Lockdowns across the world have had a particularly pronounced impact upon people working in informal sectors, with low-paid employees frequently unable to work remotely, or they have been laid off because the sector they work in has ground to a halt in the aftermath of the Covid-19 outbreak.
Indeed, a recent piece of research published by the UN University World Institute for Development Economics Research warns that global poverty could rise by “as many as half-a-billion people, or 8% of the total human population”, as a result of the pandemic.
With hundreds of millions of people in danger of being pushed into poverty, Covid-19 is set to cause the first increase in global poverty since the 1990s, severely denting the target of the UN’s first Sustainable Development Goal (SDG) of eradicating poverty by 2030.
The UN’s General Assembly established 17 SDGs in 2015, with the intention of them all being reached by 2030. The goals are designed to be a “blueprint to achieve a better and more sustainable future for all”. The SDGs form part of the 2030 Agenda for Sustainable Development, which incorporates economic, social and environmental aspects of sustainable development.
The first SDG is to “end poverty in all its forms everywhere”. It focuses on “ending poverty through inter-related strategies, including the promotion of social protection systems, decent employment and the resilience of the poor”, according to the UN.
Although a number of countries and regions have recorded significant improvements in their battle against poverty over the past 20 years, and there has been a consistent downward trend in global poverty levels, data shows that the world was not on target to achieve zero poverty by 2030, even prior to Covid-19 outbreak.
The number of people in extreme poverty – those living on less than $1.90 a day – was expected to be 6% in 2030, according to the UN’s pre-Covid estimations, down from 8.2% in 2019, 10% in 2015 and 15.7% in 2010.
However, the UN’s post-Covid forecasts estimate that the number people living in extreme poverty will rise to 8.8% in 2020 and then dip to 8.7% in 2021. This is an increase on pre-Covid estimations of 7.7% and 7.4%, respectively.
“This reversed trend for SDG 1 is bad news… it will take years to reverse these numbers,” says social and environmental impact specialist Nicola Ballerini. “Bringing people out of poverty is a complex process: it involves providing food, strengthening education, local business activity and more. It takes years to escape the poverty spiral, sometimes even generations.”
FDI as a tool to fight poverty
The Covid-19 pandemic is reversing decades of progress in the fight against poverty, and its impact on foreign direct investment (FDI) flows looks set to exacerbate this backtracking. This poses a particular problem for developing countries, where FDI helps bring economic growth and development.
Greenfield investment projects, as opposed to mergers and acquisitions, have been a key driver in increasing investment activity, attracting new capital across multiple sectors, and subsequently providing an environment in which to launch new subsidiary businesses and boost employment, which goes a long way towards reducing poverty.
Indeed, analysis from Investment Monitor shows that increased greenfield FDI projects have resulted in a lower average poverty rate in South America.
“Social contracts in democratic or semi-democratic emerging markets in Latin America and Asia have evolved over the past 20–30 years on the basis of positive-sum politics: development that has allowed many to enter the middle classes,” says vice-president of financial sector risk at Verisk Maplecroft James Lockhart Smith. “The pandemic’s economic fallout could well cause this to unravel, putting extra pressure on countries’ ability to prosper – for example, through the flourishing of extremism or economic populism.”
Supply chains take a hit
Investors are shifting their focus from establishing supply chains and other operations in low-cost developing countries and moving towards localising facilities, or relocating operations closer to origin countries. This is being done to protect their businesses against any future disruptive events, but it means a potential drop in FDI inflows in developing countries, which could affect their efforts to eradicate poverty.
“When it comes to FDI, businesses that have survived the crisis will dust off and overhaul their pre-pandemic investment plans,” says Lockhart Smith. “But they will be entering a world of higher social risk, because fragile economies and higher levels of poverty mean a greater probability of exploitative working conditions in local supply chains, potentially even forced and child labour – and they will experience more difficulty in achieving a social licence to operate.”
The UN Conference on Trade and Development expects FDI to drop by up to 40% during 2020 because of the impact of Covid-19. With economic growth being a significant factor in poverty reduction, such a decline in FDI would present a great challenge in achieving SDG 1.
Lockhart Smith adds that despite companies entering a world of higher risk, they are also entering a world of higher impact opportunity.
“This happens because the gap between reality and SDG aspirations on the ground will be greater than before,” he says. “Having a positive impact will involve bringing not just investment and employment opportunities, but industry-specific expertise and technology that will help countries set the foundations for future economic growth.”
The benefits of FDI
Industry-specific expertise and the transfer of technology are among the key benefits that host countries take from FDI. On top of that, FDI can reduce unemployment levels, which has a clear link to the eradication of poverty, while also supporting economic growth.
Moreover, FDI also boosts the tax revenues of the host countries. This is significant as local governments can use these resources to provide more services or social protection systems for the citizens of the country, which again is an important factor in fighting poverty.
Another way that FDI helps to reduce poverty is the manner in which it boosts women’s welfare, as a result of the increase in demand for labour that it brings. Due to the new jobs created through FDI projects, women are given more access to skilled and unskilled jobs, which improves female participation in the labour force, especially in the formal sector. This is important as women and younger girls are more at risk of falling into poverty, because they often lack their own source of income and assets.
FDI also helps to narrow the gender pay gap, in cases where multinational corporations implement corporate social responsibility initiatives that commit them to wage equality. The gender pay gap is a significant driver for decision making within households, and narrowing it can positively influence SGD 5, which concerns gender equality.
A collaborative approach
The SDGs were launched amid promises of global cooperation. However, Covid-19 seems to have moved countries in the opposite direction, with protectionism becoming more widespread and the tightening of FDI regulations on the rise.
“The main idea behind the SDGs is collaboration and resource sharing towards agreed global goals,” says Ballerini. “When internal situations become critical, it is quite likely that a country will opt to solve its own issues first, and save collaborating for higher and more complex goals.”
The economic hit that most countries have endured, the rises in unemployment, the reductions in FDI flows, and the protectionist rhetoric being increasingly spouted around the world, show that the SDG of eradicating poverty by 2030 looks ambitious at best, and highly unlikely to be achieved at worst.