Shock! Global poverty and inequality falling


1:36 pm - January 23rd 2010

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contribution by Nick Cowen

Via Tom Palmer and Marginal Revolution, we learn that global poverty is falling, is doing so fast, and much more so than previously expected. Equality is increasing as a consequence.

This is very cheering news, and it means far more for so many people in the world than all the news stories about bad laws, rapacious corporations, and even attacks on civil liberties. The story probably has countless more implications for human prosperity than climate change.

Yet while this is a moment of celebration for anyone who can appreciate that slowly but surely more people are having the opportunity to pursue their own happiness, news of this sort receives a rather muted response in all sides of the MSM.

Of course, this is partly because good news doesn’t sell like disasters, but there are deeper reasons why this doesn’t get the billing it should. Many on the left still rely on a narrative, whether implicit or explicit, that all the wealth that the West currently enjoys is the result of exploitation elsewhere in the world, via the system of global capitalism.

As liberals, we should appreciate that, despite the frequent predations within currently existing capitalism, the results of increased and genuinely free trade are there to see and represent a positive addition to wealth that benefits everyone.

The right, in their turn, frequently deploy a frightening narrative in which impoverished masses are about to swamp the West. But what if those masses turn out not to be so poor, and to be more eager to sell us insurance or a laptop than destroy our way of life?

Why then there would be no need to introduce bans on burkas after all, or clamp down on immigration. Both the statist left and the right need the world to seem like a much scarier and more depressing place than it necessarily is.

This is not to say that we shouldn’t be critical of currently existing global capitalism, or that we shouldn’t be alive to the risks out there in the world. But amongst the gloom of the recession, we should appreciate that things, overall, are looking much much better for hundreds of millions of people.

For more in this vein, I can recommend Tom Palmer’s talk on poverty from 2008 where he spoke at the Oxford Libertarian Society.

——————
Nick Cowen is President of the Oxford Libertarian Society

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“Via Tom Palmer and Marginal Revolution, we learn that global poverty is falling, is doing so fast, and much more so than previously expected. Equality is increasing as a consequence.”

Well, yes, although despite being one who hates to say I told you so I have been saying so for some years now.

Globalisation/international neo-liberalism, whatever you want to call it, has, over the last few decades, been causing the largest reduction in poverty in the history of our species.

While inequality within countries has been increasing (in just about every country) inequality on a global basis has been falling.

(BTW, that latest paper from Xavier Sala i Martin is just one of stream of them from him that have been saying the same thing for over a decade. This really isn’t “new news”, only the specific calculations in this paper are new, not the basic message.)

Good stuff this neo-liberalism, innit?

Couldn’t agree more. While I still have a fundamental belief in the people/population/electorate having ‘ownership’ in certain areas (education, health and social services), trade should always be free.

More importantly, this planet is not as bad as is always made out, the narrative of fear and negative sensationalism is such a huge factor in the Western consciousness. We should celebrate progress, we should celebrate achievement, not sure we should be celebrating the fact people will now be coming over and selling us insurance and laptops instead of culture, experience and different knowledge.

“As liberals, we should appreciate that, despite the frequent predations within currently existing capitalism, the results of increased and genuinely free trade are there to see and represent a positive addition to wealth that benefits everyone.”

As a liberal, I welcome the benefits of trade, and of capitalism. The market is sometimes a wonderful thing, and humans will try to better themselves. But as a liberal, I also understand that it has costs, and “free” trade is loaded with all kinds of possibilities. From some of your statements you sound like you accept international capitalism has costs and associated damage. So well-regulated trade avoiding those costs would have had a greater overall benefit, no?

Good, so let’s embrace this as a piece of great news, and a chance to think about how much better it could be if we stopped the worst excesses of capitalism. Which is what you stand for anyway, right?

Sorry to spoil the party but it isn’t quite as straight forward as it appears, if you look at China, since the 1990s it has become more neo-liberal (although there is disagreement about what exactly neo-liberalism means in China) China’s GDP may have risen since some of its’ markets have been liberalized, however, the rural poor have become poorer whereas the urban poor are magrinally better-off.
3
We have been intervening in markets since the middle of the 19th century and massive inequality still exists both economically and in terms of social goods such as health and education, quite simply it does not work.

“the rural poor have become poorer”

That would absolutely astonish me. Got the figures? Or do you mean “relatively poorer” while still becoming absolutely richer?

“the rural poor have become poorer”

that would be spot-on if he’s referring to the UK, but I doubt very much he meant it that way. What’s happened round here is that the farm workers of 20 years back have seen their tied cottages sold off and their jobs are mostly done by young Poles living 5 to a caravan (nice chaps they are, too). If the poor locals own their cottages, when the elderly die their cottages are done up and sold at high prices to ex-city types.

Now these Poles are objectively poorer than the people they replaced, so ‘poverty has increased’. But the old boys had their tied cottages or maybe even owned their own (in 1979 on 3K pa I bought a nice little cottage for 9.5K). And of course the Poles aren’t going to work for £6ph indefinitely – at least that’s not the plan of the ones I speak to. One guy was going back to Warsaw to study philosophy.

And the old country poor – the farm boys ? It’s get on or get out, alas, for them. Some turn into contractors with a chainsaw or a JCB and hang on in there – others end up in 1-bed council flats in the roughest bits of Gloucester or Cheltenham.

Now these Poles are objectively poorer than the people they replaced, so ‘poverty has increased’.

Surely when deciding whether or not poverty has increased, the relevant comparison is not with the people these Poles replaced, but with how well off these Poles would have been had they not come to the UK. And isn’t it pretty obvious that on this comparison, poverty hasn’t increased?

@Belaroka

“But as a liberal, I also understand that it has costs, and “free” trade is loaded with all kinds of possibilities. From some of your statements you sound like you accept international capitalism has costs and associated damage. So well-regulated trade avoiding those costs would have had a greater overall benefit, no?”

I think “well-regulated” is also loaded with all kinds of possibly bad ideas. For example, it might refer to fair trade which, on the whole, is probably less good for poor countries than purely free trade. If by well-regulated, we mean ensuring that the trade is truly voluntary and fully respects the explicit and implicit property rights of individuals (and not just those politically connected corporations), then I agree.

‘If by well-regulated, we mean ensuring that the trade is truly voluntary and fully respects the explicit and implicit property rights of individuals (and not just those politically connected corporations), then I agree.’

Then you appear to have come to the wrong site, pretty much everyone here has a habit of wanting to spend everyone elses money on their behalf.

Its extraordinary news! The decline has been quite incredible.

Globalisation/international neo-liberalism, whatever you want to call it, has, over the last few decades, been causing the largest reduction in poverty in the history of our species.

But come on Tim! You have to use quite broad brush strokes to argue that anything like neoliberalism has been responsible for this.

The biggest reductions have come in India and China. They have absolutely not followed a neoliberal model.

More “liberal than before” does not mean “agree with Tim Worstall/neoliberal.” A lot of the things they have done, and hence a huge portion of the poverty reduction, is by and large in contradiction to your economic philosophy.

China’s manipulated in exchange rate for added domestic stability. Its interest rates are held artifically low. It still has relatively high tariff rates, and had higher still tariffs throughout its initial industrialisation. Its was initially hard for foreign firms to enter their market and they still need a local connection to really enter comfortably. Lots of firms are still state owned.

Property rights have only recently been de jure granted, despite de facto existence for a while. It is a corrupt country. It has stolen lashings of foreign technology and is renowned for counterfeiting. Its working classes are among the least protective and vulnerable in the world and firms are free to pollute the environment to an extent which would make the western mind boggle.

It seems a little dishonest to repeatedly (as I’ve mentioned on your blog before) suggest that the successes of the developing world have been successful because they’ve done things you (or neoclassical economics) would have suggested. They have not.

“More “liberal than before” ”

Good, at least we’ve established something then. Both India and China are growing at ferocious rates because their economies are more liberal than they were before.

Therefore more liberal equals better.

My point I think?

I’m a little suspicious of this study. It seems to be saying that you get more accurate measurement of poverty from assuming that income is distributed log-normally within nations, and using GDP as a base, than actually using reported incomes from survey datasets as a base (as the World Bank do).

voxeu.org: “The World Bank estimates the mean income or consumption from the mean of the household surveys that present the inequality data, whereas we follow the growth literature in estimating the mean income as national accounts GDP per capita.”

voxeu.org: “Using the lognormality assumption, we can correct for misreporting by basing the distribution parameter not on all five quintiles, but on the middle three (specifically, on the ratios of each of the middle three quintile shares to their sum), since incomes in the middle quintiles should not be affected by problems in the tails of the distribution.”

I admit I’m not a macroeconomist – but it strikes me these are mightily broad assumptions to be making. It appears from the summary of their research that they are saying they can estimate poverty in any given geographical area ($1/day poverty, no less) purely using: (A) local GDP estimates and (B) the three middle quintiles of the local income distribution plugged into a log-normal distribution.

I would have thought that there were actually quite large variations between nations in (A) the proportion of GDP reaching the population as income and (B) the link between local poverty and the three middle quintiles of the local income distribution. Also, wouldn’t this methodology inherently (irrespective of the data put in) generate a decrease in poverty for every GDP increase?

I don’t know what others think, but if anyone here has an opinion on those assumptions (and whether they are any better than those used by the World Bank for their much less optimistic estimates of world poverty) I’d be interested to read it.

The $1 a day poverty line…

Anyway, I don’t think you’ll find many who thought that replacing pre-capitalist production with capitalist production is a step in the wrong direction. The proletarian is mostly better off than the serf, no one said different.

Any statsitics-boffins here? That methodology looks dodgy as hell.

Well certainly Tim! I’ll laugh all day long at anyone who says China or India didn’t need to be more liberal. But I’ll also laugh at people who say they kick started growth through free/freer trade because their impressive GDP growth began around a decade before their tariff reductions did.

I’m not the sort of leftie who longs for state planning, I’m all on board with market’s and their use in the dissemination of information etc. But the liberal development paradigm hasn’t been particularly successful. The discussed reduction is mostly down to the heterodox policies of a handful of large countries.

Things get a little complicated when you move away from the strong state developing world like India and China and towards weak state developing world in Africa. The same policy prescriptions aren’t applicable.

What I’m worried is that people will take the wrong lessons from this reduction. i.e. they will listen to you because you are very persuasive.

@jungle

I’m not so sure of the methodological sturdiness of this paper. I’d be interesting in seeing some more information too.

The general trends seem correct but I’m a little worried by their methodology. And their conclusions that you can compute from GDP the poverty line naturally worries me. The divergence from World Bank figures is a little worrying too, and I seem to remember there were some notable problems with the Sala-i-Martin’s figures.

Saying poverty in Africa has reduced 20% is great news but GDP growth is has been very inequitable, something like 70% of Kenya’s GDP comes from a manufacturing sector that employs 7% of the population (I seem to remember) so I’m naturally dubious.

“What I’m worried is that people will take the wrong lessons from this reduction. i.e. they will listen to you because you are very persuasive.”

Ah, but wait until you get me on the real problems of planning, infant industry protections and tariffs: public choice economics (or industry capture is another description). E#ven if it could all work in theory it doesn’t in practice precisely because it has politicians involved in it.

Too true, there are problems with it. But the discussion doesn’t end there. The dirty state activism you describe have been used successfully. But there are problems to overcome.

“Embedded Autonomy” is >a href=”http://en.wikipedia.org/wiki/Peter_B._Evans”>Peter Evan‘s phrase that describes a bureaucracy that is close enough to private enterprise to elicit useful information but autonomous enough to use that to promote useful industrial policies for the population at large. Korea is the model for this. Brazil and “hindu rate of growth” India are intermediates. Zaire could be characterised as having a completely non-autonomous bureaucracy, everything was for sale, even justice.

Now you might not think an Industrial policy is important. You also might think that other countries which are successful tend to eschew any ITT (Industrial Trade and Technology) policy at all. But Industrial Policy’s ill health has been greatly exagerated.

Currently most of the developing world operate a ITT policy focused on exports and attracting direct foreign investment, this is often not seen as an industrial policy because it is so in tune with the objectives of the Washington Consensus, but it can only be described as such. Export processing zones, preferential tax rates for foreign firms, the list goes on.

But, these measures might not be the most effective ITT policy for a specific developing country. The rationale for the above set of policies if for encouraging positive spillovers and a beneficial integration into world markets which disciplines a domestic government into “good policies.”

But reducing the policy space of governments did little to help their legitimacy during the East Asian financial crisis, and the positive spillovers from encouraging firms to export and attracting foreign investment have been exagerated. What’s needed is a more incremental and participatory method for setting industrial policy.

(Btw, have you noticed on the Wikipedia page for Public Choice Theory one of the related links is to “Yes, Minister.” Someone has a sense of humour)

[Subscribes to comments]

“The dirty state activism you describe have been used successfully.”

Even if I were to concede that (which I don’t, I think in spite of, not because of) we can go one step further.

“Korea is the model for this. Brazil and “hindu rate of growth” India are intermediates. Zaire could be characterised as having a completely non-autonomous bureaucracy, everything was for sale, even justice.”

OK, so those places which could take advantage of this process have already done so. Those which have not done so have not done so because they are incapable of doing so (as you point out, Ziare then or Congo now is never going to implement a decent industrial strategy) and thus would be better suited to and entirely free market solution.

I.e, governance is so bad that the less governance there is the better things will be.

4
Yes I did mean relatively, but why is this better than ‘absolute’? What is happening in China (Left Outside has put the planning aspect eloquently) is that there is a growing inequality between the rural poor and urban poor, hence, the rural poor are unable to access the new products, which appears to be the benchmark of judging progress.

“Yes I did mean relatively, but why is this better than ‘absolute’?”

There’s a huge difference and it’s one that’s very important indeed.

Some made up numbers to illustrate the difference.

Group A are on 100 a year (doesn’t matter what, just 100).

Group B are on 200 a year.

OK, we come back at some future date and note that Group A are now on 150 (and yes, we are assuming no inflation here) and Group B on 500.
Inequality has increased, yes. So Group A are relatively worse off. But both groups are absolutely better off. Both can afford more food, more education, more health care. Both groups are absolutely better off.

Now we can run this the other way as well. We come back at our future date and note that Group B are on 75 while Group B are on 100. Inequality has shrunk so Group A is relatively better off. But both groups are absolutely worse off. Both groups can now afford less food, less education and less health care.

So, if we look at only relative poverty we might end up applauding a decline in living standards as being a good thing if it reduces relative poverty.

OK, now you’re going to say that things are never that obvious: and indeed, you’d be right, they’re not. But this difference between relative and absolute poverty is at the heart of quite a large debate. A very important one really.

It’s a commonplace of economic thought that there’s a trade off between increasing absolute standards of living and increasing relative standards of living. Note please that the trade off doesn’t always go the same way: I’ll happily agree that there are levels of inequality which reduce growth overall. But I think that they’re extreme.

There are also levels of equality which pretty much snuff out any economic growth at all. But that’s the other extreme.

Where we are in most industrialised countries now we increase equality by taxing those who earn large amounts in order to redistribute to those who earn low amounts. All taxation has what is called a deadweight cost. A rough rule of thumb is that this is 20% of the amount raised (other research puts the marginal cost, ie, the amount of the next £ in tax raised, higher at 33%). No, this doesn’t mean that no tax should be raised: but it does mean that only those things which are worth more than 120% of the tax raised (or 133%) actually do make us better off in total.

And yes, lots of the things we currently spend taxes on pass this test (although obviously I’m one of those who insist not all).

There are other reasons out there why taxation might reduce growth as well but this is a blog comment, not an essay.

So, back to our groups.

We have two potential futures.

Where we emphasise equity and redistribution, we’re going to reduce growth a bit. So, we come back and Group A is on 120 and Group B is on 210. Absolute poverty has declined (or absolute wealth increased): all have more to spend on food, education and health care and yet relative poverty has decreased.

Or we come back and Group A is on 150 and B on 500 as before.

Now, here’s the point (Hurrah! finally!). In our attempt to insist upon greater equity everyone, both rich and poor, is worse off in material terms than if we’d just said bugger it and go for growth.

Now maybe you would prefer that world and perhaps I wouldn’t. But that doesn’t change the pont that there really is a trade off to be made there, which is why it’s so important to distinguish between relative and absolute poverty.

One more thing. For those who want to deny that there is such a tradeoff, please go and take it up with the IPCC. Here:

http://www.grida.no/publications/other/ipcc_sr/?src=/climate/ipcc/emission/

Chapter 4. The economic models underpinning climate change make the explicit assumption that concentrating more on equity (the “B” scenarios) will lead to lower economic growth than those which do not (the “A”).

And of course the IPCC is indeed the scientific consensus, isn’t it?

@Tim!

Scientific consensus? We all know economics isn’t a gay science though don’t we?

I disagree with some of the things you say but if you want to take on someone with regard to whether development comes because of state intervention or despite it take it up with Ha Joon Chang. I recommend this book not because its definitive but because it will challenge your conception of how states have developed historically.

Anyway, I’m off to the pub, respond another time. Btw, good pwn of steveb, even if I think you overstate the case for growth vs redistribution.

23. Warwick Dumas

Did the author of this piece even actually read the article they were referring to?

Why are their estimates so different to those of the World Bank (that hotbed of radical thought that has never tried to trumpet the benefits of globalisation)? They tell us – it’s because the World Bank rates poverty on consumption and here we are looking at income. (Why?)

Besides which, anything predicated on a free-and-easy “PPP” estimate is not far from computing how many angels fit on the head of a pin anyway. Without a lot of cogent health warnings, any such findings are barely worth the server space they’re written on. In their final paragraph they make a big and obvious mistake, assuming that PPP for Chinese currency in 1970 must be the same as PPP for Chinese currency in 2007. Illustrative of the nature of the undertaking?

The fact that you *can* get a substantial difference by looking at income and not consumption proves something is askew in the accounting. Poor people do not have savings, after all.

Disclaimer – I’m a supporter of liberalised, regulated trade. I just think blindly accepting this kind of nonsense as if it is better than the World Bank’s estimates, or other authoritative estimates, is not wise.

TimWorstall:

“One more thing. For those who want to deny that there is such a tradeoff, please go and take it up with the IPCC…”

It’s just an incidental base assumption used for some of their scenarios of what future human emissions might be, i.e. attempting to predict ‘business as normal’ CO2 production. That *does not* mean the IPCC claim to have proved that promoting equity will reduce economic growth. Nor does it mean that the IPCC say that governments must not promote equity or climate change will be worse (as I’ve seen others claim based on the same misinterpretation).

As it says, it’s an assumption used to create one or two of the hypothetical scenarios, and that is all it is: i.e. where there is no scientific consensus on what is very much an incidental issue (for research on climate change, not economic theory), then you are forced to go with an unproved assumption and/or conventional wisdom and state that you are doing so…

By the way, the guy that produced this sober macroeconomic study of global poverty?

The link below is to his (real!) personal website. Draw your own conclusions.

http://www.columbia.edu/~xs23/Indexmuppet.htm

(To cover my own back I should say to click any links on this site with care, some are to .exe files, which could be anything)

“That *does not* mean the IPCC claim to have proved that promoting equity will reduce economic growth.”

I don’t say they did. I say that the scientific consensus in the economic profession is that promoting equity reduces economic growth as shown by the assumptions made in the economic models which underpin the IPCC process.

The IPCC does not claim, for example, to prove that CO2 emissions will cause climate change. They claim that the scientific consensus is that they will.

“By the way, the guy that produced this sober macroeconomic study of global poverty?

The link below is to his (real!) personal website. Draw your own conclusions.”

Yes, do: Xavier Sala i Martin is one of the most cited economists on the planet. Indeed, I think (but can’t prove with a quick Google) that he’s been the most cited over one recent decade.

http://www.goodnewsindia.com/Pages/content/economy/salaIMartin.html

“Prof. Sala-i-Martin is not yet a celebrity. And if you visited his website, you may not take him seriously. There is Miss.Piggy of the Muppets striking a languid pose and techno duellists from Star Wars. The animated gifs, multi-coloured, winking text and funky audio might make you imagine a delirious teenager.

But you’d be unwise to dismiss him lightly. He is a PhD from Harvard and ranks 16th in a list of 1000 economists rated by citations of their work. Sala-i-Martin is probably the Richard Feynman of economics. Like that irreverent but brilliant physicist he has his unserious side that masks an incisive mind. ”

That’s actually got a pretty good description of his methods about measuring poverty actually in the paras that follow.

For someone who doesn’t like his results try this:

http://ideas.repec.org/p/wpa/wuwphe/0305003.html

“The paper discusses recent world income inequality calculations by Sala- i-Martin. It shows that the two main problems with which the author had to grapple (too few data to derive countries’ income distributions, and sparseness of such data in time) are not solved in a satisfactory fashion. They, and several other simplifying assumptions, make Sala-i- Martin results very dubious. We argue that Sala-i-Martin has ended up by producing a population-weighted inter-national distribution of income augmented by a constant shift parameter and not a distribution of income among world citizens.”

Note that the criticism is that while his results are better than those that went before, they’re still not good enough. A point I’ve made on another thread here recently about Concept 1, 2, and 3 measures of inequality.

27. Luis Enrique

I’m unaware of a consensus that efforts of reduce inequality hinder growth, even if that’s what the models used by the IPCC say. Some reasonably hard but interesting stuff on that topic here.

“I don’t think you’ll find many who thought that replacing pre-capitalist production with capitalist production is a step in the wrong direction. The proletarian is mostly better off than the serf, no one said different.”

Mike SC dont waste your time preaching that marxist nonsense


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