I had to deliver this last week a 10 minute informative presentation on this topic, for my “States and Markets” class. I’m sharing some thoughts with you here and would be really curious to see what non-economists/ non-policy students think about the proposed solutions. Since I am surrounded by such folks, though, views from the community are also welcome 
The figures
- there’s great news: the proportion of people living in extreme economic poverty, i.e. on less than $1.25/ day (at 2005 prices, adjusted for purchasing power parity) had dropped worldwide from 52% in 1981 to 26% in 2005
- the bad news: there are great regional disparities – China and East Asia in general, which used to be the poorest in the 80s (80% of the population affected by extreme poverty) have reduced their percentage of poor drastically (18% in 2005); however, sub-Saharan African has kept its poverty rate unchanged in the last 40 years, at about 50% of its population. Moreover, because of population increase, in absolute numbers the number of the poor has doubled (from 200 million in 1981 to 380 million in 2005)
Causes of Poverty
- colonial causes (economists like Daron Acemoglu and others prove that the institutions left behind by European colonists have persisted till nowadays and have influenced poverty levels; where colonists left “bad” rules in place (i.e. no protection for private property, etc), low economic development and ultimately stagnation occured
- regional characteristics (type of climate – exposure to flooding and typhoons, etc)
- community-level characteristics (level of education, level of services)
- household characteristics (women empowerment)
These causes also act as effects (you are poor because you are not educated and because you are not educated you remain power) so the problem gets more complicated! Tana! The poverty cycle!
The solutions
1. Foreign aid (main proponent: Jeffrey Sachs; & Bono!)
No developed country (with the exception of the Nordic countries) has actually ever fulfilled its international commitments of giving 0.7% of the National Gross Income to developing countries. We’ve never given enough aid and we’ve given low quality aid (technical assistance, food aid, etc). Poor countries are caught in a poverty trap (they are poor because they lack the basic necessities of health, education, and infrastructure, and because they are poor, they cannot invest in these basic necessities). The role of financing assistance is to close this gap and help burdened countries get started. Poor countries need $130 billion more aid by 2050.
2. No aid! Create markets and economic activity! (main proponent: William Easterly)
Aid agencies lack transparency and clear objectives. Aid is fragmented (the worldwide aid budget is split between am multitude of donors and projects and you cannot scale up success). Aid is similar to central planning, top-down solutions. Aid doesn’t work. Instead, you need to have bottom-up piecemeal solutions – create, through microcredits, functioning markets in poor communities and help the poor help themselves. Once more and more economic agents appear, countries will break out of poverty.
3. Liberalize trade! (main proponent: the International Monetary Fund)
IMF statistics prove that free trade remains a cornerstone institution for economic development. Critics (Dani Rodrick) say that free trade opportunities have only limited ability to trigger growth, because of inequities in the international trade system. If we liberalize agricultural trade, poor nations lose and the winners are taxpayers in rich nations (because they don’t have to pay taxes any longer).
4. Create good institutions (proponent: the IMF)
Following on Acemoglu’s proof that institutions (i.e. good rules of the game) are the key to growth), fans of these arrangements say we need to help the poor have stronger property rights, lower corruption, have better governance. Raising institutional quality has an exponential impact on economic growth. Institutions create a level playing field and both labour and capital are protected. These institutions have, however, to follow the number 1 tenet of macroeconomic stability. The whole macroecononomic stability mantra is criticized by Joseph Stiglitz, former head of the World Bank, who says it is too narrow and doesn’t have longer term growth in view. Instead, it only un-necessarily burdens transition countries.
5. Synthesis/ aka “Do It All!” (proponent: Paul Collier)
To really help the poor, the West needs to get as serious about it as Americans have been towards war-wrecked Europe in the 40s. There are 50 failed states in the world (the homelands of the “bottom billion”) and we have to help them via aid, reversing our trade policies, reversing our security policy and strengthening their governance and institutions (including by forcing our own multinationals to abide by fair practices). However, it could be that “doing it all” sort of means “we don’t really know what to do”.
This is the puzzle my friends. Looking forward to your creative thinking!
I’d go with number 2 and number 4.
It’s not “do it all” and it’s not one solution either. Number 2 goes after the saying “Teach them how to fish, instead of giving them the fish” and number 4 should create a stable environment for the small businesses to develop.
It cannot be easy, but I think it’s possible.
@gabi there are ups and downs for all of these choices. no 2 for instance involves a problem of scaling up your results, making them sustainable, building local capacity and ultimately strengthening the political system. if you only work locally, how about corrupt leaders. on the building institutions (option 4)… how do you that? normally, you do that by tying them to aid (i.e. we give you money if you oust corruption and the next edition of the WB good governance index indicates you’ve improved your governance). how do you build those institutions actually? and most importantly, how do you do it as “westerners” (isn’t that again some paternalistic approach that disregards “third ways” developing countries might take)… anywhow, thanks for the comment! the debate is fascinating
I’m somewhat on the institutions side — but I think that the geographical setting is also ignored too much. I took part in a seminar (taking part was more like listening in my case) by Dan Bromley at the HU last year where he forwarded that thesis. Bromley counterintuitively argues that income taxes are one of the keys to development. It might cause more confusion but I highly recommend reading his analysis (.pdf).
Hello Corina,
Personally I believe that options 2, 3 and 4 are the solutions that are most likely to reduce poverty. The historic record shows that without market economy, free trade and entrepreneurship there is no real sustained development and improvement in living conditions. The West did not overtook economically Asia at the dawn of modernity because it received aid of some sort from other parts of the world, but because it developed market economies and political and social institutions to sustain growth. I know it is rather difficult to speak today of free markets as state intervention is on the rise again, but the historic record speaks for itself. However I am not proposing simply copying and pasting institutions and free markets – I am in favor of developing this type of institutions according to local conditions and norms. If we speak of aid – one should concentrate on private donations and initiatives. State aid is politically motivated and will target those areas of the recipient’s economy that is of interest to the donor and has political conditions attached.
George
@nanne… interesting article. not necessarily counterintuitive (you know the old line, no taxation without representation… it can go the other way around and act of course as a mechanism for government accountability)
@george… not so sure about the free trade part; also, look at countries that have taken a third way (one might say simply a circumvented one) like China, Vietnam, India and they’ve broken out of the cycle of poverty. and institutional building (which you propose as a solution) is a state-driven solution, that you have to admit. anyhow though, you’re almost approaching the “it’s so complicated we don’t really know what to do” with selecting as much as 3 very strong options in and by themselves. thanks for your comment, though! an engaging conversation!
I am not sure you understood my point correctly. When I am thinking of institution building I wasn’t speaking of authoritarian governments – the cases of China and Vietnam. Although China has made a huge progress in the past 30 years and has become the 2nd largest economy in terms of GDP, the Chinese development model is highly dangerous because it involves basically a state driven pattern aimed at preserving the current leadership of Communist Party. As such I cannot really consider it a success or a pattern that should be followed by poor countries. Although this model lifted China from poverty, it did so by denying basic political rights. Therefore I cannot really accept the Chinese case as a pattern of successful development. Poverty is indeed bad, however dictatorship and authoritarianism are evil and cannot sustain development and prosperity over long cycles. At some moment in time the Chinese government won’t be able to provide enough economic growth and prosperity, and the legitimacy of the Chinese communist leadership will called into question.
India is somewhat what I had in mind – democratic institutional development coupled with economic growth. The Indian government is strong, however it is fundamentally a democracy. Institution building should be aimed at protecting and promoting individual rights, while at the same allowing the functioning of a competitive market economy.
Free trade should be seriously considered as a means of ending poverty. Lifting trade barriers and allowing agricultural products and/or manufactured goods to enter protected European and American markets should be considered and promoted as a means of ending poverty.
George
I'd go with number 2 and mumber 4.
It's not "do it all" and it's not one solution eityer. Number 2 goes after the saying "Teach them how to fish, instead of giving them the fish" and number 4 should create a stable environment for the smqll businesses to develop.
It cannot be easy, but I think it's possible.;
Food Aids are badly needed by third world countries like in Africa in Asia.~*`
food aids are badly needed by third world countries and we really need to give something to the poor.`”-
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food aids are mostly needed by the poor coutnries in africa and also in asia~”:
our country received food aids from EU nations and it is a good thing to have those food aid programs’;,
we can always give food aid to the african countries if we just save some pennies and donate it to them ~,;
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