Introduction Part 1: “What Is Poverty and Who Are the Poor? ”

Introduction Part 1:

“What Is Poverty and Who Are the Poor? ”

Introduction:


1,300,000,000 $1.25/day

People Living in “Extreme Poverty”World Bank

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

http://www.worldbank.org/Data/Views/Reports/TableView.aspx

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 unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27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 unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27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

Introduction Part 2:


~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

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 2012*

Europe $24,674 28,364 30,789 29,765 30, 455

USA 33,903 39,602 41,260 40,650 49,965

India 1,452 1,832 2,685 3,240 3,876

China 1,849 2,868 5,239 6,810 9,233

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

World 7,037 7,955 9,535 9,869 10,922

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

Africa Continues to Lag Behind: 1/3 of the world’s “extremely poor”

What does recent research tell us about why Africa continues to lag behind – and what we can do about it?

What does Capitalism

have to do with Poverty?

Overall Economic Freedom Index and the Overall Economic Freedom Index and the Top 10Top 10

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

0 2 4 6 8 10

Score (out of 10)

Hong Kong

Singapore

New Zealand

Switzerland

Unit. Arab Em.

Mauritius

Finland

Bahrain

Canada

Australia

Overall Economic Freedom Index and the Overall Economic Freedom Index and the Bottom TenBottom Ten

0 2 4 6 8 10

Score (out of 10)

Algeria

Congo, Dem. R.

Burundi

Central Afr. Rep.

Angola

Chad

Zimbabwe

Congo, Rep. Of

Myanmar

Venezuela

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

Per Capita Income and Economic Freedom Per Capita Income and Economic Freedom QuartileQuartile

$0$5,000

$10,000$15,000$20,000$25,000$30,000$35,000$40,000

GD

P P

er C

apit

a (p

pp

), 2

010

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, Sources: The Fraser Institute; The World Bank, World Development Indicators, 20132013

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

Growth in Developing Nations Per Capita and Growth in Developing Nations Per Capita and Economic Freedom QuartileEconomic Freedom Quartile

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Gro

wth

GD

P p

er

ca

pit

a

(av

era

ge

an

nu

al

%),

19

91

-

20

11

Least FreeQuartile


Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.


%

Income Share of the Poorest 10% and Income Share of the Poorest 10% and Economic FreedomEconomic Freedom

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Gro

wth

GD

P p

er

cap

ita

(avera

ge a

nn

ual

%),

1991-2

011

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile



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

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Inco

me o

f th

e L

ow

est

10%

, 2011

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.2013.


Economic Freedom and Political RightsEconomic Freedom and Political Rights(low scores indicate high level of rights) (low scores indicate high level of rights)

0.0

1.0

2.0

3.0

4.0

5.0

Po

litic

al R

igh

ts (

ou

t o

f 7)

Least FreeQuartile


Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2011, Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2011, available at http://www.freedomhouse.org/.available at http://www.freedomhouse.org/.


Economic Freedom and Civil RightsEconomic Freedom and Civil RightsLow scores indicate high level of rights Low scores indicate high level of rights

0.0

1.0

2.0

3.0

4.0

5.0

Civ

il L

iber

ties

(

ou

t o

f 7)

Least FreeQuartile


Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2011, Sources: The Fraser Institute; Freedom House, Freedom in the World Country Ratings, 2011, available at http://www.freedomhouse.org/.available at http://www.freedomhouse.org/.


Economic Freedom and CorruptionEconomic Freedom and CorruptionHigh scores indicate low corruptionHigh scores indicate low corruption

0102030405060708090

100

Co

rru

pti

on

Ra

tin

g

(ou

t o

f 1

00

)

Least FreeQuartile


Sources: The Fraser Institute; Transparency International, Corruption Perceptions Index, Sources: The Fraser Institute; Transparency International, Corruption Perceptions Index, 2012 available at http://www.transparency.org.2012 available at http://www.transparency.org.


Economic Freedom and Life SatisfactionEconomic Freedom and Life Satisfaction

3.03.54.04.55.05.56.06.57.0

Lif

e S

atis

fact

ion

o

f o

f 10

Least FreeQuartile


Sources: The Fraser Institute; Happy Planet Index 2012Sources: The Fraser Institute; Happy Planet Index 2012


Economic Growth

improves the lives of the poor by making the pie bigger

Bigger “slices” mean higher standards of

living

Reduced Poverty Since 2000:Research on Growth vs. Safety Net ?

1. 4/5 growth / 1/5 redistribution (Dollar, Kraay, Kleineberg study)• context matters: averages hide wide range of variation

2. economic growth is not generally associated with increased income inequality: •the (overall) share of income going to the poorest 2 quintiles (40%) does not change significantly with growth•poor governance often increases income inequality for specific populations in specific locations

3. 4/5 of the improvements in the lives of the poorest 40% of the population over the past decade are attributable to economic growth; 1/5 is attributable to redistribution

Talking about “Is Capitalism Good for the Poor?”•distinguish between “poverty” v. “poor people” •distinguish between treating symptoms v. underlying causes


1. 75% growth / 25% redistribution (Dollar, Kraay, Kleineberg study)• context matters: averages hide wide range of variation

safety net (redistribution)

econ growth

demographic comp.



Classroom Activity – Lesson 1:

“Defining Terms”

“Capitalism” is identified by its characteristic institutions

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

Present ? Evidence?

markets

private property

rule of law

entrepreneurship

ECONOMIC ANALYSISclearly present – the component is present in the economy with few exceptionsgenerally present – the component is present in the economy, but with many or significant exceptionsgenerally absent – the component is only present in the economy in some limited formsclearly absent – the component is almost entirely excluded from the economynot enough information

United States

•The judiciary functions independently and predictably although serious constitutional questions have arisen regarding the government mandated health insurance decision. •Corruption and cronyism is on the increase and is undermining the institutional integrity of the rule of law, resulting in an 86th percentile ranking in control of corruption and a corruption perception index of 7.1 (out of 10) by Transparency International and a decrease of 4 points in the heritage Foundation score to 71 from a previous 75 in 2010. •Property rights are guaranteed, although affected by increasing regulations, ranking the US 19th in the world, with a score of 85 out of 100 by the Heritage Fndn.

https://www.cia.gov/library/publications/the-world-factbook/maps/us_largelocator_template.html

Specific Situation: Apple Patent Victory

Aug. 25, 2012 SAN JOSE, Calif.—Nine jurors delivered a sweeping victory to Apple Inc. in a high-stakes court battle against Samsung Electronics Co., awarding the Silicon Valley company $1.05 billion in damages and providing ammunition for more legal attacks on its mobile-device rivals.

Jurors Friday found that Samsung infringed all but one of the seven patents at issue in the case—a patent covering the physical design of the iPad. They found all seven of Apple's patents valid—despite Samsung's attempts to have them thrown out. They also decided Apple didn't violate any of the five patents Samsung asserted in the case.

Present ? Evidence?

markets

private property

rule of law

entrepreneurship

clearly present

clearly present

clearly present

clearly present

Prices and products determined in markets

Patents upheld

Courts act and decisions are enforced

Millions of companies operate in every sector

ECONOMIC ANALYSISclearly present – the component is present in the economy with few exceptionsgenerally present – the component is present in the economy, but with many or significant exceptionsgenerally absent – the component is only present in the economy in some limited formsclearly absent – the component is almost entirely excluded from the economynot enough information

2012 Country Scenario Updates

Capitalism is best thought of not as “a system,” but as a

continuum of institutional combinations . . . .

Less

capitalist

More

capitalist



Less

capitalist

More

capitalist



Some institutional forms confer benefits on the poor . . . and others do NOT.

Less

capitalist

More

capitalist

Heritage: www.heritage.org/index/

freetheworld.com – Index of Economic Freedom

Ranking Criteria:• Size of government• Legal system & Property rts• Sound money• Freedom to trade internationally• Regulation

1. Size of GovernmentA. Government consumptionB. Transfers and subsidiesC. Government enterprises and investmentD. Top marginal tax rate

(i) Top marginal income tax rate(ii) Top marginal income and payroll tax rate

Process: Identify quantifiable data that can be used to rank countries.

Consider how these measures connect to the institutions we ranked in the “Will the Real Capitalism?” activity:

markets, entrepreneurship

2. Legal System and Property RightsA. Judicial independenceB. Impartial courtsC. Protection of property rightsD. Military interference in rule of law and politicsE. Integrity of the legal systemF. Legal enforcement of contractsG. Regulatory restrictions on the sale of real propertyH. Reliability of policeI. Business costs of crime

rule of law, entrepreneurship, property rights

3. Sound MoneyA. Money growthB. Standard deviation of inflationC. Inflation: most recent yearD. Freedom to own foreign currency bank accounts

entrepreneurship

4. Freedom to Trade InternationallyA. Tariffs

(i) Revenue from trade taxes (% of trade sector)(ii) Mean tariff rate(iii) Standard deviation of tariff rates

B. Regulatory trade barriers(i) Non-tariff trade barriers(ii) Compliance costs of importing and exporting

C. Black-market exchange ratesD. Controls of the movement of capital and people

(i) Foreign ownership/investment restrictions(ii) Capital controls(iii) Freedom of foreigners to visit

markets

5. RegulationA. Credit market regulations

(i) Ownership of banks(ii) Private sector credit(iii) Interest rate controls/ negative real interest rates

B. Labor market regulations(i) Hiring regulations and minimum wage(ii) Hiring and firing regulations(iii) Centralized collective bargaining(iv) Hours regulations(v) Mandated cost of worker dismissal(vi) Conscription

C. Business regulations(i) Administrative requirements(ii) Bureaucracy costs(iii) Starting a business(iv) Extra payments/ bribes/favoritism(v) Licensing restrictions(vi) Cost of tax compliance

Markets, entrepreneurship

10 9 8 7 6 5

Fraser Institute Index of Economic Freedom 2013

(Released Sept. 2013)

Most Free: Hong Kong 8.97 Least Free: Venezuela 3.93

2011 data

10 9 8 7 6 5

Fraser Institute Index of Economic Freedom 2012

(Released Sept. 2012)

Most Free: Hong Kong 8.9 Least Free: Venezuela 4.07

2010 data

2013 Rankings* (Out of 151)

• Hong Kong 1• Singapore 2• NZ 3• Switzerland 4• UAE 5• Mauritius 6• Finland 7• Bahrain 8 Canada 8• Australia 10• Chile 11• United Kingdom 12• Jordan 13 (42 in 2010, 62

2012)• U.S. 17 (3 in 2006)• Israel 49 (44 in 2007, 83 in

2011)

• Poland 59 (88 in 1990, 44 in 2012)• Uganda 64 (67 in 2010, 51 in 2001,

113/113 in 1990)• Greece 85• Kenya 87• Mexico 94 (69 in 2010)• Russia 101• Egypt 108 (from high of 46, 80 in 2010)• India 111• China 123 (82 in 2010)• Iran 127• Ethiopia 142• Zimbabwe 149• Myanmar 151• Venezuela 152

*2010 Data* 2011 data

2012 Rankings* (Out of 144)

• Hong Kong 1• Singapore 2• NZ 3• Switzerland 4• Australia 5• Canada 6• Bahrain 7• Mauritius 8• Finland 9• Chile 10• United Kingdom 12• Ireland 12• U.S. 18 (down from 3 in 2006)• Japan 20• Poland 48 (88 in 1990)

• Uganda 50 (67 in 2010, 51 in 2001, 113/113 in 1990)

• Jordan 62 (42 in 2010)• Greece 81• Mexico 91 (69 in 2010)• Egypt 99 (from high of 46, 80 in 2010)• Israel 52 (44 in 2007, 83 in 2011)• Russia 95• China 107 (82 in 2010)• India 111• Iran 111• Zimbabwe 142• Myanmar 143• Venezuela 144

*2010 Data* 2010 data





safety net (redistribution)

econ growth

demographic comp.



2. economic growth is not generally associated with increased income inequality: •the (overall) share of income going to the poorest 2 quintiles (40%) does not change significantly with growth•poor governance often increases income inequality for specific populations in specific locations

3. 4/5 of the improvements in the lives of the poorest 40% of the population over the past decade are attributable to economic growth; 1/5 is attributable to redistribution

Talking about “Is Capitalism Good for the Poor?”•distinguish between “poverty” v. “poor people” •distinguish between treating symptoms v. underlying causes

Income Share of the Poorest 10% and Economic Freedom

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Gro

wth

GD

P p

er

cap

ita

(avera

ge a

nn

ual

%),

1991-2

011

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.2013.


Income of the Poorest 10% and Income of the Poorest 10% and Economic FreedomEconomic Freedom

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Inco

me o

f th

e L

ow

est

10%

, 2011

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile



Growth in Developing Nations Per Capita and Economic Freedom Quartile

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Gro

wth

GD

P p

er

ca

pit

a

(av

era

ge

an

nu

al

%),

19

91

-

20

11

Least FreeQuartile




%

Focus of lessons 2-5 in “Is Capitalism Good for the Poor?”

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

Institutions Associated with Economic Growth

Proposal Selection Form

Proposer Identification Code __________________

Circle a proposal:

19/1 18/2 17/3 16/4 15/5 14/6 13/7 12/8 11/9 10/10 9/11 8/12 7/13 6/14 5/15 4/16 3/17 2/18 1/19

If the responder accepts this proposal,

I will receive ________ and the responder will receive ________ .

If the responder does not accept this proposal, both the responder and I will receive $0.

XyZpDQ

$$$$$ $$$$$

Responder Identification Code _________________

If I accept the proposal circled above,

I will receive ________ and the proposer will receive ________

If I reject this proposal , I will receive $0 and the proposer will receive $0.

Circle either accept or reject below.

ACCEPT REJECT

123LMNO

Proposer Identification Code __________________

Circle a proposal:

19/1 18/2 17/3 16/4 15/5 14/6 13/7 12/8 11/9 10/10 9/11 8/12 7/13 6/14 5/15 4/16 3/17 2/18 1/19

If the responder accepts this proposal,

I will receive ________ and the responder will receive ________ .

If the responder does not accept this proposal, both the responder and I will receive $0.********************

XyZpDQ

$$$$$ $$$$$

$$$$$ $$$$$

What did the proposers offer?

Why?

How did they decide how much to offer?

Which offers did responders

accept? / reject?

Why?

How did responders decide whether to accept or reject an offer?

A fundamental assumption of economics is that economic man is a rational decision-

maker who acts in his self-interest.

Are the results of this activity consistent with this theory of homo economicus (economic

man)?

Why or Why not?


“Institutions That Promote Social Cooperation”


“Character Values and Capitalism”

• John Nash – 1994 Nobel Prize in Economics for his work in game theory

• Game Theory – the study of interactions in which the results of one person’s choices depend not only on his own behavior, but also on the choices made by another person.

• Vernon Smith – 2002 Nobel Prize in Economics for experimental economics, which builds on game theory.

Experimental Economics - History

“These experiments create an empirical challenge to what we call the

selfishness axiom—

the assumption that individuals seek to maximize their own material gains in these

interactions and expect others to do the same.”

(Joseph Henrich, Emory University –

recently completed a 4-continent research

project in which the Ultimatum Game

was played in 15 indigenous societies)

Purpose of Ultimatum Game Experiments

If individuals “seek to maximize their own material gains,” and assume that other people

do, too, what will proposers do?

Why?

(explain their thinking)

If individuals “seek to maximize their own material gains,” and assume that other people do, too,

how will responders react to proposals?

Why?

Results of Large Numbers of Ultimatum Game Experiments*:

• the modal (most common) split is

50% - 50%• the mean (average) split is about

60% - 40%• about 20% of low offers are rejected

*Games conducted with college students in the U.S. and other developed countries. Students were paid to participate. Stake was the equivalent of $10 U.S. Results are considered to be “robust.”

Conclusions:

The results of ultimatum games are inconsistent with the model of

economic man that predicts material self-interest (selfishness).

Note, especially, the rejection rate.

Proposed Explanations

• “Other-regarding” behavior is one of our preferences – we gain satisfaction not only from our lives (as the homo economicus model predicts), but also from the lives of others.

• Players demand fairness, and punish unfair behavior on the part of proposers. – Responders take into account not just the amount

of money offered but also the percent of the total.

Proposed Explanations (cont.)

• More equal splits may be less the result of fearing punishment for being unfair than they are the result of individuals’ concern for their reputations– This is consistent with the results of experiments

comparing the behavior of people in market and non-market economies.

– (also consistent with Adam Smith’s observations)

• Behavior in none of the 15 less-developed societies was consistent with the selfishness axiom.

• Individual differences do not explain ultimatum game outcomes– age, – gender, – socio-economic status, – risk-aversiveness, – size of the stake (up to 3 months income)

Conclusions based on continued research:

However . . .

• in the routine degree of economic cooperation in everyday lifeand

• in the degree to which markets are an integral part of society

Group Differences

are significant in explaining

experimental outcomes

Thus, we return to institutions:

1. The way people play the ultimatum game reflects the way they interact in everyday life.

2. Splits are more equal in cultures where people commonly exchange products and labor in markets.

3. Markets are institutions through which societies develop distinctive patterns of interaction, which may be internalized and reflected in ultimatum game behavior.

Suppose that someone argued that capitalism is not good for the poor because it makes people greedy and selfish and encourages them to ignore others and think only of themselves. How could you use the results of ultimatum game experiments to counter that argument?

Food for Thought (or assessment)


“Property Rights and the Rule of Law”

Property Rights ARE Human Rights

Property rights are the rights of human

beings to freely use and transfer their

possessions, including

themselves.

People People

Not Not

PropertyProperty

Property Rights: New in Human History

Benefits to the Poor

Under the rule of law, the poor can be secure in their property

rights, which gives them the opportunity to use property to

improve their well-being.

part 2:

How property rights encourage growth by providing incentives for the creation of capital.

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

Capital – dead or alive?Property Rights benefit the poor by making

owned capital secure and productive.

Property Rights and Growth

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

• Owners consider the future.• Owners more likely to improve property

– because they retain the value of the improvements

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.

Greater Security = Greater Productivity

• Property rights benefit the poor more than the rich (who can defend their own property rights)– definition and enforcement of Property Rights

gives the poor the same rights enjoyed by the rich.

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

Secure Property Rights

• Defined• Defensible• Divestible

India’s Dalits: “Untouchable”

Informal restrictions on property rights

Defined but not Enforced

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

Property Rights . . . AND the Rule of LawAND the Rule of Law

• Rule of physical force (anarchy)• Rule of men• Rule of law

Securing Property Rights

Rule of Physical Force

Defined Seldom and then not clearly

Defended Only for those with the physical force to do so or the money to pay someone else

Peaceful divestiture Peaceful transfer uncommon – even through inheritance

Characteristics of Property Rights Under Anarchy

Rule of Man

Defined Sometimes – but often irrelevant or ignored

Defended Only for those who have the favor of those in charge

Peaceful divestiture Subject to the wishes of those in power

Characteristics of Property Rights Under Rule of Man

Formal laws may exist, but enforcement is subject to the whim of those in power

Rule of Law

Definition clear

Defendable Yes – both publicly and privately

Divestible Peaceful transfer routine

Characteristics of Property Rights Under Rule of Law:

Both the governed and the governors are subject to the law.

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.

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


“Property Rights and the Rule of Law”

Importance of Property Rights to Economic Growth and to the Well-being of the Poor

Para, BrazilAmazon Basin

Focusing the Research: The Role of Property Rights in Reducing Poverty

We KNOW:• Economic growth is the key to reducing absolute

poverty and raising standards of living.• One source of economic growth is increased

productivity, the ability to increase output per unit of resource input.

• Productivity is increased through investment in human and physical capital

• People invest in their human capital by getting education, training, or experience.

• Investment in physical capital includes developing and/or purchasing the buildings, machines, and equipment that make human labor more productive.

• People take better care of things they own. Property rights act as an incentive for people to protect the value of their possessions.

We WANT to know:• Are property rights a tool in

fighting poverty?• Does the existence of strong

property rights promote economic growth?

• Does clear title to land encourage (act as an incentive for) capital investment?

Research Question: On the Amazonian frontier of Brazil, are landholders with title more or less likely than landholders without clear title to invest in capital improvements to their land?

Ricardo’s Journal

• June 01, 1993 11:49 a.m. Fax to Dr. Lee Alston and Dr. Gary Libecap

• The travel to São Felix was not too bad as I expected. We went on the back of a pick-up truck, and although crowded (13 people, 2 kids and two chickens on the truck and 4 people on the cabin) it was better than a bus. . . .

Ricardo’s Journal

• To get a better sample, I choose to survey the colony in the two opposite extremes. One 4 minutes down river from town (Santa Rosa) and other 5 hours upriver (Chadazinho). About half people I surveyd had definitive land tittle, but only a few are registered . . . and only few are in the name of landholder. Usually, the tittle is on name of the previous holder (i.e. when the previous owner sold the land, he gave as well the tittle). Sometimes the farmers got also a power of attorney paper, sometimes not. Registering the tittle and transferring is very expensive and this is the reason people usually do not do it.

Current Land-holder’sName

Has Clear Title to Land ?

Hect cleared

Hect perman-ent crops

added

Chick-ens

Cattle Pigs Horses Hect pasture added

Meters fenced

Almezino Yes 12.5 27.5 40 50 10 0 30 1600

Fco. No 20 22 200 2 4 3 20 2600

Raimundo Yes 17 25 80 11 1 3 14 240

Raul Yes 2 26 30 12 0 1 20 1000

Marcelo (1) Yes 0 0 10 0 2 0 0 0

Julia Yes 0 12.5 25 3 0 0 4 1500

Ant. Evang Yes 2 12.5 100 20 4 0 4 3300

Anor. Yes 0 15 70 0 12 0 1 2000

Geraldo Yes 8 35 70 100 35 10 20 8,000

Survey Data

Current Land-holder’sName

Has Clear Title to Land ?

Hect cleared

HectPerman-ent crops

added

Chickens Cattle Pigs Horses Hect pasture added

Meters fenced

Jose Cirilio

Yes 20 4 30 50 5 3 20 800

Vicente No 12.5 14 100 27 3 3 12.5 1000

NO - The settler has no claim to the land other than occupancy (squatter), or his claim is uncertain. For example, the settler holds a signed receipt from a previous owner, or the settler has a provisional title which hasn’t been registered.

Yes – The settler has a clear and legally recognized title to the land and the title would be upheld in a court of law.

The number of hectares the farmer cleared since he became the landholder.

(Land cleared by a previous owner is not included.)

1 hectare = ~2.5 acres, or 2.5 football fields.

Permanent crops are usually tree crops such as bananas, coffee, and cocoa. Several years’ growth is required before they bear a significant crop. However, in the long run, they tend to be more valuable than annual crops (which are planted each year).

Converting land to pasture required logging out the trees, and/or removing stumps and rocks, and/or seeding to create suitable grazing for cattle.

Landholders could maintain livestock for their own use without much fencing. Raising cattle for market required fencing.

Activity Investment in Land?Yes / No

Explanation

Clearing land

Planting permanent crops

Buying chickens

Buying cattle

Buying pigs

Buying horses

Adding pasture .

Fencing

Identifying Investment

Average investment

inmeters fenced

Average investment

in hect pasture

added

Average investment

in hect perm crops

added

Average investment

inhect land cleared

Title No title

Title No title

Title No title

Title No title

Calculating the Impact of Title

Average investment

inmeters fenced

Average investment

in hect pasture

added

Average investment

in hect perm crops

added

Average investment

inhect land cleared

Title No title

Title No title

Title No title

Title No title

1551.5

788.89

17.88

5.5

20.31

16.56

15.31

10.5

Calculating the Impact of Title

Predict – Who Has Title ?

Name Title toLand

Hectcleared

HectPermanent

crops added

HectPastureadded

Metersfenced

Osdete 0 ? ?

Joao Golano

35 85 30 5500

Jose Carlos

25 1 25 0

Germano 18.5 44 0 0

Conclusions of the Pará Study

• Farmers were aware that having title increased the value of their property

• Farmers assessed the costs and benefits of obtaining title (distance, etc.)

• Farmers with title made significantly greater levels of investment in the productivity of their land

• Securing and enforcing the property rights of the poor is an important step in improving their well-being

Documents

Introduction Part 1: “What Is Poverty and Who Are the Poor? ”