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McGraw-Hill/Irwin
©2008 The McGraw-Hill Companies, All Rights Reserved
Global PovertyGlobal Poverty
Chapter 22Chapter 22
2
American Poverty
Poverty, like beauty, is often in the eye of the beholder.
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Official Poverty Thresholds
The U.S. government sets the poverty threshold as how much money a family needs to purchase a minimally adequate diet.
Poverty threshold (U.S) is an annual income of less than $20,000 for a family of four (2007, inflation adjusted).
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Inflation Adjustments
The price of the poverty basket rises with inflation.
The current $20,000 threshold breaks down in the following way:
One third goes for food.
Implied rent is about $600-700 per month.
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U.S. Poverty Count
Over 35 million U.S. households are poor making the poverty rate 12.5 percent.
Poverty rate is the percentage of the population counted as poor.
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How Poor is U.S. “Poor”?
Critics of U.S. poverty statistics say that fewer Americans are poor and even fewer are really destitute.
In-kind income.
Material possessions.
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In-Kind Income
The official tally only counts cash income and ignores in-kind transfers.
In-kind transfers are direct transfers of goods and services, rather than cash, e.g., food stamps, Medicaid benefits, and housing subsidies.
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Material Possessions
American poverty isn’t synonymous with homelessness, malnutrition, chronic illness, or social isolation.
Many of America’s poor families have material possessions such as homes, motor vehicles, telephones, color TVs, major appliances, etc.
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Global Poverty
American poverty is more about relative deprivation than absolute deprivation.
In the rest of the world, poverty is all about absolute deprivation.
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Low Average Incomes
Over three-fourths of the world’s population live in low-income or low-middle-income nations.
Average income in those nations is under $4,000 per year – less than one-tenth of U.S. per capita GDP.
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World Bank Poverty Threshold
Extreme poverty (world) is the World Bank standard of less than $1 per day per person (inflation adjusted).
Severe poverty (world) is the World Bank standard of less than $2 per day per person (inflation adjusted).
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Inflation Adjustment
World Bank poverty thresholds are adjusted each year for inflation and for changing consumption patterns.
The $1/day standard of 1985 is about $1.50/day in today’s dollars.
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Global Poverty Counts
The World Bank classifies over a billion people as being in extreme poverty.
There are nearly 3 billion in severe poverty.
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Geography of Extreme Poverty
0% 20% 40% 60% 80%
World
China
Bolivia
India
Nigeria
Mali
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Population in Severe Poverty(less than $2/day)
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Country PercentNumber (millions)
Nigeria 92 129
Mali 91 11
Bangladesh 83 117
India 80 864
Ethiopia 78 55
China 47 611
World 54 2,700
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Social Indicators
Living on less than $2/day means always being hungry, malnourished, ill-clothed, dirty, and unhealthy.
Life expectancy is frighteningly short.
Only one out of two women and two out of three men are literate.
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Persistent Poverty
Global poverty is not only more desperate than American poverty, but is also more permanent.
Social institutions and economic stagnation keep a lid on upward mobility.
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Goals and Strategies
Global poverty is so extensive that no policy approach offers a quick solution.
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The U.N. Millennium Goal
The millennium poverty goal is the United Nations goal of reducing the global rate of extreme poverty to 15 percent by 2015.
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Why Should We Care?
Humanitarianism is a starting point for global concern for poor people.
Poverty and inequality sow the seeds of social tension both within and across national borders.
Poverty in other nations limits potential markets for international trade.
Undeveloped human capital limits human creativity.
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Glaring Inequalities
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Policy Strategies
There are only two general approaches to reducing global poverty:
Redistribution of income within and across nations.
Economic growth that raises average incomes.
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Income Redistribution
The potential for redistribution is often exaggerated and its risks underestimated.
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Within-Nation Redistribution
Poor nations are so poor that redistributing income will not significantly help out the very poor.
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Economic Risks
Incentives to produce may be harmed if the rewards to saving, investment, entrepreneurship, and management are expropriated.
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Expenditure Reallocation
Governments can reduce poverty by reallocating government expenditures:
Reallocate resources from military to schools, health services, and infrastructure.
Redirect resources to rural development and core infrastructure.
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Across-Nation Redistribution
Redistribution across national borders can make even bigger dents in global poverty.
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Foreign Aid
The United Nations’ millennium aid goal is to raise foreign aid levels to 0.7 percent of donor-country GDP.
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Foreign Aid
Country Total Aid ($millions) Percent of Donor Total Income
Australia 1,460 0.25
Canada 2,599 0.27
Denmark 2,037 0.85
France 8,473 0.41
Japan 8,906 0.19
Italy 2,462 0.15
Norway 2,199 0.87
United Kingdom 7,883 0.36
United States 19,705 0.17
22-Nations Total 79,512 0.25%
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Nongovernmental Aid
Official development assistance is augmented by private charities and other nongovernmental organizations.
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Economic Growth
Across-nation transfers alone cannot eliminate global poverty.
The key to ending global poverty is economic growth.
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Increasing Total Income
Redistributing existing income doesn’t do the job; total income has to increase.
This is what economic growth is all about.
Economic growth – an increase in output (real GDP); an expansion of production possibilities.
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Unique Needs
Poor nations need the basics – the bricks and mortar elements of an economy such as water systems, roads, schools, and legal systems.
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Growth Potential
Every percentage point of economic growth increases the total income of low-income and lower-middle-income nations by about $55 billion.
Global poverty could be cut in half by 2015 if these nations could grow by 3.8 percent per year.
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Growth Potential
The decline in Chinese poverty accounted for most of the reduction in global poverty from 30 percent in 1990 to 21 percent in 2006.
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Reducing Population Growth
Reducing population growth rates in the poorest nations is one of the critical keys to reducing global poverty.
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24%
24%
57%
23%
46%
0% 10% 20% 30% 40% 50% 60%
Yemen
Senegal
Namibia
Ethiopia
Bolivia
Poorest quintile
Richest quintile
Contraceptive Use (percent)
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Growth Rates in Selected Countries, 2000-2005
Average Annual Growth Rate (2000-2005) of
GDP PopulationPer Capita
GDP
High-income countries
United States 2.8 1.0 1.8
Canada 2.6 1.0 1.6
Japan 1.3 0.2 1.1
France 1.5 0.6 0.9
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Growth Rates in Selected Countries, 2000-2005
Average Annual Growth Rate (2000-2005) of
GDP PopulationPer Capita
GDP
Low-income countries
China 9.6 0.9 8.7
India 6.9 1.5 5.4
Nigeria 5.9 2.3 3.6
Ethiopia 4.2 2.1 2.1
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Growth Rates in Selected Countries, 2000-2005
Average Annual Growth Rate (2000-2005) of
GDP PopulationPer Capita
GDP
Low-income countries
Kenya 2.8 2.2 0.6
Paraguay 1.8 2.4 -.06
Venezuela 1.3 1.8 -0.6
Haiti -0.5 1.4 -1.9
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Human Capital Development
The next key to reducing poverty is to increase human capital to make the existing population more productive.
Human capital – the knowledge and skills possessed by the workforce.
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Education
Few people in poor nations are literate.
Educational deficiencies are greatest for females which creates an inequality trap for them.
An inequality trap is the institutional barrier that impedes human and physical capital investment, particularly by the poorest segments of society.
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Education
People in poor nations have unequal access to schools.
Physical access to schools in rural areas is difficult.
Children in the poorest families don’t go to school because they need to work to help support their families.
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School Attendance(6-11 Year-olds Not in School)
20%
6% 5%
65%
0%
10%
20%
30%
40%
50%
60%
70%
Benin Nepal Egypt
Poorest Quintile
Richest Quintile
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Health
Health care is a critical dimension of human capital development.
Immunization rates are low.
Water and sanitation facilities are in short supply.
Professional health care is hard to find.
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Rostow’s 5 Stages of Development
Stage 1: Traditional society – rigid institutions, low productivity, little infrastructure, dependence on subsistence agriculture.
Stage 2: Preconditions for takeoff – improve institutional structure, increased agricultural productivity, emergence of an entrepreneurial class.
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Rostow’s 5 Stages of Development
Stage 3: Takeoff into sustained growth – increased saving and investment, rapid industrialization, growth-enhancing policies.
Stage 4: Drive to maturity – spread of growth process to lagging industrial sectors.
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Rostow’s 5 Stages of Development
Stage 5: High mass consumption – high per capita GDP attained and accessible to most of population.
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Meeting Basic Needs
To get beyond Rostow’s stage 1, poor nations must substantially improve the health and education of the mass of poor people.
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Implied Costs
The money needed to meet the basic needs of poor nations is modest.
The challenge for poor nations is to get their resources applied to these basic needs.
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Capital Investment
Poor nations need to sharply increase capital investment to reach Rostow’s Stages 2 and 3.
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Low Investment Rates
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Internal Financing
If internally financed, increasing the investment rate requires poor nations to increase saving by cutting back on domestic consumption.
Investment rate – the percentage of total output (GDP) allocated to the production of new plant, equipment and structures.
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Internal Financing
Pervasive poverty in poor nations sharply limits their ability to increase savings.
Microfinance can be critical to escaping poverty.
Microfinance – the granting of small (micro), unsecured loans to small business and entrepreneurs.
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Inflation Financing
Some nations have used inflation to shift resources from consumption to private investment.
This inflation tax ultimately backfires when both domestic and foreign investors lose confidence in the nation’s currency.
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External Financing
Poor nations have to get external funding to lift their investment rate.
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Agricultural Development
Poor nations are heavily dependent on agriculture.
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Low Farm Productivity
To grow their economies – to rise out of stage 1 – poor nations have to invest in agricultural development.
Low productivity keeps poor nations dependent on agriculture.
Productivity – output per unit of input, e.g. output per labor-hour.
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Agricultural Share of Output
1%
2%
10%
65%
48%
46%
54%
33%
52%
0% 20% 40% 60% 80%
Japan
Europe EMU
United States
Somalia
Ethiopia
Congo
Central African Republic
Cambodia
Afghanistan
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Low Farm Productivity
$36,863
$118
$373
$103
$309
$168
$0 $200 $400 $600 $800 $1,000
United States
Ethiopia
China
Burundi
Bangladesh
Angola
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Institutional Reform
A nation needs an institutional structure that promotes economic growth:
Property rights.
Entrepreneurial incentives.
Equity.
Business climate.
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Business Climates Affect Growth
BUSINESS CLIMATE
$27,726
$12,395
$6,937$3,721 $4,794
Best Favorable Neutral Unfavorable Worst
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Investment Climate
Policy Uncertainty
52%
40%
33%
Kenya
Cambodia
China
Firms Deterring Investment
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Investment Climate
Corruption
74%
56%
27%
Kenya
Cambodia
China
Firms Deterring Investment
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Investment Climate
Property Rights
51%
61%
18%
Kenya
Cambodia
China
Firms Deterring Investment
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Investment Climate
Crime
70%
42%
20%
Kenya
Cambodia
China
Firms Deterring Investment
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Investment Climate
High Taxes
68%
19%
37%
Kenya
Cambodia
China
Firms Deterring Investment
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World Trade
Rich nations lock poor nations out of export markets in which they have a comparative advantage – especially agricultural export markets.
Comparative advantage – the ability of a country to produce a specific good at a lower opportunity cost than its trading partners.
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World Trade
Some rich nations use import quotas to protect their domestic farmers from imports from global competition.
Import quota – a limit on the quantity of a good that may be imported in a given time period.
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World Trade
Trade barriers in rich nations impede poor nations from pursuing agricultural development that is a prerequisite for growth.
McGraw-Hill/Irwin
©2008 The McGraw-Hill Companies, All Rights Reserved
Global PovertyGlobal Poverty
End of Chapter 22End of Chapter 22
