Low-Income Countries are Falling Behind

Economic Growth in Low-Income Countries Has Slowed Significantly Post-COVID, Leaving Progress on Extreme Poverty Reduction at Risk

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Over the last forty years, the world has made historic progress in reducing the scourge of global poverty. The share of the human population living in extreme poverty (less than $2.15 a day) has fallen from more than 40% to less than 10% within a generation, lifting hundreds of millions of people out of acute suffering. Yet progress has been too slow—and even worse, it has now stalled.

The COVID-19 pandemic, ensuing inflation, and the rise in international conflict have made it so that global extreme poverty rates have actually risen over the last four years. Declines in the less-extreme forms of global poverty more common in middle-income countries have continued but at a much slower pace than during the 2010s. Unless something changes, institutions like the World Bank warn of a possible “lost decade” for the war on global poverty.

That would be a disaster given the massive existing disparities within the global economy. Annual per-capita output in the United States, the world’s largest frontier economy, is $73k—roughly 26 times the average for the low-income countries where 766M people currently live. Even lower-middle-income countries like India, Nigeria, and the Philippines average only one-ninth America’s economic output. That lower GDP represents less consumption of food, healthcare, and technology, less investment in infrastructure, education, and housing, and less general welfare for billions of people across the globe. Indeed, between-country economic inequality is so large that the 10th percentile of American income is two and a half times as much as the 90th percentile of Indian income.

To reach high living standards, low and middle-income countries must achieve “economic convergence”—not only growing their economies but growing them substantially faster than frontier countries like the US so they can “catch up”. A relatively-normal 2.5% increase in US economic output would deliver an average of $1,800 a year extra to Americans, but to achieve those same dollar gains Sierra Leone would need to more-than-double the size of its economy. Yet much of classical economic theory predicts countries like Sierra Leone should swiftly converge with the US—after all, frontier economies have to earn most of their growth by making difficult discoveries along the scientific frontier, while low-income countries can make substantial gains through rapid deployment of existing technologies like trains, phones, electricity, schools, etc.

In practice, those gains can’t be taken for granted—long-run growth is shaped by often imperfect national institutions navigating an increasingly complex global economy. Even among countries able to sustain long periods of robust economic growth, shifting macroeconomic trends and worldwide emergencies can slow, halt, or even reverse progress.

Indeed, although the first two decades of this millennium were marked by historic catch-up growth among low and middle-income countries, that era may have come to an end. Over the last four years, the poorest countries in the world have grown slower than the richest ones—instead of converging, they are diverging. Relative growth among middle-income countries is at least positive, but it remains near the lowest levels in two decades. The world’s low-income countries are falling behind, and that is terrible news for humanity.

A Closer Look at the State of Economic Convergence

In breaking down post-COVID relative economic growth, plenty of noticeable region and nation-level trends emerge. First and most importantly, the world’s two largest countries, China and India, have both been growing significantly faster than the US. There are some other bright spots in Asia—most notably, Bangladesh, Vietnam, and Turkiye—but large chunks of Southeast Asia are struggling to keep up. In South and Central America, the vast majority of countries are falling behind, with the only exceptions being oil-rich Guyana and a couple of central American states. Most African nations are likewise failing to converge towards the US—but Kenya, Ethiopia, Egypt, and the DRC are major countries on the continent that have been able to buck the trend.

Taking a longer view, China and India have continually been growing faster than the United States—and given the two countries’ massive population size, that alone is powering a large chunk of the global economic convergence between middle-income countries and the US. Still, India and China remain on vastly different long-run growth trajectories. China has been rapidly gaining on frontier economies for decades, but has slowed from its exceptional pace seen in the late 2000s. India, meanwhile, has been growing at comparatively much, much more tepid pace, leaving a now-yawning gap between the two country’s positions. Perhaps most interesting, however, is that both countries have seen marginal slowdowns in their rate of convergence over the last four years and are noticeably below their pre-COVID relative growth trend.

That recent phenomenon of weakening relative growth also holds for many other major nations in Asia—relative growth in Indonesia, Vietnam, Bangladesh, Pakistan, and the Philippines have all fallen behind where you’d expect if pre-COVID convergence trends held. Two major countries in particular—the Philippines and Pakistan—not only saw slower rates of economic convergence but actively got poorer relative to the US. Pakistan has been buffeted by major natural disasters, an extended energy shortage, and a debt crisis, while the Philippines’ heavily internationalized economy was hit particularly hard by the COVID shock.

Meanwhile, the African continent’s most populous country Nigeria has seen its output per person slide for nearly a decade straight at this point. The situation is so bad it’s hard to measure—the country has not performed a full census since 2006 as instability and political infighting force the count to be repeatedly postponed. Other major countries like Tanzania have also lost ground relative to the United States, while Ethiopia, long a standout performer, continues to converge with the US but has seen its growth slow significantly in the wake of the brutal civil war. Meanwhile, Kenya has been able to maintain its slow but steady relative pace of gains.

How the Growth Gap Worsened

What’s behind this general lack of economic convergence over the last four years? You could write a whole piece on the unique country-level factors driving variation for each country, but there are a few key trends that have held back most low and middle-income countries. The first is just that the scale of emergency spending available to and deployed by high-income nations was much larger than for low-income nations. A country like the US could borrow billions to mitigate the economic impacts of COVID-19 in ways that would be difficult for Brazil and almost impossible for Cameroon. This included spending on economic relief like stimulus checks and furlough benefits, but also included spending on healthcare, vaccine access, supply chain resiliency, and much more. Indeed, relative government spending was already the largest for high-income countries pre-COVID, but in 2020 it also grew faster than for any other income group.

The second trend is that the particulars of the post-COVID inflationary surge hit low and middle-income countries the hardest. Global prices for food and energy spiked disproportionately in 2021/2022, and it is the poorest people on the planet who must spend the highest share of their income on those essentials. When energy prices spiked, countries like Italy could afford to order more liquefied natural gas shipments in ways that countries like Pakistan simply could not. Likewise, massive disruptions to the food industry are going to hit harder when they reach low-income countries where agriculture is the largest source of employment and the largest budget item for most households.

The third trend is the increasing intensity of geopolitical conflict throughout the post-COVID period. Global combat deaths have risen significantly since 2020 as a myriad of global conflicts started or reignited, and major countries like Ethiopia, Ukraine, Sudan, Gaza, and Myanmar are seeing economic devastation as a result of direct military conflict. The economic spillovers of these conflicts directly worsened economic growth elsewhere in the world, especially by targeting key food/energy supply chains and international shipping routes. Yet there are also important geopolitical costs that don’t come directly from armed conflict—for example, increases in tariffs, sanctions, and other barriers to trade can reduce global economic output and impose costs even on countries that don’t participate in trade wars directly. The combination of these geopolitical conflicts, COVID, the particulars of the recent inflation surge, and the weaker stimulus capacity all contributed to low-income countries falling behind over the last four years.

A Call to Action

In writing about macroeconomics, I usually conclude articles by talking about the abstract implications or solutions to an issue—but right now I am here to say that this is a place where you (yes you, reading this!) can directly make a difference. Today is Giving Tuesday, and so a dozen major substack writers (including me) have partnered with GiveDirectly to help them raise money for low-income families in western Rwanda. GiveDirectly is a charity that does exactly what the name suggests—it gives money directly to low-income people across the world to combat extreme poverty. Since recipients are adept at figuring out what they need most, cash transfers are an extremely effective way of delivering aid—evidence shows they have massive direct consumption benefits to recipients plus health benefits for households, spillover economic benefits to local communities, long-term benefits to childhood education, and more.

In fact, the people who professionally evaluate charitable interventions have recently more-than-tripled their best estimates of direct cash transfers’ effectiveness as more evidence mounts in their favor. Personally, I would stress that the international income disparities are so large that your donation genuinely does go much, much farther than you’d think—it’s truly possible to change someone’s life for the price of a cup of coffee a day. That’s especially true right now, since the first $400k worth of today’s donations are being matched by GiveDirectly.

This is also an extremely personal issue to me—as a bit of background, before I started this career as a full-time writer I was a Peace Corps volunteer in Rwanda’s northern neighbor, Uganda. Most Peace Corps volunteers are teachers, but the work I was tasked with doing fell under the broad umbrella of “economic development”—in practice, that meant providing assistance to subsistence/smallholder farmers, teaching skills to high-school students, and working on HIV/AIDS prevention and treatment. Volunteering is supposed to be a two-and-a-half-year commitment, but my service was cut dramatically short when everyone was evacuated at the onset of the COVID-19 pandemic.

Peace Corps is still a program I am deeply fond of, but in many ways it’s always trying to escape the now-50-year-old economic development framework it was designed under. The agency tries to push volunteers towards interventions where they’ll have large positive impacts, but projects can easily fall apart if they aren’t a good match for their specific community or if the often-inexperienced volunteer struggles with implementation. More than that, Peace Corps by its very nature relies on in-kind interventions that are limited in scope, require the mass overhead of a federal bureaucracy, and can’t be rigorously evaluated post-service to measure volunteers’ direct impact.

The pandemic really underscored that problem—here I was, working for an international aid organization that was not only completely unprepared for this international emergency but had functionally been forced to capitulate in the face of it. Peace Corps’ model relied on American volunteers, and when those volunteers all had to leave the agency was left unable to do much during a time of exceptional global need.

But the positive side to this story is that after my evacuation GiveDirectly partnered with the US Agency for International Development to (after some political squabbling) distribute tens of millions of dollars in pandemic relief to low-income Ugandans, including people near where I lived. Hearing directly and secondhand about how that money got people through the pandemic and reshaped their lives made me proud that cash transfers were becoming a larger part of the formal international aid toolkit.

Returning to Rwanda, it’s worth noting how much economic progress the country has made in the 30 years since the 1994 genocide. It remains very low-income but has maintained a steady path of convergence with the US even in the post-COVID era. It’s not uncommon for the country to deliver real per-capita GDP growth in the range of 5-6%, helping to increase general well-being and bring down extreme poverty levels. Rwandans’ access to electricity, running water, and internet access are rising while infant mortality is falling. This is an economic convergence success story, and one you can personally help accelerate today.