The Optimist

The Price Is Right

How the world can buy its way out of poverty for just $100 billion.

July 11 was World Population Day, an annual occasion on which the United Nations reminds us all of the number of people on the planet -- now approaching 7 billion -- and the monumental challenges entailed in the task of caring for such an enormous human family. Among those challenges was "ending poverty," said U.N. Secretary-General Ban Ki-moon in a statement, one whose resolution would "unleash ... vast human potential."

That's undoubtedly true -- were a world free of poverty more than an idle dream. And the good news is that perhaps it is.

Poverty is, of course, a highly relative concept, but the usual definition of "absolute" poverty is an income of less than $1.25 a day. And it is an increasingly manageable task to ensure no one on the globe lives below that income. There are already a lot fewer poor people living at that level of destitution than there used to be -- indeed, less than half as many as there were 20 years ago. Laurence Chandy and Geoffrey Gertz at the Brookings Institution estimate there were around 1.8 billion people worldwide living on less than $1.25 a day in the early 1990s; the figure dropped to 1.3 billion people in 2005 and further to 900 million in 2010. Chandy and Gertz suggest that if we could accurately and directly supplement the income of each poor person in the world to bring his or her daily income up to $1.25, it would have cost $96 billion in 2005. But by 2010, as the number of poor people fell, that cost had dropped to $66 billion. This is something close to an aid official's dream: a foreign assistance program that actually gets cheaper every year.

Of course, donor countries might balk at combating absolute poverty in countries rich enough to handle the problem themselves. Martin Ravallion of the World Bank argues that the majority of countries with an average income above $4,000 could end domestic absolute poverty through a tax on those earning more than $13 a day in the country. For China in 2005 (with an average income just over $4,000), for example, he estimates that a 37 percent tax on those earning over $13 a day would provide enough revenue to bring every poor person in the country above the $1.25-a-day line. We've had six more years of growth in China since then; World Bank data suggests average incomes climbed 50 percent between 2005 and 2009 alone. That means there are a lot more rich people and a lot fewer poor people in the country already, and the necessary tax would be even lower today.

What about poor people living in countries with average incomes under $4,000? Such countries were home to about three-quarters of all those living on less than $1.25 a day six years ago, according to the World Bank. And because these countries contained most of the world's very poorest people, they also accounted for as much as 90 percent of the "income gap": the money required to lift poor people up to the $1.25 mark. If we assume (conservatively) that this share of the income gap is still about right, that would leave the annual global cost of eliminating absolute poverty in countries too poor to deal with it themselves at about $59 billion, or less than the annual budget of New York City.

And even that number is likely to drop fairly rapidly. Chandy and Gertz suggest that by 2015 there may only be 586 million people living below $1.25 a day, suggesting that the annual cost of eliminating poverty in poor countries could be only $40 billion in four years' time. By that time, too, more countries will be rich enough to handle poverty on their own, and the income gap will have fallen further, meaning that the actual number could be even less.

That's the theory, at least. But the $40 billion figure rests on the assumption that we can identify the world's poorest, work out exactly how poor they are, and deliver them the right amount of money to get them to $1.25 a day. We can't. Even the best income surveys are inaccurate, and enough people cycle in and out of absolute poverty that it would be an impossible task to precisely track and target them over time.

Still, we shouldn't overstate the scale of the problem: It isn't that hard to get a reasonably accurate measure of a household's income and wealth. In 1998, economists Lant Pritchett and Deon Filmer found that tracking people's ownership of 23 different assets -- bicycles, land, and flush toilets among them -- was a very reliable guide to their affluence or lack thereof. If you are willing to accept a little more imprecision, even simpler approaches are possible. In Bangladesh, a cash-transfer program kicks in if families meet one of only a few criteria for eligibility: working as day laborers, as sharecroppers, or in one of a few low-paid occupations such as fishing or weaving; belonging to a female-headed household; or owning less than half an acre of land.

The Bangladeshi program is designed to target families in the bottom 40 percent of the country's population with cash transfers. The Primary Education Stipend is given to parents of 4.8 million children from deprived households in return for sending their kids to school, at a rate of about $1.76 per child per month. Six national banks disburse funds to parents with bank-issued identity cards at temporary distribution points set up within a maximum of five kilometers from each school. The program has been analyzed by Bob Baulch of the International Food Policy Research Institute, and the study suggests that even a very poor and very populous country can operate a large-scale targeted cash-transfer mechanism. A little under 30 percent of the poorest fifth of the country's rural households get the stipend compared with around 10 percent of the richest fifth -- far from perfect accuracy, but some evidence that targeting can work. (And considering that the average income in Bangladesh is under $4 a day, even the least-poor recipients of the subsidy are still poor by any reasonable definition.)

Based on the Bangladeshi experience, it's safe to assume that the real price tag of ending absolute poverty in poor countries by 2015 would be a lot higher than the theoretical cost of $40 billion. But it's hard to imagine even a relatively inefficient, bureaucratic, and poorly targeted cash-payment-based program exceeding $100 billion. That's less than the value of current aid flows, which stands at around $129 billion -- and it amounts to  only 0.25 percent of the GDP of high-income OECD members. In cash-strapped times and with the effectiveness of traditional aid still widely questioned, many rich countries have been wary of any commitment to increase assistance. But perhaps they could all agree to an additional one-quarter of 1 percent of their GDP going directly to the planet's poorest? For a measure that could end absolute poverty worldwide, it hardly seems like too much to ask.

MUNIR UZ ZAMAN/AFP/Getty Images

The Optimist

A Thousand Points of Light

When it comes to bringing electricity to the developing world, small is beautiful.

After nearly a decade of donor efforts, it is fair to say Afghanistan's electricity sector remains a mess. This fact was highlighted in a New York Times op-ed last week by Glenn Zorpette, the editor of an electrical engineering journal, who chronicled a three-year U.S. Agency for International Development (USAID) struggle to build a diesel power plant outside Kabul. Zorpette notes that the plant, finally completed, often sits idle because the cost of trucking fuel into the country makes the electricity six times the price of power imported from neighboring states. Surveys of businesses suggest that electricity customers in Afghanistan see 20 outages a month on average and that seven out of 10 firms own a generator because networked power is unreliable or just unavailable.

But USAID should look on the sort-of-bright side: For once, this is a problem that has little to do with the particular curses of Afghanistan or the failings of its occupiers. The electricity sector is a multibillion-dollar muddle across much of the developing world, where utilities with limited reach, poor service, and a tendency to hemorrhage money are the norm. The answer in Afghanistan, as well as in these other dimly lit places, is to move away from the current model of provision -- that of a centralized government-run monopoly -- toward competitive services by small-scale providers. And with the help of technology, the latter option is becoming a widespread reality. Think of it as the "microgrid" model.

Perhaps 20 percent of rural low-income populations in developing countries have access to electricity, and rates are even worse in rural and urban Africa. Even for those near a power line, often the only way to get service is to pay off utility workers. For the average firm in Eastern Europe and Central Asia, about 10 percent of the money set aside for paying various bribes goes to keeping the lights on and the water running. And for those lucky enough to have a supply, the quality of networked power is grim. Looking at developing countries as a whole, business surveys suggest that 40 percent of firms see electricity supply as a major constraint to doing business, each firm suffers an average of nine power outages a month, and nearly a third of firms own a generator to provide backup power -- or even as their main source of electricity.

Behind these statistics lies a political calculus. The lucky few who are already connected to power grids -- as you might guess, they tend to be the rich elite -- would rather not pay very much for their power. And under the status quo they don't have to: Prices are often set very low to favor current customers, if they pay at all. In Bangladesh, only about 55 percent of generated power is paid for. Of the missing 45 percent, perhaps 15 to 18 percent is accounted for by what the industry calls "true technical" losses; the rest goes to illegal connections or underbilling accounts. A 1994 survey suggests that electricity revenues in developing countries average only about 60 percent of costs. Starved of financing, state electric utilities can't roll out decent service to the bulk of the country. About a third of utilities in Africa and South Asia can't even keep up with their own basic operations and maintenance.

That means that 80 percent of Africans, for example, are left relying on more expensive, less efficient, and unhealthier alternatives. Poor people overwhelmingly use wood or dung for cooking and candles or kerosene for lighting. They waste time collecting fuel and money buying kerosene, suffer respiratory conditions and burns, produce far more greenhouse gas emissions per unit of heat or light than more efficient technologies, and get dim lighting and unreliable cooking heat -- all at a far, far higher price per unit of energy than the most expensive electricity.

But where the state utility is too beholden to an urban elite, private providers can fill the gap. A World Bank survey of 49 countries from a few years ago found that 7,000 small-scale private companies, serving communities of less than 50,000 people, were already responsible for meeting the electricity needs of between 10 million and 50 million households. In Bangladesh, the Philippines, and Cambodia, they accounted for more than a third of all electricity connections in the country.

Private providers usually charge far more than the state-run utility for electricity. In Cambodia, for example, the government utility already charges some of the highest tariffs in the world, averaging 16 cents a kilowatt-hour -- but the small-scale providers charge double that or more. On the other hand, they actually deliver what they promise, providing power to homes that would otherwise be unconnected. Given time and a friendly business environment, some small-scale providers could even grow big enough to benefit from economies of scale that still exist for traditional power plants (larger fossil-fueled plants are more efficient than small ones). But even if they don't, they'll still be lowering the real cost of energy for the people who need it most.

And technology is making small-scale provision, and even self-provision, an ever more attractive option. As the prices for solar panels drop -- they are down 60 percent since 2009 -- it becomes possible for many households to be electrically self-sufficient. In India, a panel costs about $300, the same as a year's supply of kerosene for a lamp. One panel can provide lighting; add another and you can power a TV. Off-grid solar might be generating as much as 200 megawatts in India by 2013, enough to power more than 30 million standard LED light bulbs. And India is part of a worldwide trend: According to a recent U.N. report, developing countries as a whole spent $72 billion on renewable energy in 2010, more than developed countries invested. And about a third of worldwide renewable investments were small-scale.

It is true that private participation in the electricity sector has a decidedly mixed record in developing countries. In some cases, public utilities have contracted with private firms to build plants and generate power, deals that have often proved financially ruinous and been tainted with corruption. But an approach that bypasses government altogether, with private firms or even individual households responsible for both generation and distribution, should be able to steer clear of these problems. And an exhaustive 2009 study carried out by staff at the World Bank found that private-sector participation in electricity has led to an increase in quality of services, in part because private providers have the incentive to ensure they get paid for the services they deliver.

All in all, giving poor people the opportunity to pay full price for electricity through local provision will be good for poverty, the economy, and the environment. People will get reliable, modern power that extends working and studying hours, and that power will be safer and cleaner than energy produced from a range of technologies that involve burning stuff invented between the Stone Age and the 1850s. Donors like USAID would do well to support the new microgrid model -- and leave the unreformed and perhaps unreformable state power behemoths to their fates.

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