Transcript The End of Poverty Ellen Bishop Mihaela Carstei Loveena Dookhony

The End of Poverty
Ellen Bishop
Mihaela Carstei
Loveena Dookhony
Sarah Falvey
Erica McCarty
Lidia Villalba-Van-Dijk
January 30th, 2007
A Global Family Portrait
• Malawi
• “the poorest of the poor” or “the extreme poor”
• Roughly 1 billion people
• Fighting for survival each day
• Bangladesh
• “The poor”
• Roughly 1.5 billion people
• Chronic financial hardship and lack of basic amenities
• Extreme poor + poor = 40% of world population
A Global Family Portrait
• India & China
• “Middle income households” by developing world
standards
• Approximately 2.5 billion people
• High income world
• The remaining 1 billion people
• Good news:
• Half of the world is experiencing economic progress!
• Bad news:
• 1/6th of humanity is not even of the development ladder
Our Generation’s Challenge
• “End of poverty”
1. End the struggle of those that live in extreme poverty
2. Ensure that all of the world’s poor have a chance to
climb the ladder of development
• Bold but achievable goals:
• Meet the MDGs by 2015
• End extreme poverty by 2025
• Ensure well before 2025 that ALL countries make
reliable progress up the ladder of economic development
• Accomplish the above goals with modest financial help
from rich countries
• Aid within the bounds of what they already promised
How We Got Where We Are
• The gulf between the rich and the poor is a new
phenomenon
• 3 main points stand out
• All regions were poor in 1820
• All regions experienced economic progress
• Today’s rich countries experienced by far the greatest
economic progress
• Why different regions grew at different rates?
• It is not the transfer of income but rather the overall
increase in world income
• Unprecedented long-term increases in total production
• How? → Industrial Revolution
Why Was Britain First?
• British society was relatively open
• Britain had strengthening institutions of political liberty
• Britain became one of the leading centers of Europe’s scientific
revolution
• Britain had several crucial geographical advantages
• Britain remained sovereign and faced lesser risk of invasion than
its neighbors
• Britain had coal!
200 Years of Modern Economic Growth
• The richest countries were able to achieve 2 centuries of
modern economic growth
• The poorest did not even begin their economic growth
until decades later
• The key point is that there are practical solutions to
almost all of their problems
• Past bad policies can be corrected
• The colonial era is truly finished
• Geographical obstacles can be overcome with technology
• Yet, there is no single explanation for why certain parts
of the world remain poor
THERE IS NO SINGLE REMEDY!
Why Some Countries Fail to Thrive
• Factors that can lead to reduction of income (Micro-Level)
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Lack of Savings
Absence of Trade
Technological Reversal
Natural Resource Decline
Adverse Productivity Shock
Population Growth
• Factors that can prevent economic growth (Macro-Level)
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Poverty Trap
Physical Geography
Fiscal Trap
Governance Failures
Cultural Barriers
Geopolitics
Lack of Innovation
Demographic Trap
Why Some Poor Countries Grew and
Other Declined
• Asia vs. Africa
• Food Productivity
• Asia densely populated vs. Africa sparsely populated,
establishing food networks, etc.
• Better initial social conditions
• Higher literacy, lower infant mortality, lower fertility rates
in Asia
• Higher overall population tend to do better than
smaller populations
• Better opportunity to expand economy
Clinical Economics
• Sach’s framework for approaching the economic
problem Correct Diagnosis
• Similarities between clinical medicine and good
development economics
• Five Key Lessons:
• Economies are complex systems
• Economists need to learn art of different diagnosis
• Clinical economics should view treatment in “family”
terms, not just individual terms
• Development practice requires monitoring and
evaluation, including rigorous comparison of goals and
outcomes
• Development community lacks requisite ethical and
professional standards and must provide deep
commitment to right answers
Clinical Economics: Differential Diagnosis for
Poverty Reduction
• Before diagnosing the appropriate treatment,
economists must properly identify it through
checklist, with following categories:
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Extent of Extreme Poverty
Economic Policy
Fiscal Framework
Physical Geography and Human Ecology
Patterns of Governance
Cultural Barriers to Economic Development
Geopolitics
Bolivia’s High-Altitude Hyperinflation
• Bolivia’s hyperinflation caused by government printing money to finance
large budget deficit, borrowing from Bolivian Central Bank driving
down value of currency and driving up price of goods, so population had to
sell pesos on black market for dollars
• 5,000 pesos per dollar in Jan. 1983, 10,000 by Jan. 1984, 250,000 by Dec. 1984,
and 2 mill by July 1985 (Inflation over 24,000 percent)
• Problem diagnosed as government revenue dependent on tax on oil,
however, oil prices only raised periodically so revenue prices declined in
value Solution: One time increase in oil prices, along with package of
fiscal measures, when implemented it instantly stabilized prices
• However, problem deeper. Tin market dissolved: important source of jobs
and taxes for state
• Hyperinflation returned after Central Bank was unable to account for
double salaries in December inflation. Solution: CB sell FX reserves
into currency market, leading to strengthening of peso.
Bolivia’s High-Altitude Hyperinflation
• Underlying problems in Bolivia:
• Collapse of tin prices eating away at budget and macroeconomic
stability
• Debt Crisis
• Problems with IMF team. End solution: Bolivia’s refusal to pay Debt
cancellation
• Tax Reform
• Solution: Tax upper-class land owners
• Social Inequality
• Partial Solution: Establish emergency social fund to address social issues
• Geography: land locked and high transportation costs
• Lessons learned
• Stabilization is complex process
• Macroeconomic tools are limited in power
• Successful change requires combination of technocratic knowledge, bold
political leadership and social participation
• Financial Assistance required from abroad
• Poor countries must demand their due
Poland and its Problems
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High debt no longer being paid
Hyperinflation
Political crisis
Black markets
Smuggling
Shortages
Large budget deficits
Unstable currency
June 4, 1989—first partially free elections, reformist
Solidarity party took control
Sachs' Recommendations
• Reunite Poland with the rest of Europe – this
requires a "mixed economy"
• Trade in the market with Europe
• Adopt laws and institutions of Western Europe to
eventually become part of the EC
• Excessive stabilization program for currency
• Negotiate for cancellation, as Bolivia had in 1987.
5 Pillars of Sachs' Program
• Stabilization
• Liberalization
• Privatization
• Social safety net
• "Institutional Harmonization"
Results
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Currency was steeply devalued and pegged at 9,500Z/$
New laws allowing private companies
Trade barriers were eliminated
Increase in foreign investment from Western Europe
This initial growth, Sachs argues, was the first case of post
communist growth in Eastern Europe
• Still there was the matter of the large Polish debt
• "The gains to reform had to accrue to the Polish people, not
to Poland’s foreign creditors."
• After much difficult negotiation with the US and other
foreign countries, 50% of Poland’s debt was cancelled,
roughly $15 billion
Russia and its Problems
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Huge black market
Shortages
Spiraling inflation
Very similar to Poland's problems the year
before
Complete reliance on oil and gas exports for
foreign exchange
World price of oil plummeted in the late 80s
Depletion in oil fields and lack of investment in
new fields
More borrowing
Differences in Russia
• Larger scale of problems than Poland
• Stronger communist stranglehold
• 1,000 years of autocracy, not just communist–no
democratic memory
• Huge geographical, religious, linguistic, and
cultural distances within Russia and between
Russia and the west
• No "return to Europe" as an end-goal
• No one in Russia had any western training or
even travel
Goals
• Price decontrol, currency convertibility, and market
liberalization were needed, but would be far from
sufficient
• As in Poland, stabilization of the ruble, and
cancellation of debt
• 4 steps Sachs advocated for:
• stabilization fund for the ruble, just like in Poland
• Sachs argued for 15 separate national currencies for each
former Soviet republic.
• debt forgiveness
• enhanced aid programs
Results
• International trade only partially opened
• Currency only partially converted
• No monetary stabilization whatsoever
• Rampant inflation
• Sachs argued his policies didn't work because necessary people
weren't on board.
• If this is what needs to get done, how do we get the necessary
people on board?
Economic Boom in China
• Began after Mao's death and ascension of Deng Zhao-Ping in the
late 1970s
• Since then China has been growing at a rate of almost 8%/year
• Average income per person doubled every 9 yrs
• Drop from 64 to 17% of people living in extreme poverty
• 1992 Chinese economists were plotting economic reform and
institutional change
• they wanted information on Eastern Europe's recent revival
• the government was critical of Eastern European reform because
it used market mechanisms to replace central planning
1979
• Overnight, farms were assigned to the household instead of the
state
• Incentives to work harder
• Higher food yields
• Further reform 1980s and 90s
• Peasants could leave farm to work in industry
• International trade and investment was opened up
• Export boom in garments, textiles, footwear, plastics, toys, and
electronics
• Increase in FDI
• capital flows from western capitals
• money from Chinese exiles living abroad
• money from Hong Kong
• State enterprises were not privatized at this time, only partially
liberalized
Differences between China and Eastern
Europe
• No huge debt in China as in Russia and Poland
• Export-led growth in china because of coastlines that were not
available in eastern Europe
• Overseas Chinese expatriates invested in the emerging economy
• Russia heavily reliant on gas and oil, whose stocks were
decreasing
• Eastern European economies were already highly technical
whereas china was not
• All of these made reform harder in eastern Europe than china
Continuing Problems in China
• Isolation geographically from other
countries
• Poor health care
• Poor environmental protection
• Young population that will soon press for
more political reform
India’s Market Reforms
• History of India
• Moguls vs. Maharajahs
• East India Company in 1602
• British Raj- Divide and rule
• India after British Colonialism
• Illiteracy
• Low life Expectancy
• Repeated famines and epidemics
India after Independence
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Nehru- Democratic Socialism
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State Controls
Economic Breakthrough
• Green Revolution in 1960s
• Market Reforms in early 1990s
• IT Revolution in mid-1990s
Current Main Challenges
• Key Sectors confined to some old systems
• Infrastructure still poor in rural areas
• More investment in Health and Education
• How to finance these projects
• India currently growing very rapidly- “likely to
reshape global politics and society”
Africa and Disease
• Misconception: Corruption is root cause
• IMF/WB policies failed miserably
• Exploitation of Africa
• No Long-term Econ. Development
Causes of African Poverty
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Not only corruption
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Not only Colonial legacy
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Good Governance and Market Reforms are not
enough
Constant Disease and Death in Africa:
1. MALARIA
2. AIDS
Diseases in Africa
MALARIA
• Malaria is treatable- 3 millions die annually
• Environmental factors
• Malaria
Poverty?
AIDS
• misconception: Africans are promiscuous
What has been done?
• Not a lot Global Fund
Current
• Global Fund
“AFRICA’S PROBLEMS ARE DIFFICULT BUT SOLVABLE”
The Millennium, 9/11 and the UN
• Millennium: Let’s eradicate poverty
• Post 9/11: War on terrorism
• “Weapons of Mass Salvation”
• 3000 people died on 9/11: 10,000 Africans die
tragically every day
• MDGs: 8 goals with measurable outcomes to
monitor poverty
On-the-ground solutions for ending poverty
Meeting the rural poor: Suari, Kenya
• Meeting with +200 members of the community.
• Findings and challenges:
• Difficulties in agriculture: e.g. nutrient depleted soils & erratic
rainfalls
• Poor health: e.g. endemic malaria & HIV/ AIDS
• Lack of access to other basic services: education, electricity,
cooking fuels, transport, communications (isolation)
Meeting the rural poor: Suari, Kenya
• The Big Five development interventions:
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Agricultural inputs
Investments in basic health
Investments in education
Power, transport & communication services
Safe drinking water & sanitation
The costs of these services would be very low: $350.000 per year
or roughly $70 per person per year in Sauri.
 Soon the investments would repay themselves in lives,
education, etc, but also in commercial returns.
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Ensure good governance & decrease in corruption
Making the investments needed to end poverty
The extreme poor lack six major kinds
of capital (poverty trap)
• Human capital
• Business capital
• Infrastructure
• Natural capital
• Public institutional capital
• Knowledge capital
 Decrease in the ratio of capital per person,
which leads to the poverty trap.
How the poverty trap works and how
foreign aid helps overcome it
• Figure 1: Basic mechanics of capital accumulation.
• Figure 2: The poverty trap
• Figure 3: The role of ODA in breaking the poverty
trap.
 Importance of INCREASING RETURNS to
capital (e.g. roads). Capital stock becomes useful
only when it meets a minimum standard.
A global compact to end poverty
Millennium Development Goals-Based
Poverty Reduction Strategy
• To handle a much greater flow of resources:
• A Differential Diagnosis, which identifies policies and
investments needed for MDG
• An Investment Plan, which shows size, timing and costs
• A Financial Plan, i.e. financial needs (incl. MDG Financing Gap)
• A Donor Plan, which gives multiyear donor commitments
(predictability & harmonization)
• A Public Management Plan, which outlines mechanisms of
governance and public admin.
Global Policies for Poverty Reduction
• At the global level (cannot be solved at national
level), four needs to be addressed:
• The Debt Crisis: rich countries should have given grants rather
than loans (e.g. Marshall)
• Global Trade Policy: reduce trade barriers, but:
• Wrong slogan of “trade not aid”
• Agricultural liberalization will not be a panacea
• Science for Development: poor are ignored by the scientific
international community
• Environmental Stewardship
Roadmap for End of Book
• Can the rich afford to help the poor?
• Myths and Magic Bullets
• Why we should do it
• Our generations challenge
Can We Afford to Help the Poor?
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Five reasons why the level of help needed is
modest
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Level of the world’s extremely poor has decreased
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Goal is to eradicate extreme poverty
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Success will be much easier than it appears
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The rich world today is so vastly rich
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Our tools are more powerful than ever
Most of the Aid Given is Wasted
Function
Amount
Debt relief
$6 billion
Loan repayment
$11 billion
Help middle-income countries
$59 billion
Total Aid given globally
$76 billion
Myths and Magic Bullets
• Africa
• “Money down the drain” argument
• Aid programs would fail in Africa
• Corruption is the culprit
• A democracy deficit
• Lack of modern values
Why We Should Act
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Stability
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Security
Because we promised
• Conferences where the US was a signatory
1. Rio Summit of Sustainable Development (‘92)
2. Monterrey Consensus (’02)
3. World Summit on Sustainable Development (‘02)
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Rebalancing Foreign Policy
1. The Marshall Plan
2. Jubilee 2000
3. Emergency Plan for AIDS
Where Do We Go from Here?
• Commit to Ending Poverty
• Adopt a Plan of Action
• Raise the Voice of the Poor
• Redeem the Role of the US in the World
• Rescue the IMF and World Bank
• Strengthen the UN
• Harness Global Science
• Promote Sustainable Development
• Make a Personal Commitment
Thank you!