Introduction:

“What Is Poverty and Who Are the Poor? ”

1,400,000,000 $1.25/day

1 Billion People Live in “Extreme Poverty”World Bank

1,000,000,000 $1.00/day

World Bank 2010

Economic Terminology

• Income• Wealth• GDP (Gross Domestic Product)• Per capita GDP

Why do we use GDP to measure poverty?

Economic Terminology

• Absolute Poverty – measured against a designated minimum threshold of material well-being. The incomes of the poor fall below the minimum threshold. – Current standard = $1/day PPP

• Relative Poverty - identified by comparing levels of material well-being experienced by different individuals or groups, rather than by comparing the level of well-being to a standard.

Consumption Measure of Number of Poor by World Region

Poverty Can Be Measured by Either Output (GDP) or Consumption

Regions 20005 2008  

East Asia and the Pacific 332 million 284 million 

Eastern Europe and Central Asia

6 million 2 million  

Latin America and the Caribbean

48 million 37 million  

Middle East and North Africa

11 million 9 million  

South Asia 598 million 571 million  

Sub-Saharan Africa 395 million 386 million  

 

Total 1.39 billion 1.289 billion  

Reduction in number of poor, 2005-2008: 101 million  

Sources: World Bank Poverty and Inequality http://www.worldbank.org/Data/Views/Reports/TableView.aspx (May 1,2012

Countries of the World; Low, Middle and High Income

The number of extreme poor has declined by 500 million

since 1981

Share of World Population in Poverty, 1820 – 1998 ($1/day)

World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.”  unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27

Number of People Living on Less Than $1 Per Day, 1820 - 1998

1980

World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.”  unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27

World Bank 2009

• ..\..\..\Videos\RealPlayer Downloads\Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The Joy of Stats - BBC Four.flv

Height Is a Proxy for Economic Well-Being

~1750

Years of Life Expectancy at Birth

PlaceMiddle Ages

Select Years 1950-55 1975-80 2005-10

France ~30 (1800) 66 74 81

UK 20-30 ~36(1799-1803)

69 73 79

India 25(1901-11)

39 53 64

China 25-35(1929-31)

41 65 73

Africa 38 48 51

World 20-30 46 60 67

Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (2011); UNDP (2002) http://hdr.undp.org/statistics/data/indic/indic_1_1_1.html

Real Gross Domestic Product Per Capita (1990$ International PPP)

Area 1000 1500 1700 1820 1952 1995 2001

Europe $400 ~$640 870 1,130 4,370 13,950 19,256

USA 600 1,260 10,650 23,380 27,948

India 530 530 610 1,570 1,957

China 450 600 600 600 540 3,200 3,583

Africa 400 400 400 400 1,220 1,489

World 420 550 600 670 2,270 5,190 6,049

Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

Real Gross Domestic Product Per Capita (2005$ International PPP)

1995 2001 2007 2010

Europe $24,674 28,364 30,789 29,765

USA 33,903 39,602 41,260 40,650

India 1,452 1,832 2,685 3,240

China 1,849 2,868 5,239 6,810

Africa 1,498 1,589 1,914 2,022

World 7,037 7,955 9,535 9,869

Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

Number of People Living on Less than $1.25/day(millions)

1981 1990 1999 2005 2008

East Asia & Pacific

1,096 926 656 332 284

Sub-Saharan Africa

205 290 376 395 386

Source: World Bank Poverty and Inequality Databasehttp://databank.worldbank.org/Data/Views/Reports/TableView.aspx (April 30, 2012)

The Good News and The Bad News

Poverty has declined according to China’s and India’s poverty lines

0

100

200

300

1977-78 1987 1993 1999

Millions of people

India

China

David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.”  unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 24.

What does Capitalism

have to do with Poverty?

21

Measurement: Fraser Institute

Economic Freedom:

• Size of government and taxation• Protection of private property and the rule of

law• Soundness of money• Trade regulation and tariffs• Regulation of business, labor and capital

markets

22

Background: Economic Freedom Project

• 25 year project

Transparency is a highly valued part of the project

• Based entirely on third party data from World Bank, International Monetary Fund (IMF), Global Competitiveness Report, etc. (based on both objective and survey data)

We rank 141 countries representing 95% of the world’s population according to the extent to which they permit their citizens to be economically free

Per Capita Income and Economic Per Capita Income and Economic Freedom QuartileFreedom Quartile

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

GD

P P

er C

apit

a (p

pp

), 2

009

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

Most Free ……………. Least FreeMost Free ……………. Least Free

Sources: The Fraser Institute; The World Bank, World Development Sources: The Fraser Institute; The World Bank, World Development Indicators, Indicators, 20112011

Overall Economic Freedom Index: Top Ten

0 2 4 6 8 10

Score (out of 10)

Hong Kong

Singapore

New Zealand

Switzerland

Australia

Canada

Chile

United Kingdom

Mauritius

United States

Source: The Fraser Institute 2011.Source: The Fraser Institute 2011.

Overall Economic Freedom Index: Bottom Ten

0 2 4 6 8 10

Score (out of 10)

Chad

Burundi

Congo, Rep. Of

Guinea-Bissau

Central Afr. Rep.

Congo, Dem. R.

Angola

Venezuela

Myanmar

Zimbabwe

Source: The Fraser Institute 2011.Source: The Fraser Institute 2011.

Per Capita Income and Economic Per Capita Income and Economic Freedom QuartileFreedom Quartile

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

GD

P P

er C

apit

a (p

pp

), 2

009

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

Most Free ……………. Least FreeMost Free ……………. Least Free

Sources: The Fraser Institute; The World Bank, World Development Sources: The Fraser Institute; The World Bank, World Development Indicators, Indicators, 20112011

27

Most Free …………….. Least FreeMost Free …………….. Least FreeSources: The Fraser Institute; The World Bank, World Development Indicators, 2011.Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.

Income Share of the Poorest 10% and Economic

Freedom

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Inco

me S

hare

Held

by

Lo

west

10%

, 1990-2

009

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile

Income of the Poorest 10% and Economic Income of the Poorest 10% and Economic FreedomFreedom

$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000

Inco

me

of

the

Lo

wes

t 10

%,

1990

-200

9

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile

Most Free ……………. Least FreeMost Free ……………. Least Free

Sources: The Fraser Institute; The World Bank, World Development Indicators, Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.2011.

29

Most Free ……………..…… Least FreeMost Free ……………..…… Least FreeSources: The Fraser Institute; The World Bank, World Development Indicators, 2011.Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.

Growth in Real GDP Per Capita (developing nations) and Economic Freedom Quartile

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

GD

P P

er

Ca

pit

a %

Gro

wth

,

19

90

-20

09

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

30

Most Free ……………. Least FreeMost Free ……………. Least Free

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.

Life Expectancy at Birth and Economic Freedom

Quartiles

0

20

40

60

80

Yea

rs

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

31

Most Free …………………. Least FreeMost Free …………………. Least Free

Sources: The Fraser Institute; New Economic Foundation (2009), The (un)Happy Planet Sources: The Fraser Institute; New Economic Foundation (2009), The (un)Happy Planet Index 2.0. Why good lives don't have to cost the Earth.Index 2.0. Why good lives don't have to cost the Earth.

Economic Freedom and Life Satisfaction

Higher values indicate higher levels of satisfaction

0.01.02.03.04.05.06.07.08.0

Lif

e S

atis

fact

ion

(o

ut

of

10)

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

32

EFW mapEFW map

Economic Growth

improves the lives of the poor by making the pie bigger

Bigger “slices” mean higher standards of

living

C:\Users\Public\Desktop\Gapminder Desktop.lnk

Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction.

• Private Property Rights• Rule of law• Open, competitive markets• Entrepreneurship and innovation

Proposition:

A nation’s institutions determine its ability to reduce poverty.

Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction.

• Private Property Rights• Rule of law• Open, competitive markets• Entrepreneurship and innovation

Proposition:

A nation’s institutions determine its ability to reduce poverty.

Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction.

• Private Property Rights• Rule of law• Open, competitive markets• Entrepreneurship and innovation

Proposition:

A nation’s institutions determine its ability to reduce poverty.

Lesson 2: “Property Rights and the Rule of Law”

Property RightsProperty Rights benefit the poor by making

owned capital secure and productive.

Formal Legal Characteristics

• Definable• Enforceable• Transferable

An Important Note

• The term “Property Right” is shorthand for Human Rights.– The right to freely use and transfer possessions

including yourself.

• People, Not Property.– Recognition of people’s right of ownership to

themselves and their labor.

Defined but not Enforced

• A right that is defined but not enforced is useless.

defending & enforcing Property Rights is paramount

Property Rights and Growth

• Property Right holders have an incentive to preserve their property.

• Owners consider the future.• Owners will improve a property.

– The value of improvements reside with the owner.

Investment

• Secure property rights make investment more likely.

• Property Rights allow people to obtain debt.– Use of past and future incomes.– Collateralization is of greatest benefit to the poor.

Property Rights and the Poor

• Property Rights are of the greatest benefit to the poor.– The rich can enforce rights over their property.– The poor cannot.

• The definition and enforcement of Property Rights gives the poor the same right enjoyed by the rich.

• Secure property rights also contribute to economic growth by enabling the poor to shift effort from protective to productive activities.

Enforcing the Rules

• Rule of Force– Anarchy

• Rule of Men– Laws are enforced at the good will of the enforcer.

• Rule of Law– Both the governed and the governing are ruled by the

same laws.

Big Picture

• Rights to property promote economic growth by encouraging preservation, improvement and investment in owned resources.

• In societies without clearly defined property rights the poor are disadvantaged because they lack the resources to enforce their rights.

Big Picture

• To effectively stimulate economic growth property rights must exist within a society characterized by stable and predictable rules of law.

Lesson 3: “Competition Opens Markets to the Poor”

The Role of Competition

To Compete or Not?

The question is not whether we

shall have competition, but what

forms it will take.

- Paul Heyne• Competition will always occur.

– Scarcity• We cannot fulfill all our wants at no cost.

Non-Market Competition

• What determines participation?– Connections– Wealth– Etc.

• What determines production?– No effective production signals.– No effective incentives to innovate.

Market Competition

– Suppliers compete with Suppliers.– Demanders compete with Demanders– All are trying to Maximize Profits

• Profits draw a crowd

– It is about increasing revenue and lowering costs.

Revenue and Costs

• Since demand curves slope downward, for producers, there are three ways to increase profits.– Sell more at lower prices.– Lower costs– Innovate new goods that can command a premium.

Prices and Production• Prices are determined by the interaction of the Supply and Demand for a good.

D

S

Pe

Qe

D

S

Pe

Qe

P2e

Q2e

An Increase in the Supply of a good increases quantity traded and lowers price

More Sellers More Supplied at Lower Prices

Innovation = Lower Costs = Increased Supply

$$$$$

$$$

$

2 31

$$$$$

$$$

$

2 31

Graphing calculator

Communications

ConstructionEngineering

Opportunity

• The greatest impact on the poor comes from the opportunities that competitive markets provide.– Employment – Increased output – increased labor

usage.– Entrepreneurship – The poor can get in the game –

not restricted to approved classes.

Case Study – Opening Markets in China

1977-78 • 250 million Chinese peasants with incomes below

the country’s official poverty line of approximately 70 cents (U.S.) per day.

• 600-700 million Chinese living on less than $1 per day, the commonly used international poverty line.

• Most of the population were peasants, herded together into communal farms. This system produced very poor economic results with widespread poverty and periodic famines.

Case Study – Opening Markets in China

1978• Economic reforms begin: limited property rights and

open markets • Communes were broken up and families given

individual plots of land and families were allowed to sell some of their output in farm markets.

• The right to enter the market with their produce drastically changed the incentives facing Chinese farmers.

• This institutional reform led to a dramatic surge in grain production in China and fueled spectacular poverty reduction.

Decline in Numbers of People Living Below the Poverty Line in China, 1977 – 1999

0

100

200

300

1977-78 1987 1993 1999

Millions of people

The Big Picture

• Competition and Markets benefit the poor by– Providing more goods at lower prices.– Increasing the quality and variety of goods available.– Providing opportunities for work.– Stimulating entrepreneurial activities.– Unleashing the talent and abilities that were always

there.

Economic Growth Overcomes Poverty

Markets create wealth and foster economic growth

Conclusions and Caveats

Provide the Framework and Incentives for the Creation of Wealth

•Property Rights•Rule of law•Competitive markets•Entrepreneurship / Innovation

Institutions of Capitalism

Questions that Remain

Unequal Income Distribution

Income Mobility

Individualism of Property Rights

Barriers to the Institutions of Capitalism

Institutions of Capitalism

The Mix

Importance of the Rule of Law

Capitalism and Markets

•Lock us in mutual dependence

•Promote other regarding behavior

•Foster a civil society where anonymous cooperation is the norm

•Benefit the poor in ways that are most important to them, providing

Wealth, Dignity, and Mobility