2021–22: The Great Divergence and a Stalled Recovery

By The World Bank

Cover Image Attribute: Image by Mohamed Hassan from Pixabay

Since 2020, progress in poverty reduction has been slow. Poverty estimates for 2021 and 2022 have been “nowcasted”—that is, gross domestic product (GDP) growth rates have been used to forecast household incomes, assuming all households experience equal growth. Nowcast estimates suggest that poverty reduction resumed in 2021, but only at the slow rate of progress seen before the crisis. (Chart 1)

Chart 1

Projections for 2022 are that the pace of poverty reduction will further stall as global growth prospects dim with the war in Ukraine, a growth slowdown in China, and higher food and energy prices. In the short run, high food price inflation can significantly impact poorer households, which spend a larger share of their income on food. To highlight the additional negative impact of food prices in the short run, poverty simulations are also presented for a downside scenario that assumes maximum effect, as reflected by poorer households' price data and consumption choices.3 In the long run, families may adapt to higher prices by changing their consumption patterns to at least partly lessen the impacts, and wages in specific sectors can adjust. For many poor rural households engaged in agriculture, higher food prices can be a source of income growth. World Bank poverty assessments conducted after the 2008 and 2011 food price crises in Bangladesh, Cambodia, Ethiopia, India, and Uganda showed the critical role that higher food prices, which led to higher agricultural income growth and higher agricultural wages, played in raising the incomes of poor households. However, increases in food prices will hurt some poor— such as poor urban households—much more than others. The impacts on the urban poor can lead to unrest in cities (as in earlier food price crises) and require a strong policy response.

At least 667 million people were expected to be in extreme poverty by 2022. That is 70 million more than the forecast would have been without the lingering effects of COVID-19 and the Russian invasion of Ukraine. In a worst-case scenario, up to 685 million people could be in extreme poverty—89 million more than would have otherwise been the case. At these levels, the number of people forecasted to move out of poverty in 2022 could be as low as 5 million. This finding places 2022 on track to be the second-worst year for poverty reduction in the last 22 years (after 2020). Global poverty rates are projected to be just as high in 2022 as in 2019, indicating several years of lost progress.

The pathways countries have followed since the pandemic has exacerbated global inequality, with richer countries recovering faster than poor countries. Chart 2 shows the change in the number of extremely poor, by year, for three income groups. Recovery is estimated to have been lower in LICs, with 11 of 27 countries still assessed to have poverty increases in 2021 and full recovery expected in only six. Although recovery was more widespread in LMICs in 2021, it is estimated that most countries had not reversed the substantial increase in poverty in 2020. In UMICs, recovery was more significant but not by much. From 2020 to 2022, the incomes of the world’s richest 20 percent likely grew by 3.3 percent because of differences in between-country growth rates. By contrast, the rate for the bottom four quintiles was 2.1 percent to 2.5 percent.

Chart 2

Taken together, the threats to poverty reduction noted in this report have set back progress by at least four years (Chart 3). By 2030, the global extreme poverty rate will be 7 percent. The goal of reducing global poverty to 3 percent by 2030 was difficult enough to achieve before the current crisis. The recent setbacks have put this target nearly out of reach—and there is an urgent need to correct course.

These projections mask substantial differences in projections between regions. Extreme poverty is projected to become increasingly concentrated in Sub-Saharan Africa. Other regions will likely reach the 2030 target of less than 3 percent extreme poverty by 2030, but poverty is projected to remain well above the target in Sub-Saharan Africa. Achieving the 3 percent goal by 2030 would require Sub-Saharan Africa to achieve growth rates about eight times higher than historical rates between 2010 and 2019.

The compounding pressure of the overlapping crises experienced over the past two years has created a high-risk profile for the world. Government policies play a critical role in shielding societies from the worst outcomes of crises. Fiscal policy is a crucial instrument of such policies. Unfortunately, many countries, especially LICs, entered the pandemic with fiscal systems unable to fully confront or deal with their challenges. The coming years present new opportunities and challenges. The second part of this report discusses how fiscal policy can be employed to promote a robust and inclusive recovery.

Chart 3

NOTE: This article is an excerpt from a report titled; "Correcting Course – Poverty & Shared Prosperity 2022," which was prepared by the staff of The World Bank with external contributions. Download the Full Report - Pdf

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