Lecture 19 Problem of Poverty

8/12/2019 Lecture 19 Problem of Poverty

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International Political Economy #19

The Problem of Poverty

William Kindred Winecoff

Indiana University Bloomington

November 7, 2013

W. K. Winecoff | IPE #19: Problem of Poverty 1/20
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What Is Development?

Sustained improvement in a societys standard of living that is broadly

shared.

Narrow definition of development: increase in GDP per capita.

Broad definition: increase in quality of life, including literacy, infant

mortality, life expectancy, education, access to health care, etc.

These things are heavily correlated with each other and with

income.

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Not Just Growth; Also Distribution

The broadly shared part is very important. Net wealth of all U.S.

presidents since 1776 combined is = $2.7 billion. Contrast with the

wealth of:

Abacha (Nigeria), $5 billion;

al-Bashir (Sudan), $7 bn;Babangida (Nigeria), $8 bn;

Mobutu (Zaire, now Congo DR), over $10 bn;

Mubarak (Egypt), over $40 bn;

Khaddafi (Libya), over $60 bn.

Nigeria ex-president Olusegun Obasanjo: corrupt African leaders havestolen at least $140 billion from their people in the decades since

independence.

Mo Ibrahim Prize for African Leadership: no recipient in 50% of years:

http://www.moibrahimfoundation.org/ibrahim-prize/.

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The Malthusian Trap

Thomas Malthus (1798) had a theory of economic (non)growth: we can

never do much better than subsistence living.

When were poor we have lots of kids, because some die

young and because many needed to work to support society:population grows exponentially.

But production grows linearly: inputs of labor at constant

productivity.

The result? The population outgrows the capacity to sustain itself until

something plague, famine, war pegs population back.

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The Malthusian Trap in Theory

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The Malthusian Trap in Practice - Wealth

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The Malthusian Trap in Practice - Population

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The Great Divergence

Poor Malthus: would have been correct if writing about any other time

in human history.

Theres a way to escape the trap: grow production exponentially to keep

up with population. I.e., improve technology.

The Industrial Revolution.

Who has industrialized? The Core. Who has not, at least in part? The

Gap.

This is The Great Divergence.

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Population by Region (in Millions)

1950 2005 Growth Rate

Industrialized 813 1,211 0.5%

Asia 1,400 3,905 0.64%

World (total) 2,519 6,465 0.75%

All Developing 1707 5,252 0.89%

Africa 224 906 1.7%

Least Developed 1,707 5,253 1.8%

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Fertility Rates by Region, 2009

Developed World 1.7

World (total) 2.5

All-Developing 2.7

Least-Developed 4.3

Sub-Saharan Africa 4.51

The correlation should be pretty clear: the richer you are, the fewer

children you have.

So while the Core has escaped the Malthusian Trap, the Gap has not

fully done so.

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Asymmetric Growth in the Americas

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Globalizing Malthus

How do we escape the trap?

The application of technology to the economy.

How do we get technology?

We have to save and invest.

Development, then ultimately depends on being able to save and invest.

S I = XM.

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The Logic of Development

Complicating this a bit more, we can say that development requires

structural change in the economy:

1 Workers get pulled away from agriculture into industry, or

from less-efficient to more-efficient modes of production.2 At first they are employed in low-capital industrial production,

e.g. textiles.

3 Over time, traditional labor-intensive production methods are

replaced by more modern capital-intensive methods. This

leads to increased productivity per unit of labor.As productivity rises, incomes rise too. (Unless corrupt governments

steal it.)

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Investment Is the Key

So we need investment. We need capital.

Investment, in this context, refers to the purchase of machines and

infrastructure that are used to produce other goods. (What economistscall capital.)

Without investment: no new production methods > no productivity

growth > no economic growth > no development.

With investment: new production methods > productivity growth >

economic growth > development.

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Getting Investment

Okay, so we want investment growth. How do we get it?

Via savings, the portion of national income that is not

consumed.

In order to invest, you first need to save.

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The Problem

Poor people are poor. Often living at a subsistence level.

It is not easy to save when most of your income goes to food and

shelter.

If you cant save, you can import investment from other parts of the

world. (Hint: you already know how this works.)

But it might be difficult for poor countries with bad infrastructure, bad

governance, a depressed local market, and little human capital to be able

to attract foreign investment. Factor in frequent civil conflicts (or the

risk of them), and you can see why outsiders might not want to invest.

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Explaining Poverty, I

The Poverty Trap: The poor are poor because they are poor.

Self-reinforcing dynamics.

This argument underlies U.N. Millennium Development goals,

and is associated with thinkers like Jeffrey Sachs.

Consider a typical Malthusian country:

Low capital (investment) per capita (K/population), plus high

birth rates.

Low savings means you cant increase K fast; high birth rates

means population grows.Hence, K per capita falls with each generation.

Problem: some countries get out of this trap, even without outside help.

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Explaining Poverty, II

Structuralism: The poor are poor because they are exploited.

Global power asymmetries: Core extracts surplus from Gap.

This view very prevalent during decolonization period,

1950-1985, particularly in the UN.

Emphasized international trade as mechanism of exploitation.

Composition of Core-Gap trade: Core sends manufactured

goods, gets resources and commodities.

Tech progress in Core means manufacturing gets more

efficient; therefore terms of trade for Gap declines over time.No development if the Gap participates in the global economy.

Problem: some countries esp. in Asia have developed by

participating in the global economy. Those that havent have stagnated.

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Explaining Poverty, III

Neoliberalism: The poor are poor because they are inefficient.

Societies sometimes squander their resources.

Provides intellectual justification for Washington Consensus.

World Bank and IMF are fans, beginning in the 1980s.

Emphasized political failure rather than market failure.

Governments are corrupt: allocate resources to stay in power

rather than develop.

Creates culture of rent-seeking rather than risk-taking.

Investment is likely to be expropriated, so is not made.Development requires limiting the role of the state.

Problem: Many states have had large role for the state and had

successful development.

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The International Politics of Development

The politics of development revolve around differences in theseapproaches.

Poverty trap is a tautology, and also not much of a theory, so well focus

on the other two.

Structuralism vs. Neoliberalism:Structuralism: If the problem is that market failures prevent

development, then the solution is to use the state to correct

the market failure.

Neoliberalism: Political failure is a bigger problem then

market failure, so keep the state small and allow markets towork their magic.

I.e., this debate is about the relative role of states and markets in

development.

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Lecture 19 Problem of Poverty