Lecture notes: World poverty

Poverty today

The World Bank report

  • pretty positive picture
  • although serious problems remain

1990

  • 36 percent of the world’s people lived in poverty
  • on less than US$1.90 a day
  • 2 billion people

2015

  • plunged to 10 percent
  • 736 million people

Sub-Saharan Africa as an exception

  • 41 percent of people are poor in Sub-Saharan Africa
  • of the world’s 28 poorest countries, 27 are in Sub-Saharan Africa

Statistics

The concept of poverty

Surviving on 1.9 US$ a day — but higher measures too

  • 3.5US$
  • 5.5US$

This highlights the problems of using the dollar

  • Turkish people became considerable poorer in dollars after the devaluations
  • not because they actually became poorer but because the dollar became more expensive

PPP

Aggregate data on economic growth doesn’t tell you how the poverty varies within a country

  • you have to look at gini coefficients etc

Can also vary within families

  • women might be poorer than men in the same family

Self-sufficiency

  • the dollar amount doesn’t tell you are self-sufficiency of farmers
  • people in the countryside are always poorer
  • but they have other means of survival

Poverty not only a matter of income — some measure of well-being

  • access to clean water, sanitation, education and health services

Also social standing

  • what allows you to participate in society as an equal
  • Adam Smith: “starched white shirt”

How to find a job:

  • some countries: shoes, trousers, shirt
  • other countries: a car, a cell phone

Explanations

How should the differences in wealth and development be explained?

Imperialism, Marxist version:

  • The Third World is poor since they First World is rich

Our wealth depends on their poverty

  • we have become rich since they have become poor
  • they have become poor since we have become rich

But

  • the world economy is not a zero-sum game
  • you need to specify some mechanism whereby this would happen

Lenin

  • Imperialism, the Highest Stage of Capitalism, 1917
  • but actually it’s a ripoff from John Hobson

Capital flows from rich countries to poor

  • there are not enough investment opportunities in the West
  • the working class is exploited
  • they cannot buy the things they themselves produce

International capitalism is looking for new places to invest

  • first comes the investments
  • they come to own big chunks of the economy
  • then come the political/military control
  • as a way to protect their investments

Russia as a good example of this

  • Lenin had to explain why a revolution was possible in Russia
  • a country with no proper working-class would never have a revolution
  • but Russia as a victim of imperialism had a role in the revolutionary struggle

Later theories

  • “exploitation”

But in which direction is money moving?

  • into poor countries our out of them?

Taking home profits

  • but the profitable investments continue to be in the poor country
  • money will return

International politics of poverty

Presupposes an idea of development and “progress”

  • cf. the League of Nations and the “Mandate Period”
  • development as a way to become independent
  • a measurement of how close you are to catching up with the West

Western ideals of “progress” becoming more widely shared

  • internet allows comparisons that previously were impossible

The Cold War setting

World poverty as a battle ground

  • the US had to show that capitalism was working for poor people in the world
  • they needed to “take off” — path of development
  • or they would defect to the Communist camp

Communism

  • central planning
  • abolition of private property
  • today we think of this as disastrous, but it didn’t always look that way

One independent country after another declares itself “socialist”

  • a way to break with the West and the legacy of colonialism
  • get help from other Communist countries

Dependency theory

Poor countries develop but in a dependent way

  • their development takes place is the terms of world capitalism

They are given the role of producers of natural resources

  • very little by means of technological development

Industrialization too

  • but we are only putting things together
  • no research and development

The domestic elite in the periphery joins the elite in the center

  • together they exploit the poor people of the periphery

The elite has the same consumption patterns

  • no interest in developing their countries
  • they benefit more than anyone from cheap labor

Terms of trade

  • declining terms of trade as an explanation for why poor countries are becoming poorer

Definition:

  • the ratio of the prices at which a country’s exports are sold to the prices paid for its imports. A country’s terms of trade improve if it gets more for its exports relative to what it pays for imports, and they deteriorate if it gets less.

Uneven trade

  • many poorer or developing countries have relied heavily on exporting primary commodities (like agricultural products, minerals, and raw materials), while importing manufactured goods from developed countries

With growing income levels there is going to be comparatively less demand for the things that poor countries produce

  • natural resources
  • you can only eat so much
  • new technology — the proportion of raw materials is declining

This leads to

  • long-term price decline for primary goods

This will reduce the relative value of their products

  • they can buy less and less of foreign goods with the goods they are exporting
  • more exports are needed to finance the same amount of imports, leading to a loss of income and purchasing power

The outcome:

  • chronic trade deficits, debt accumulation, reduced ability to invest in development, and increased vulnerability to global market fluctuations

Data on terms of trade

Import substitution

  • developed as an answer to the problem of declining terms of trade
  • there are really two kinds of economics — one for the rich, the other for the poor

Poor countries should break with the world economy and develop in our own fashion

  • use their own saving
  • develop their own technology

The predominant view in the 1950s and 60s

  • international agencies supported it too!

A lot of misallocation of resources

  • a lot of corruption
  • infant industries that never grew up

Raul Prebich

Center-Periphery Model:

  • Dichotomy of the World Economy: Prebisch divided the world economy into two distinct zones: the ‘center’ (or core), comprising industrialized, developed countries, and the ‘periphery’, consisting of underdeveloped, primary-commodity-exporting countries.
  • Economic Dependence: He argued that peripheral countries were in a state of economic dependence on core countries. This dependence was characterized by the periphery exporting raw materials to and importing manufactured goods from the center.
  • Unequal Exchange and Deteriorating Terms of Trade: Prebisch observed that over time, the terms of trade tended to move against the primary-commodity-producing periphery and in favor of the industrialized center. This meant that the periphery would continually get less for what they export relative to the cost of what they import.
  • Income Elasticity: Part of this phenomenon was attributed to the fact that the income elasticity of demand for primary commodities (often produced by peripheral countries) is lower than that for manufactured goods. Thus, as incomes rise globally, the demand for manufactured goods increases more rapidly than for primary commodities, leading to declining prices for these commodities relative to manufactured goods.

Economic Development Strategies:

  • Import Substitution Industrialization (ISI): Prebisch advocated for ISI as a strategy for economic development. ISI involves reducing dependency on imported goods by developing local industries. The idea was to encourage the domestic production of goods that were previously imported, to foster industrialization and reduce the outflow of capital.
  • Role of the State: He emphasized the importance of state intervention in the economy to promote industrialization, manage foreign exchange, and regulate foreign investment.
  • Regional Integration: Prebisch also promoted the idea of regional economic integration among developing countries as a means to expand markets, reduce dependence on the center, and enhance collective bargaining power.

Legacy and Critiques:

  • Influence on Latin American Economic Policy: Prebisch’s ideas greatly influenced economic policies in Latin America, particularly from the 1950s to the 1970s.
  • Critiques: Critics of Prebisch’s theories argue that ISI can lead to inefficiency, lack of competitiveness, and neglect of export potentials. Also, over-reliance on state intervention can lead to bureaucratic inefficiencies and corruption.
  • Continued Relevance: Despite these critiques, Prebisch’s core ideas about the structural imbalances in the world economy and the need for a development strategy tailored to the specific conditions of developing countries remain influential in development economics.

Walt Rostow and “take-off”

The Traditional Society:

  • characterized by subsistence agriculture or hunting and gathering; limited technology; and a static, rigid social structure.

The Preconditions for Take-off:

  • phase where the society starts to develop more productive agricultural practices and begins to generate surplus capital that can be invested in other areas of the economy.

The Take-off:

  • industrialization begins to occur, and economic growth becomes a more common and sustained process.

The take-off is facilitated by:

  • development of a manufacturing sector,
  • structural changes in the economy (from agriculture to industry),
  • increased investment in industrial production,
  • development of new technologies and infrastructure,
  • growth of a skilled and educated workforce.

The Drive to Maturity:

  • during this stage, the economy diversifies from heavy industry to include a wider range of manufacturing and services. The economy enjoys the benefits of technological and entrepreneurial maturity.

The Age of High Mass Consumption:

  • marked by a shift from production of heavy industry to consumer goods, leading to high levels of material wealth and widespread consumption.

Critique

  • Linear Progression: Rostow’s model suggests a linear progression of economic development, which has been criticized for being overly simplistic and not accounting for the varied and non-linear paths different countries have followed.
  • Western Bias: The model is seen as ethnocentric, mainly reflecting the development experience of Western Europe and the United States, and may not adequately address the unique challenges and circumstances of other regions, especially post-colonial societies.
  • Political and Social Factors: Critics argue that Rostow’s model downplays the role of political, social, and cultural factors in economic development.
  • Environmental Sustainability: In the contemporary context, Rostow’s model is often critiqued for not considering environmental sustainability, an increasingly crucial aspect of development.

Gershenkron and “the advantages of backwardness”

Catching Up with Advanced Economies:

  • Gerschenkron posited that backward economies (those that are less industrially developed) have certain advantages that can enable them to catch up more rapidly with more advanced economies.

Role of the State:

  • Gerschenkron emphasized the crucial role of the state in driving industrialization in backward countries
  • the state can mobilize resources, direct investment, and foster the development of industries more effectively in these contexts, as opposed to relying solely on market forces.

Substitute for Missing Prerequisites:

  • backward countries often lack the prerequisites for industrialization that advanced countries had (like a wealthy, capitalist class willing to invest in industrial ventures)
  • substituted by other means — such as state intervention, or by importing technology and know-how from more advanced countries.

Opportunity to Leapfrog:

  • opportunity to leapfrog stages of development that advanced countries had to go through
  • latecomers can adopt the latest technologies and organizational methods without having to go through the incremental development and obsolescence of earlier technologies.

Learning from the Experience of Others:

  • Less developed countries can benefit from the experiences, both positive and negative, of countries that have already industrialized

Critique:

  • not universally applicable to all backward countries. The success of state-led industrialization depends on a variety of factors, including political stability, quality of governance, and the capacity of the state to mobilize resources effectively
  • Gerschenkron’s model led to an overemphasis on heavy industry at the expense of consumer goods and services, which may not always be the most beneficial path for economic development
  • the theory’s emphasis on strong state intervention can sometimes lead to authoritarian governance styles, which may suppress democratic processes and civil liberties
  • Gerschenkron’s theory often overlooked the social and environmental costs of rapid industrialization.

Arthur Lewis on the role of labor

The traditional Sector:

  • characterized by subsistence agriculture with low productivity and a surplus of labor.

The Modern Sector:

  • characterized by higher productivity industries, often urban and capitalist in nature.

Labor Transfer and Surplus:

  • the traditional, agrarian sector had an excess of labor—a surplus that did not significantly contribute to output
  • this surplus labor could be transferred to the modern sector without negatively affecting agricultural output.

Capital Accumulation:

  • economic growth in the modern sector leads to increased profits, which are reinvested to expand industrial capacity. This expansion creates more jobs and further draws labor from the traditional sector.

Wage Differences and Productivity:

  • at first wages in the modern sector are higher than in the traditional sector, reflecting higher productivity. Over time, as labor continues to move to the modern sector, wages in the traditional sector begin to rise, and wages in the modern sector stabilize.

Economic Growth and Development:

  • the continuous transfer of labor and the reinvestment of profits in the modern sector fuel economic growth. Eventually, the economy transitions to a point where the traditional sector becomes a smaller part of the economy, and the modern sector dominates.

Critiques:

  • [ver-Simplification: Critics argue that the dual-sector model oversimplifies the complexities of developing economies, especially the diversity of sectors and the informal economy.
  • neglect of Agricultural Development: The model has been criticized for underestimating the importance of agricultural development and rural development as integral parts of economic growth.
  • labor Market Dynamics: The assumption of a surplus of labor in agriculture and its easy transferability to industry doesn’t always hold true, especially considering skills mismatch and geographic constraints.

NIEO

The rise and fall of the idea of a “new international economic order”

  • “The most serious challenge to US global leadership since the end of the Second World War”
  • adds an economic dimension to the struggle for independence

Post-war boom

  • but this did not include the newly independent countries
  • little economic growth, industrialization
  • very dependent on commodities

Communism as a constant temptation

  • height of the Cold War
  • challenge to the United States

“Neocolonialism”

  • MNCs dominate the economy of many countries
  • we talked about this before

The demands

More Favorable Terms of Trade:

  • developing countries sought better prices for their raw materials and more favorable terms of trade to improve their economic situation

Greater Development Assistance:

  • NIEO called for increased financial aid and better access to markets in developed countries, aiming to facilitate development and reduce poverty in the Global South

Sovereignty Over Natural Resources:

  • A key demand was the right for countries to have full permanent sovereignty over their natural resources and economic activities, enabling them to regulate and control foreign investment within their bordersA commodity fund — stabilize prices and export earnings

Technology Transfer:

  • NIEO emphasized the need for technology transfer from developed to developing countries under fair and most favorable terms, to help them build their industrial bases.

Debt Relief:

  • Many developing countries were burdened with external debt, so the NIEO included calls for debt relief and restructuring to manage their financial obligations better.

Fairer Regulation of Multinational Corporations:

  • NIEO sought to establish a code of conduct for multinational corporations to prevent exploitation and ensure that their activities contributed positively to the host countries.

Reforms in the Global Institutional Framework:

  • This included reforming international institutions like the IMF and the World Bank to better represent the interests of developing countries.

Preferential Treatment for Developing Countries:

  • The NIEO proposed preferential treatment in trade for developing countries, such as reduced tariffs and better market access to the markets of developed countries.

The United Nations

The forum where NIEO was implemented

  • not Bretton Woods etc
  • UN — one country, one vote
  • the majority of members are no longer Western countries
  • the only forum where small countries have influence
  • the North/South division is more important than the East/West division

But instead

  • the US moving away from the UN
  • no longer a tool of US statecraft

UNCTAD

As one of the few institutional outcomes

  • established in 1964 as an intergovernmental organization
  • promote the interests of developing states in world trade, aid, transport, finance and technology

Meets once in four years

  • permanent secretariat is in Geneva
  • significant that it is NOT Washington

Recent changes

  • forced to change as a result of the collapse of the idea of “development economics”

Nationalization of natural resources

1950s discussion regarding human rights

  • 1958, UN Commission on sovereignty over natural resources

Expropriation of resources

  • whether to pay compensation?
  • how much — and to whom

Problem of who would control the nationalized resources

  • a way for local elites to enrich themselves
  • no democratic accountability

Quickly growing trend

  • 6 cases in 1960
  • to 68 cases in 1974

The West tries to protect itself by means of bilateral investment treaties

  • developing countries want a multilateral agreement
  • Kissinger seemed to be making concessions

First Oil Crisis, October, 1973

War between the Arab world and Israel

  • October, 1973

New economic weapon

  • OPEC organize an embargo on oil shipments to the US
  • cut back oil production
  • price skyrocket

The end of NIEO

Contributing factors — all reducing the leverage

  • the oil shock
  • the debt crisis — recycling of petrodollars
  • conditional loans from the IMF, etc

Cancun meeting in 1981

  • Reagan kills the whole thing
  • rather, reducing the power of the state and opening up markets
  • improve the incentives for individuals
  • an emerging Washington Consensus

Structural adjustments

  • cutting back state-owned corporations
  • privatizations etc — the largest transfer of property in history

Conclusion

  • the West won, the poor countries lost

Return to a discussion of human rights

  • this is something that poor countries could be accused of
  • and not having the right institutions

A new kind of individualism

  • nothing about state rights

The looting machine (Burgis)

Transparency International:

  • “We define corruption as the abuse of entrusted power for private gain”

Statistics

Two economic theories or one?

The dependency theory examples are always from Latin America

  • indeed very high levels of external loans
  • a lot of dependency on foreign money

But this is not always the case

  • East Asia: very high levels of domestic spending
  • China: state control can squeeze money out of the economy

Export-led growth

  • a whole world market to sell do

The role of the state

  • infant industries
  • gathering savings
  • supporting research and development
  • nurturing “national leaders”

Economic theory and economic growth

The solution seems simple:

  • we need more economic growth

Not so much economic theory

  • more statistics
  • and history

Economic theory

  • not very good at explaining economic growth

We talked about before

  • the contrast between prices and values

Economists only think in terms of investments

  • invest and you will be rewarded

But how this only can explain incremental change

  • and this is always going to be the far smaller part

The world economy has grown exponentially

  • McCloskey — “the great enrichment”
  • cannot be explained by input/output models
  • we are talking about qualitative leaps

Cf. technological inventions

  • move us from one kind of an economy to another
  • from horses to steam — from electricity to the internet

Aid dependency

Many countries highly dependent on foreign aid

  • fail to develop
  • and live off the largesse of aid donors

In 1970, the United Nations agreed on 0.7% of Gross National Income per country as the target for how much should be dedicated for international aid.

President of Tanzania, Benjamin W. Mkapa, stated that “Development aid has taken deep root to the psyche of the people, especially in the poorer countries of the South. It is similar to drug addiction.”

Motives for aid

  • obviously humanitarian
  • but also supporting one’s own exports
  • military and economic considerations

Stuns economic growth

  • aid replaces development
  • food aid does damage to local production
  • difficult for local products to compete
  • cf. the threat of starvation as a result of the war in Ukraine
  • the views of the donors as more important than local constituencies

Political dependency

  • the donors influences local politics
  • reduces the bargaining power of the people — weakens democratic institutions
  • easier for “presidentialism”

Corruption

  • most aid dependent countries have very high levels of corruption
  • funds are used for private ends — rent-seeking behavior

Recent trends

  • reduced dependency in countries like Ghana and Mozambique

Alternative forms of aid

  • somehow the recipient must be in charge of the programs

Other examples

  • The Grameen Bank
  • De Soto on property rights

The success of world trade

Hans Rosling and others

  • tell a great story of improvement of living conditions

It is basically a question of globalization

  • the power of world trade

And we know why

  • countries can specialize and then trade with each other
  • a much bigger market — a world market

Example: Bangla Desh

This used to be a country with extreme poverty

  • has really moved up in the world

But obvious resource implications

  • if everyone around the world is to have a Western life-style

For example:

  • resource scarcity
  • pollution
  • global warming

We will talk more about this during the last week — “limits”