Subsistence Is Not Enough

Jan 12 , 2025
By Kweilin Ellingrud , Marco Piccitto and Tilman Tacke

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In 1990, more than one-third of the global population lived below the World Bank’s extreme poverty line (2.15 dollars a day). Since then, the share has fallen below 10pc, a remarkable and inspiring achievement. But barely scraping by falls far short of what impoverished people aspire to.

To this end, the McKinsey Global Institute (MGI) has introduced the concept of an "empowerment line." Building on the work of development economists, this threshold represents the income required to access essentials like food, shelter, healthcare, education, water, transportation, and energy while also saving enough to weather unexpected emergencies.

Income is vital for economic empowerment, but affordability is equally important. While the income required to meet basic needs varies by country, the global benchmark is 12 dollars per person per day in purchasing power parity terms. Despite decades of progress, roughly 80pc of people in low-income economies, and 50pc in middle-income countries, still fall below this threshold. Even in the world’s most developed countries, 20pc of the population remains economically disempowered.

One reason for this persistent empowerment gap is that rising GDP per capita does not always translate into widespread economic benefits. The cost of essentials, such as housing in high-income countries and food in lower-income countries, often rises faster than wages, effectively “crowding out” income gains and eroding living standards.

Lowering the cost of critical goods and services could play a crucial role in promoting inclusive development. MGI estimates that reducing prices in high-cost countries to match those of more affordable peers at similar income levels could lift around 230 million people – 2.8pc of the global population – above the empowerment line. In countries with per capita incomes between 2,500 dollars and 5,000 dollars, for example, food costs often vary widely, with some households paying more than twice as much as others for necessities.

Narrowing these gaps would not only alleviate financial pressures but also enable millions of families to achieve lasting economic security.

Efficient markets help keep prices in check, while inefficiencies drive up costs and limit access to essential goods and services. A recent MGI report shows the need for governments to improve affordability and emphasises the effectiveness of fostering competition, domestically and globally, through regulations and trade policies.

The private sector, which employs the vast majority of the global workforce, is also well-positioned to support economic empowerment, and there are three compelling reasons why companies should.

For starters, the private sector is already driving economic empowerment by creating quality jobs and delivering goods and services. According to MGI, US businesses channel four trillion dollars annually toward empowering employees, suppliers, and communities, while their European counterparts contribute 2.1 trillion dollars. At this scale, even minor improvements could generate substantial benefits. Businesses face increasing pressure to consider their social impact alongside financial performance.

Research shows that addressing the broader effects of their activities can help companies enhance employee satisfaction, improve customer loyalty, and boost productivity.

Lastly, an empowerment-oriented approach can reveal new market opportunities. While few mobile providers entered sub-Saharan Africa or South Asia with the goal of empowering local communities, their success at linking small farmers to global markets and accelerating financial inclusion has accomplished that. A similar trend is playing out in the retail sector, where discount grocery stores’ low-cost business model has made food more affordable for millions of people around the world.

To understand how businesses can promote empowerment, MGI analyzed initiatives launched by 100 large companies from a range of industries worldwide. These efforts include subsidised healthcare, in-house training programs to help employees advance to higher-paying roles, and philanthropic activities like donations to food banks and disaster relief. A growing number of companies have also pledged to pay their employees a living wage, with some requiring their suppliers to do the same.

But, determining the most effective approach remains a considerable challenge. While marginal abatement cost curves are a widely accepted tool for assessing the cost efficiency of efforts to reduce greenhouse gas emissions, there is no comparable framework for evaluating the impact of social initiatives. To fill this gap, MGI has developed an “empowerment impact” metric, which measures the benefits of such programs relative to their costs. A ratio of 1.0 means that each dollar spent delivers a dollar in benefits to households below the empowerment threshold, while a lower ratio reflects greater cost efficiency.

Using this metric, companies can better design and implement social programs. For example, MGI estimates that if US corporations and foundations improved the cost efficiency of their charitable giving – totalling 140 billion dollars annually – by just 10pc, they could lift an additional five million people above the economic empowerment threshold.

Companies could leverage their expertise to identify the groups most at risk of falling below the empowerment line, tailoring solutions to address specific challenges, such as housing shortages in Germany, high food prices in Vietnam and China, and rising healthcare costs in the US. Recognising these local contexts could help companies develop initiatives that play to their core strengths. For example, a pharmaceutical company might focus on expanding access to life-saving drugs, while a bank could invest in affordable housing projects.

To be sure, economic growth is the single most powerful driver of poverty reduction, particularly in low- and middle-income countries. But growth alone is not enough. Achieving meaningful progress requires widely shared benefits, supported by robust social provisions and improved affordability. Without these foundations, economic empowerment will remain elusive, preventing millions of people from reaching their full potential.

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PUBLISHED ON Jan 12,2025 [ VOL 25 , NO 1289]

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