Wealth and Poverty PDF

Stuvia.com - The Marketplace to Buy and Sell your Study Material Chapter 2: Wealth and Poverty PART I: POVERTY 1. The concept of poverty Poverty is usually deﬁned in terms of income or consumpBon o If your income y or consumpBon c is below a threshold value z (“the poverty line”), you are considered to be poor (compared to a standard) o Then you have a headcount raBo (the number of people who have an income below the poverty line) & how far people are from the poverty line There are many diﬀerent ways to set the poverty line o Absolute (e.g., minimum needed to survive) o RelaBve (e.g., 60% of median income) § In Eu countries Extreme poverty is deﬁned by the Interna6onal Poverty Line: 2.15 $ (measured in PPP- adjusted dollars a day per person in 2017 PPP terms) (PPP = purchasing power parity) o Below the internaBonal poverty line you barely have enough to survive o PPP: adjust for the amount you can buy with a certain money in diﬀerent countries (you modify the exchange rate in order to reﬂect the fact that a certain amount of money needs to buy a bundel in diﬀerent countries MulFdimensional poverty There are other measures of poverty As a result of a broader concepBon of human well-being, poverty is now more and more deﬁned also in terms of non-monetary dimensions o You need more that just money, you have to look at the other dimenBons The mulBdimensional concept of poverty looks at health, educaBon, and living standards This is reﬂected in the MDGs and the SDGs See also the 2023 Global MulBdimensional Poverty Index Report (UNDP) How the index is calculated & diﬀerent aspects they collect data from combine to an index Where do poor people live? In some countries you don’t have enough data 7 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material 2. Extreme poverty trends Income poverty has diminished UnBl recently, most of humanity lived in extreme poverty Since the 1980s both the number and the percentage of people living in extreme poverty has decreased substanBally The decrease is spectacular in Asia The number of people living in extreme poverty has not decreased in Sub-Saharan Africa (excepBon) The COVID-19 pandemic and the war in Ukraine have disturbed the evoluBon (then it increased) In the beginning, the majority of the world populaBon lived in extreme poverty The number starts to decline fast in 1980 And decreasing ever since except in 2020 DistribuBon of income class o A lot of people are just above the poverty line They mostly lived in Asia and Sub Sahara Afrika in 1990 Now they mostly live in Sub Sahara Afrika (it has not declined) Everywhere else in does have declined 3. The millennium development goals (2000-2015) The Millennium Development Goals (MDGs) are eight goals that 189 UN member states raBﬁed in 2000 to achieve by the year 2015 Goal 1: Eradicate extreme poverty and hunger Goal 2: Achieve universal primary educaBon Goal 3: Promote gender equality and empower women ▪ Goal 4: Reduce child mortality Goal 5: Improve maternal health Goal 6: Combat HIV/AIDS, malaria, and other diseases Goal 7: Ensure environmental sustainability Goal 8: Develop a global partnership for development Eradicate extreme poverty and hunger (MDG 1) Target 1a: Reduce by half the proporBon of people living on less than a dollar a day o 1.1 ProporBon of populaBon below $1 (PPP) per day o 1.2 Poverty gap raBo o 1.3 Share of poorest quinBle in naBonal consumpBon Target 1b: Achieve full and producBve employment and decent work for all, including women and young people o 1.4 Growth rate of GDP per person employed o 1.5 Employment-to-populaBon raBo o 1.6 ProporBon of employed people living below $1 (PPP) per day o 1.7 ProporBon of own-account and contribuBng family workers in total employment Target 1c: Reduce by half the proporBon of people who suﬀer from hunger o 1.8 Prevalence of underweight children under-ﬁve years of age o 1.9 ProporBon of populaBon below minimum level of dietary energy consumpBon 8 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material à EvaluaBon relaBvely posiBve: they didn’t achieve everything, but what they did achieve was substanBal. Example: Goal 1 4. Sustainable Development Goals (2015-2030) A`er the Rio +20 conference of 2012 the UN started a process to replace the MDGs by the SDGs The American economist Jeﬀrey Sachs, special advisor of the UN on MDGs, proposed to have a restricted list of broad SDGs o Jeﬀrey D. Sachs, “From Millennium Development Goals to Sustainable Development Goals” In the end an Open Working Group on SDGs drew up a list of 17 SDGs, that was approved by the General Assembly of the UN o But criBque: at MDG, there were few goals, so you could really focus; the more goals, the harder to achieve. 17 SDGs, 169 goals, 304 indicators There is progress, but not fast enough!! 9 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material 5. CriIcism of MDG’s and SDG’s Strengths and weaknesses of MDGs Strengths: Inﬂuence on internaBonal discourse o Countries evaluated by looking at how they were doing for the MDGs o Because they had to focus on them, the goals had been reached Inﬂuence on the allocaBon of resources for development goals of the highest priority Inﬂuence on the monitoring of policies In the past there have been other iniBaBves to set global prioriBes, but these were always more limited Weaknesses: The people concerned had no voice in the determinaBon of the MDGs Too many targets are formulated in relaBve terms The targets do not take into account the diﬀerences in the starBng posBons of countries Some goals are missing (for instance: human rights) The MDG agenda does not touch upon the structural causes of poverty and desBtuBon Countries are too narrowly judged upon the progress they make with regard to the MDGs Strengths and weaknesses of SDGs Strengths: ConBnuaBon of the MDGs More goals, more targets Weaknesses Too many goals, too many targets? Too much emphasis on development, to li;le on sustainability o For instance: Jason Hickel, “The world’s Sustainable Development Goals aren’t sustainable”, Foreign Policy, 30 September 2020. o Mainly criBcism on the use of the SDG Index as an indicator of sustainability of countries An alternaFve cost-beneﬁt approach For some the SDG list is too long and the prioriBes are insuﬃciently clear Would it not be be;er to focus on those targets that generate the greatest net beneﬁts? This is the approach followed by Bjorn Lomborg and the Copenhagen Consensus Center o Formulate a list of potenBal goals and the esBmate what it will cost and what the beneﬁts will be o PrioriBze the goals that have the biggest beneﬁt = Smart Development Goals o Looking at goals from an economist perspecBve 5. The Malthusian trap and the industrial revoluIon Poverty and the Malthusian trap For millennia, mankind has been poor and only since the industrial revoluBon (mid 18th century) mankind escaped the “Malthusian trap” The “Malthusian trap” refers to the insight of Thomas Malthus (1766- 1834) that populaBon size tends to grow exponenBally but is ulBmately checked by available means of survival (food and other resources) tending to grow at a linear rate o PopulaBons tend to grow at a constant rate, food producBon can’t increase at the same rate. We would be stuck in poverty! o history turned out to be diﬀerent (for most countries) 10 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material Escape from the trap: the industrial revoluFon Historically, welfare per capita only increased following reducBons in populaBon size a`er periods of war or disease (e.g., Black Death) o Shi`s in power balance between ruling class and people o`en occurred only a`er such disasters due to scarcity of agricultural labour Gregory Clark hypothesizes that the industrial revoluBon started in the UK because of a long tradiBon of an “agricultural culture” (se;lement, private property rights, trade, rules of engagement, rule of law) rather than a “nomad or ca;le raising culture” (free roaming, common property rights, culture of honour) o Industrial revoluBon made a big diﬀerence -> escape of the Malthusian trap 6. Poverty trap and ways out The SACHS diagnosFc checklist Jeﬀrey Sachs, The End of Poverty (2005) o Idea: country’s that cannot leave poverty because they can’t invest enough A poverty trap (being too poor to make basic investments and grow) can be caused by: o Bad economic policies (closing the economy, central planning,...) o Financial insolvency of government (history of over-spending, over-borrowing,...) o Adverse geography (landlocked, mountainous, endemic disease burden,...) o Poor governance (corrupBon, incompetence, ineﬃciency,...) o Cultural barriers (paternalism,...) o GeopoliBcs (insecure relaBons with neighbors, colonialism, proxy state,...) Sachs is in favor of a “big push” o As an internaBonal community we have to help them (increasing development aid) o BUT not everybody agrees COLLIER on poverty traps and instruments Paul Collier, The Bo;om Billion (2007) o The countries are the poorest in the world Four major problems cause resistant poverty o Conﬂict trap (Congo, Somalia, Afghanistan,...) o Natural resource trap (the resource curse, Dutch disease) (e.g., Venezuela/oil, Angola/diamonds,...) o Being landlocked with bad neighbours (Chad, Niger,...) o Bad governance in a small country Possible instruments to escape these traps (a more targeted approach) o Aid (but quesBonable eﬀecBveness) o Military intervenBon (NATO, US, UK,...) or “over the horizon control” (e.g., France in Africa) o Laws and charters o Trade policy to reverse marginalisaBon Aid and assistance In most major religions and moral philosophies, the rich have a responsibility to help the poor; there is also an evoluBonary argument for aid and assistance Foreign aid is used primarily for poliBcal objecBves (military aid as well as development aid) In 1970 the UN adopted a resoluBon which set a target for donor countries: the raBo of Oﬃcial Development Assistance (ODA) to Gross NaBonal Income should reach 0.7% o Most countries don’t reach this target!! Today, for all donor countries together the raBo is equal to 0.33%; only ﬁve countries (Denmark, Germany, Luxembourg, Norway, Sweden) reach the target 11 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material The eﬀecBveness of aid is seriously quesBoned (self-interest of rich countries, corrupBon in DCs) Trade measures (reducing tariﬀs, quotas and other trade barriers) and granBng debt relief also reduce poverty 7. To sum up Poverty is a mulBdimensional concept Extreme poverty has decreased signiﬁcantly, but the pandemic seems to have slowed (or stopped) the process The MDGS and SDGs have incited the internaBonal community to focus on the reducBon of poverty Poor countries are facing various poverty traps Aid and assistance may help overcome these traps, but are also put into quesBon PART II: INCOME 1. Facts on global income EvoluBon of income: Over the last 200 years, global output as measured by GDP (and income) has grown spectacularly o GDP/capita has increased, is not just because there are more people Around 1800, about 85% of the world populaBon lived in extreme poverty; nowadays, less than 10% (see the Gapminder “mountain graph”) In recent decades, the world distribuBon has evolved from two humps to one hump The majority of the populaBon is in the “middle income” categories Majority of the world in extreme poverty in the beginning Later about half in extreme poverty and right a small peak (two humped distribuBon) -> polarized world Today: 8% in extreme poverty, but the majority income between the two ExpectaBon: shi` form the le` to the right will increase (more rich, less poverty) o Think about China! o In a course op 30 years the economic growth was so big that the extreme poverty doesn’t exist anymore 12 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material 2. Diﬀerences between countries Rich and Poor The gap between rich and poor countries remains huge In terms of Purchasing Power Parity (PPP) the gap is smaller than in terms of exchange rates o The PPP conversion factors adjust the currency exchange rates for diﬀerences in the price levels of countries o The idea is to use rates which correspond to similar purchasing power in terms of amounts of goods and services In 2020, GDP per capita has decreased in high income countries The relaBve GDP per capita (PPP) of high income countries is decreasing 3. Global income inequality There are sBll huge diﬀerences between rich and poor people on earth Good long-term data are missing, but it seems that in the last two centuries global income inequality mostly increased o We need to know how incomes are distributed In the last decades, however, global income inequality has decreased o “The incomes of the poorer half of the world populaBon rose faster than the incomes of the richer half of the world populaBon.” (“The history of global economic inequality”, Our World in Data) o Especially in Asia economic growth was strong The expectaBon is that income inequality will conBnue to decrease à Global populaBon from the poorest to the richest and then indicate how much they earn In the beginning a lot of people with low incomes If you reach the end you have very high incomes Inequality between and within countries The change in global income inequality is the result of two evoluBons: o The change of inequality between countries o The change of inequality within countries As a result of the strong economic growth in big countries that were previously poor (e.g., China and India), the inequality between countries has decreased However, since the 1980s income inequality within many countries has increased The eﬀect of the decrease of inequality between countries has been stronger than the eﬀect of the increase of inequality within countries Signiﬁcant trends regarding income inequality UnBl the end of the 1970s income inequality in the US and in Europe tended to decrease A`er 1980 inequality has strongly increased in the US (unBl today) Inequality is now much higher in the US than in most European countries o In the US, since the 1990s the share of the 1% richest in total income is larger than that of the 50% poorest (not the case then) The diﬀerence in inequality between the US and Europe appears to be increasing In Belgium inequality is relaBvely low (and has not increased as much as in other countries) 13 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material 4. Income and other dimensions Social gradients Diﬀerences in income tend to go together with diﬀerences in other aspects of well-being (“social gradients”) o Health o EducaBon o Housing condiBons People who are richer tend to have be;er health, educaBon… and tend to live longer E.g., there is posiBve correlaBon between income and life expectancy It is not always easy to unravel the causal mechanisms o If you put it in a graph (income/ health), it has a posiBve slope (but not a perfect correlaBon) 5. Geography and development Geography, wealth and poverty (how can we explain that some countries are poor or rich) How well a country is connected to the rest of the world o Adam Smith (1776) already argued that naBons bordering a sea would usually be richer than landlocked countries o Trade is easier over the sea o But is no rule: Switzerland is the richest country is Europe (due to policy) Moderate climates are more conducive to economic development than more extreme climates PopulaBon (and GDP) tends to concentrate in coastal areas and moderate climate zones o Bv Antwerp, Sidney, Melbourne… Why? Sea transportaBon is cheaper than terrestrial transport; hence coastal areas can capture “gains of trade” Ideas (and people) used to spread through coastal areas (easy travel by sea) Winter is a control on many diseases Agricultural producBvity is higher in moderate climates 6. Approaches to development (policy) 6.1. The market approach to development (ac5on taken by free people) Four basic rules 1. Private property of means of producBon (natural resources, labour, capital goods, technology) 2. Free and compeBBve markets 3. Unrestricted trade at local, naBonal and internaBonal level 4. State-enforced system of “law and order” to guarantee property rights, contracts and safe commercial relaBons between unrelated individuals o State exists, but has limited role Adam Smith (1776) advocated this system as a reacBon to the mercanBlist system of the 18th century (monopolies granted by the sovereign) There was a strong presence to the government of the state (granted monopolies); but this goes against the intrest of the populaBon 14 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material Key features of the market approach The role of government is limited to law and order to uphold the compeBBve market system and to provide public services o law and order, defense, money, public infrastructure, basic educaBon The approach is eﬃcient as the system is compaBble with individual incenBves for wealth formaBon o If you leave people free, people can make their own decisions (that can fail or succeed) In reality: problems are business cycles and unemployment, unequal distribuBon of income and wealth, and market failures o There is are booming periods or recession periods o common property, externaliBes, informaBon issues, missing markets,... DeregulaBon and free markets (goods, capital but not people) are the basic approach of internaBonal insBtuBons (IMF, World Bank) – the so- called “Washington consensus” o “We have to get rid of the excessive government and need to give a larger role to the market” 6.2. The state approach to development (state takes decisions) What goods, what price, how much… is decided by the state State approach (socialism, communism,...) was advocated by Karl Marx (Manifesto of the Communist Party, 1848) and put into pracBce by Lenin (1917) and others in the Soviet Union Later it was adopted in Central and Eastern European countries (post WW II), China (Mao), Vietnam (Ho Chi Min), Cuba (Castro), North Korea (Kim Il Sung), Zimbabwe (Mugabe) and many developing countries World poverty in this (Marxist) view is due to o Unfair trade between a core and the periphery (dependency theory) o ColonisaBon and postcolonial control (local elites) § Created a dependency between countries, rich countries took advantage of the wealth coming from the poor countries (resources, labour) o Proﬁteering mulBnaBonal corporaBons § “They keep poor countries poor” Key features of the state approach Means of producBon (land, resources, capital, labour) are owned or controlled by the state with the intent to recycle surplus value (proﬁts) and equalise individual incomes Control is in the hands of individuals and organisaBons represenBng the state (the power to coerce and a monopoly on violence) Government agencies (or ministries) are ﬁxing o ProducBon quota for each industry o AllocaBon of resources (capital, labour) o Prices of inputs and outputs o With the objecBve to ensure basic needs and to secure a relaBvely equal distribuBon of income (less inequality) 15 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material The economic debate about state organisaBon of the economy Whether it is possible or not to have the same outcomes than a market approach The rise of socialism and communism led to debates about the economics of socialism, especially in the 1930s o Oskar Lange claimed that the state can in principle achieve the same outcome as a market economy under perfect compeBBon o Friedrich von Hayek argued that the amount of informaBon required to organise a complete economy surpasses the capabiliBes of planning agencies so that surpluses and parBcularly shortages are endemic A command economy is o`en not compaBble with private incenBves of agents (hidden unemployment, waste, corrupBon, repression) In pracBce a command economy o`en leads to: o Ineﬃciency, corrupBon and cronyism § Workers not very moBvated to work hard, because you always get your wage § A lot of things went wrong because if the state decides everything individuals don’t get the incenBve to employ their resources as they would in another system § Cronyism: friends help friends while they don’t have the competences (put them in charge) o Suppression of individual freedoms § Not only in the economic sphere § ElecBons not free, outcome in known in advance § Impossible to express yourselves (people in jail when they speak out against the regime) o Inequality (elites and the masses) § They say that they create a much more equal society, in pracBce there in more inequality § Those who belong to the elite can get very rich, and the majority is kept poor 6.3. State capitalism or blended approach (elements of both combined) Markets are used, but the state is deeply engaged in the producBon of private goods (market goods) by means of state owned enterprises (SOEs) or parBally privaBsed ﬁrms Dominant posiBon granted to limited number of SOEs in diﬀerent industries o Because they are more reliable PromoBon or protecBon of industry champions Considerable control over credit and investment State capitalism or blended approach o`en precedes a more free market mode or a more centrally planned mode Examples are Japan (1960s), Korea (1980s), China (Deng Xiaoping reforms), Vietnam (doi moi reform), Singapore (Lee Kuan Yew), France (De Gaulle),... ( all a`er WOII) Successful systems may adopt poliBcal democracy (e.g., India, EU...) or single party systems (authoritarian meritocracy) (e.g., China) India is a democracy with elecBons and the ruling party can change (which have important concequences) China is under the rule of the communis party for a long Bme 16 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material The blended approach may develop from free market to more state intervenBon (European countries) or from communism and reform (China, Vietnam) Ex Belgium: the government has a big role in redistribuBon Some development economists o`en advocate the blended approach Ha Joon CHANG & Ilene GRABEL (2004), Reclaiming Development Dani RODRIK (2007), One Economics, Many Recipes Finding a balance The challenge socieBes face is to achieve the right balance between the market and state approach to development In early stages, state capitalism (infant industry protecBon) is probably preferable In later stages, there are gains to be made from openness and free trade Good governance is key to development 7. GlobalizaIon GlobalisaBon refers to the increase of global economic, poliBcal, environmental, and social acBviBes leading to a more interdependent world The scale and the importance of globalizaBon has increased a lot Expansion of world trade, globalizaBon of capital markets, the emergence of global companies and internaBonal migraBon are indicaBve of globalizaBon This is not an enBrely new phenomenon (19th century), but the scale of present-day globalizaBon is more impressive 4 posiBve aspects of globalizaBon 1. It leads to wealth creaBon for rich and poor through the exploitaBon of gains of trade (specializaBon, cheaper products, the creaBon of new jobs) o A lot of people beneﬁt from it, but not everyone (gains not always distributed)!!! o ComparaBve advantage leads to gains of trade, provided equal technologies 2. The spread of technology and knowledge increases producBvity and sBmulates further innovaBon 3. This oﬀers more possibiliBes to reduce poverty and hunger 4. Trade and development are conducive to reducing poliBcal instability and crime o They believed that more internaBonal interacBons would lead to internaBonal peace, because why would you destroy your material wellbeing (if all countries beneﬁt from trade) 8 negaBve aspects of globalizaBon 1. The advantages from trade may be distributed unequally if technologies are diﬀerent (producBve rich vs. unproducBve poor) 2. Trade implies transiBon costs (changes in industrial locaBon and structure with job gains but also job losses) 3. Environmental damage and unsustainable development o It’s not always more and cheaper, the price we pay for it is environmental o Not sustainable! 4. Transmission of diseases (e.g., HIV/AIDS) 5. InternaBonal crime and terrorism 6. Cultural imperialism (Anglo-Saxon dominance) o The American culture than dominated the world and seen as a treat to some other cultures 7. Growing gap between rich and poor (winner takes all markets) 17 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year? Stuvia.com - The Marketplace to Buy and Sell your Study Material 8. Loss of naBonal autonomy o Individual countries cannot make descisions anymore o All made by large internaBonal ﬁrms 8. To sum up Global GDP and income per capita have risen signiﬁcantly Global inequality remains very high, but appears to be decreasing Income is correlated with other dimensions Geographical locaBon is important: a large part of the planet does not share the assets of many rich countries (moderate climate, access to the sea,...) There are diﬀerent approaches to development (market, state, blended) GlobalisaBon is mainly driven by market forces focusing on economic growth, but more emphasis on human governance and environment appears to be needed 18 Downloaded by: carolinaalmeidadj | [email protected] Want to earn $1.236 Distribution of this document is illegal extra per year?

Wealth and Poverty PDF

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