From priced out to economically empowered: Why affordability matters

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Progress toward economic inclusion requires factoring in both what households bring in and what they must pay for essentials, my colleagues and I argue in our new research.

The empowerment line, a metric introduced by the McKinsey Global Institute, offers a way to measure how many people can pay for the essentials to survive. It considers the spending power people need to afford a basket of essential goods and services in their country (decent housing, healthcare, good nutrition, transportation, plus a small margin for savings to reduce the odds of slipping back into poverty). Empowerment is a higher benchmark than the well-known international poverty line; it is designed to measure those who are not formally counted as poor but still struggle to make ends meet. Those who are economically empowered are fully able to meet their needs, and thus better able to contribute to growth and lead healthier lives.

How can countries get more of their populations above this empowerment threshold? Economic growth (measured by shifts in GDP per capita) can make a huge dent, as China has shown in recent decades. We looked across 120 countries as of 2022 and found that those with higher average incomes typically have a larger share of the population above the empowerment line. Climbing the income ladder is critical: only about 20% of the population is fully empowered in lower-income economies, but that share increases to roughly 50% in middle-income economies and about 80% in higher-income economies.

But that last statistic is sobering. Even the wealthiest economies have not lifted the last 20% or so of the population above the empowerment line—and affordability of essential goods and services is one of the biggest barriers. Postpandemic inflation has aggravated this issue and highlighted the structural issues that have been building for many years. In many countries around the world and certainly in the U.S., costs for housing, healthcare, and education have been increasing for decades. Post-COVID, we also saw significant increases in prices for food and gas.

Higher incomes (at a country level) are associated with higher costs for life’s necessities, including rent, food, energy, and transportation. Those cost increases largely eat up the additional income that goes to the bottom 20% of the population when a country attains a higher rung on the income ladder. High prices for the necessities of life have millions of people worldwide feeling as if they’re falling behind, even if their wages are growing.

Much of the debate on how to help struggling households centers on boosting incomes and reducing inequality—and that is important. But solving the puzzle requires addressing the cost side of the ledger as well. Indeed, if countries with more expensive empowerment baskets of goods and services could lower those costs to match better-performing peers of similar income levels, almost a quarter billion additional people would be above the empowerment line. Some countries are managing to keep the cost of essential goods and services lower, and are thus economically empowering more of their people.

In most middle- and high-income countries, high housing costs are the biggest hurdle. Housing interventions can be transformative; conversely, inaction can have a dramatic impact on individuals and families in places where housing markets are distorted. Countries that have prioritized affordable housing are able to lift living standards for a wider swath of the population. That can look like increasing supply of housing – through rezoning laws or government incentives.

A broad “affordability agenda” could relieve at least part of the burden for households on the margins. Putting the essentials within reach for everyone would require addressing structural issues, including low productivity growth in sectors such as construction and healthcare, constraints on access and supply, and low levels of competition.

While policies and public investment would need to be part of the answer, the private sector could also play a critical role. Its role in providing good jobs is one of the biggest drivers of empowerment, of course. Beyond that, companies can innovate to address unmet demand in the lower-cost end of the markets for housing, energy, food, and healthcare. They could develop new affordable offerings and expand low-cost business models into underserved regions and customer segments.

Economic growth is a prerequisite for empowering households, especially in lower- and middle-income countries. But it’s not enough to solve empowerment for the remaining 20% in higher-income countries. Ensuring that essential goods and services are within reach is part of building a more balanced economy where everyone has a measure of security and the opportunity to thrive.

This article originally appeared in Forbes.

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