Wednesday, November 26, 2014

Reason and the End of Poverty

WASHINGTON, DC – The World Bank has set two new goals for itself: ending extreme and chronic poverty in the world by 2030, and promoting shared prosperity, defined in terms of progress of the poorest 40% of the population in each society. Now that the United Nations General Assembly Open Working Group on Sustainable Development Goals has endorsed the Bank’s anti-poverty target, debate about how to achieve it has revived an old question: Will the benefits of economic growth trickle down on their own, reaching all, or will we need targeted redistributive policies?

Many people remain in the growth-only camp only because of an error in deductive reasoning; unlike committed ideologues, they can be weaned from their position. That is why the World Bank’s second goal of promoting shared prosperity is important not only in itself, but as an essential complement to the goal of ending poverty.

Recognizing that some “frictional” poverty will inevitably persist over the next two decades, the World Bank’s formal target is to reduce the percentage of people living below the poverty line – defined as daily consumption of less than $1.25 (in purchasing-power-parity terms) per person – to less than 3%.

World Bank research predicts that if all countries grow at the same rates that they did over the past 20 years, with no change in income distribution, world poverty will fall to 7.7% by 2030, from 17.7% in 2010. If they grow faster, at the average rates recorded in the 2000’s, the poverty rate will fall to 5.5%.

These numbers suggest that growth alone is unlikely to get us to the 3% target. But this is mere suggestion. One can argue that we should nonetheless rely on growth and simply adopt measures that encourage more of it.

In a new paper, David Dollar, Tatjana Kleineberg, and Aart Kraay analyze empirically the relationship between growth and poverty. Their comprehensive study draws on high-quality survey data from 118 countries and reaches a clear conclusion: the bulk of poverty eradication that took place in recent decades was driven by economies’ overall income growth. More specifically, 77% of the cross-country variation in the income growth of the poorest 40% of the population reflects differences in average income growth.

Findings like these lead many people to conclude that eradicating poverty requires us to rely on overall growth, and that direct government policy interventions have little merit. But this is a wrong conclusion, which illustrates a lapse of logic.

To see why, suppose that in 1930 an economist conducted an empirical study of what cured infectious diseases, and, analyzing masses of data from previous years, concluded that 98% of all treatable illnesses were cured by non-antibiotic medicines – “tradicines,” which include all traditional medicines of various schools. This conclusion would most likely be valid, because the use of antibiotics before 1930 – just two years after Alexander Fleming discovered penicillin and years before it was fully workable as a cure – was rare and mostly inadvertent.

But now suppose that the economist goes on to argue that, therefore, it would be silly to give patients penicillin, because we know that 98% of all treatable diseases were cured by tradicines, and penicillin is not a tradicine. That is a wrong deduction, based on evidence that does not exist. What the economist’s study in 1930 showed is that tradicines accounted for 98% of the cases that were successfully treated. It does not show that penicillin does not work.

This is a common mistake. We often hear assertions like, “We must rely on the private sector to create jobs, because studies show that 90% of past jobs were created by the private sector.” If we accepted this reasoning, we would have to accept a Soviet researcher’s assertion in the late 1980’s that we must rely on the state to create jobs, because 90% of past jobs were created by the state.

On job creation, there is both theory and evidence to support the conclusion that the private sector is the main driver of sustainable expansion (which is not to deny that there may be scope for tweaking public policies to make the private sector more employment-friendly). But on poverty eradication, theory and evidence show that policy interventions, when skillfully designed, can play a significant role. Some of these policies already exist; some have to be crafted – the antibiotics of our time.

In India, the government has tried for decades to get cheap food to the poor. Cost-benefit analysis has led many to declare it a failed policy. But the fault lies with the program’s method, which is to rely on the state both to collect the food from farmers and to deliver it to the poor. Around 45% of food grain leaks out and disappears in this process. This means that the program’s leaks need to be repaired, not that the entire scheme should be abandoned. A carefully designed public-private partnership – in which the state gives a subsidy directly to the poor, who then buy food from private farmers and traders – would benefit all.

Obviously, when the poor have more (and healthier) food, their nutrition improves; when better-nourished people go to school, they become more productive; the same is true of health services. Overall economic growth is important, but the poor should not have to wait until its benefits trickle down to them; with the right anti-poverty policies, governments can encourage trickle-up growth as well.

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    1. CommentedKP Vinod

      a small addition to my previous comment. That the targeting mechanism whether private or public is a larger debate - that we cannot wait to address and should try all mixed measures that "deliver" the intended benefit.

    2. CommentedKP Vinod

      I think that it is amply evident in India that waiting for trickle down effects of growth will not suffice and is a gradualism promoted by those who have never experienced competing in a market driven growth economy on a hungry stomach.

      The larger problem is one of integrity. In India where integrity was a political non-issue till the very recent past, any expansion of a welfare program is a dog-whistle to the political and bureaucratic class that announces another expansion of schemes with the possibility of greater pilferage.

      By Kaushik Basu's own statistic if the the diversion from a scheme is close to 50% on a scheme that has a high rate of awareness - we still do not have a political party (or Economist) that believes that tightening the scheme in itself will result in close to 100% increase in coverage (offcourse thats a pipe dream!)

      The penicillin example is slightly misplaced as an example of deductive logic, but what is said regarding the food distribution scheme per se is bang on target - notwithstanding the gaping integrity issue.


    3. CommentedEdward Ponderer

      As the old saying goes, when there is a will, there is a way. And never was there a truer double-edged sword. The will is bound up with human ego. Communism thought to control it with a gun, Capitalism with a bribe -- and its made a monkey out of both systems. Shall the political hacks at the UN really accomplish their show-piece target? No doubt the governments and various bureaucracies all the way down the line to the very last petty corrupt official. No, the will of unbridled ego is to steal every last penny of the pie--how well-drawn indeed is the articles illustration! If we are to change that will, we must change that ego -- it must come to realize the consequences of a globalizing world with its ever-deepening interdependence. Where investment must take place is in the realm of behavioral economics--the study and rebuilding of basic human relationships. Integral education, not just in general subject manner, but in how people and whole societies need to integrate--actually how we globally get the next generation to think and feel in these terms, and then use the power of the media environment to press for such new values as mutual responsibility, must be the preliminary step. How long shall we continue to try to build skyscraper on foundations of quicksand. How many times, with harder and harder falls to the pavement must we play the monkey ever slipping on the same banana peel?

    4. CommentedZsolt Hermann

      I fully agree with the writer. The situation raises multiple questions/matters. 1. The most important matter which can fully dismiss the ideology of the "growth camp" is that the present constant quantitative growth model has no future anyway, as it is unnatural and as such it is unsustainable in a closed and finite natural system. So as there will be no further quantitative growth there will be no trickling either. Moreover even those that are at the tip of the pyramid today will fall much lower when the present excessive and artificial bubbles start bursting. 2. The second matter is motivation. It is very nice to talk about sharing, but people need to be motivated to do so. As we see from history motivating people by moral ideals, by force or trickery simply does not work. The only motivation that is sustainable is a positive one, when people do something because they expect benefit from the action. Today we possess all the necessary transparent, scientific information to help people understand we al are part of the same, global, integral system, as if sitting and sailing on the same boat. In such an integral system all components are necessary and crucial for the optimal function of the system and the health and prosperity of the individual is directly dependant on the health and prosperity of the whole. Those who contribute the most still receive their just share but nobody could twist the system in a way that they gain extra over what they deserve. We are ahead of historic changes and it is crucially important we all understand where we are, what the principles of our new conditions are so we can adapt to them pro-actively in advance in full awareness.

    5. CommentedProcyon Mukherjee

      Amartya Sen's book, "Uncertain Glory" brings out a very blatant statistics that bringing children to primary school is itself not good enough, although it could be the first step. The Math is simple, child attendance is 65% and teacher attendance is 70%, the number of holidays in the year runs into 100 days and number of hours of studies in a day is averaging 4.5 hours. This leaves just about 85 days of schooling in a year. But add to it what the children actually do during the day, for example in a Math class the children are given tables to memorize, which engages them without any meaningful impact, or poems are memorized in the language class, etc. It is a long way to go to get actual education being imparted that would change lives of people to come out of poverty; doling out food is just a very elementary step, which however is a case of debate still now on the methods that would work.

    6. CommentedWayne Davidson

      Economics, a paradox of empirical analyses that has habituated governments to the flawed economics of GDP, an untenable globalized measurement that has led to the unprecedented immiseration of human capitol in first world countries. "The power to be habituated to his surroundings is a marked characteristic of mankind. Very few of us realize with conviction the intensely unusual, unstable, complicated, unreliable, temporary nature of the economic organization" John M Keynes.