on them. The overarching theme is the
centrality of the institutional context in which policy and accumulation decisions
are made. Reading this literature suggests that the gap between the agendas of the
glohal rsongovernment organizations and the economics profession is not that
large. It also seems at odds with the common portrayal of economists as seeing free
markets and unfettered growth as the being the only routes out of poverty.
Responsibility for achieving" the goal of cutting global poverty rates in half lies
firmly at the door of domestic governments. The possibility of concerted interna-
tional action playing a major role is remote. The foreign aid resources on offer are
woefully inadequate relative to the task at hand. The aid target set by the United
Nations is that high-income countries should deliver 0.7 percent of GDP in aid.
Most high-income nations do not meet this target. But even if they did, 0.7 percent
of GDP from the G7 group of countries (the United States, Canada, United
Kingdom, Germany, France, Italy andJapan) would generate $142 billion per year.
For comparison, the cost of giving everyone living below a dollar a day a transfer of
a dollar per day would cost $443 billion per year. Canceling debt repayments from
the world's poorest countries would yield only around $1 billion per year. This is
not to say that effectively targeted aid and debt relief cannot have some impact, but
rather to point out that domestic reforms are going to have to do the lion's share
of the work.
Moreover, national governments that seek to reduce poverty will typically not
succeed by only enacting reforms at a lofty level—government budgets not too far
out of balance, not too much inflation, greater openness to foreign trade and
investment. The institutions and policies that determine the economic and political
environment within which individuals accumulate skills and firms accumulate
capital and produce output must take center stage. Researchers have a role to play
here in conducting subnational analysis to identify effective antipoverty policies.
Buitding up bodies of evidence based on various countries and tying studies to
particular theoretical accounts can help to create a menu of antipoverty policy
options for consideration and comparison.

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20 Journal of Economic Perspectives
Economics has many contributions to make to the debate about the way to
achieve global poverty reduction. First, unique among the social sciences, it pro-
vides a consistent and common theoretical framework within which we can evaluate
policy and institutional reforms. Second, it is in a position to provide some
quantification of the effects ofvarious measures. Third, advances in theoretical and
empirical political economy provide a basis for encompassing an agenda that puts
more weight on institutional change. Fourth, there is real promise that we can, in
future, deliver a better understanding of the microeconomic processes that gener-
ate income growth.
The m.essage for economists is optimistic. The kind of evidence currently being
built by microeconomic research at the subnational level will doubtless be the most
persuasive and credible advice to policymakers in the decade to come. But it is clear
that, when it comes to halving global poverty, there is no magic bullet.
• We are grateful to Silvia Pezzinifor excellent research assistance and to Bronwen Burgess,
BratI De Long, Angus Deaton, Markus Goldstein, Art Kraay, Alan Krueger, Timothy Taylor
and Michael Waldman for providing comments on an earlier draft.

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Timothy Besley and Robin Burgess 21
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