# **1. Introduction**

For the first time since the early 1980s, when systematic poverty-rate monitoring started, data for the first decade of the 21st century indicate a decline in both the poverty rate and the number of poor in all regions of the developing world. This progress represents a substantial step in reaching the Millennium Development Goals (MDGs), and the goal of halving the global extreme poverty rate by 2015 has been reached five years ahead of schedule,<sup>1</sup> based on 2010 estimates. Whether one uses national or international poverty lines, there is evidence of steady reductions in poverty incidence and depth. In more than 80 percent of the countries for which a poverty spell can be calculated, the last decade shows a reduction in poverty. Despite this positive development, 1.2 billion people around the world still are desperately poor, living below the low threshold of US$1.25 a day, and many more remain vulnerable.

The reduction in poverty observed in the majority of countries during the last decade, however, provides an opportunity to study the most significant factors that were at work in favor of the poor. Was the observed reduction in poverty a result of demographic changes that led to lower dependency ratios? Was poverty reduction the result of higher employment or higher labor income thanks to improved labor market conditions? Was this success due to improved and more effective social policies? Was it an improvement in labor market conditions in richer countries and an increase in remittances in poorer ones?

To answer these questions, and to contribute to the evidence base for future policy, we focus on a subsample of countries where there was a substantial decline in poverty. The questions are relevant for some Latin American countries where there is a debate about the relative roles of better job opportunities and of the expansion and effectiveness of transfer policies in explaining the observed reductions in poverty and inequality. Similarly, in some South Asian and Eastern European countries, some observers question whether the reduction in poverty was on account of better job opportunities or higher remittances. In East Asia, several countries have seen strong growth, job creation, and poverty reduction, but are now questioning whether social policy should focus more on redistribution.

The literature has proposed counterfactual decomposition methods to identify the contribution to variations in overall poverty.<sup>2</sup> These decompositions include the Datt-Ravallion (1992) method, which splits the change in poverty into distribution-neutral growth and redistribution effects. Kolenikov and Shorrocks (2000) decompose variations in poverty into growth, distribution, and prices, while Ravallion and Huppi (1991) offer a way of decomposing changes in poverty over time into intra-sectoral effects and population shifts. However, the usefulness of these decomposition methods is severely limited in policymaking by the fact that they explain changes

> 1 For more detail on the MDGs see http://www.un.org/millenniumgoals/. For more details on global changes in poverty see Chen and Ravallion 2008; World Bank 2013.

> 2 For a recent review of micro-decomposition methods see Fortin et al. 2011; Essama-Nssah 2012.

2