The End of Poverty

Notes from Jeffrey Sachs‘ book The End Of Poverty – How We Can Make It Happen In Our Lifetime.

Introduction: 

  • We live in a world that could viably end poverty by 2025.
  • Our morning papers could read “Yesterday more than 20,000 people perished of extreme poverty” – 8,000 children to malaria, 5,000 to tuberculosis, 7,500 to AIDS and thousands more to diarrhoea, respiratory infections etc.
  • The US has launched a War on Terror (costing $450 billion/year) but neglected the root causes of global instability, global poverty (currently $15 billion/year).
  • When the preconditions of basic infrastructure (roads, power & ports) and human capital (health & education) are in place, markets are powerful engines for development. Without them, markets can cruelly bypass large parts of the world.
  • Keynes envisaged an end to poverty in Great Britain and other industrialised countries 85 years ago. His dreams in Economic Possibilities for Our Grandchildren were realised. Collectively we can repeat history and end poverty on a global scale.

1. A Global Family Portrait

Sachs takes us through a description of various areas he has worked in during recent years.

  • Malawi – the perfect storm: life is difficult in this landlocked, impoverished nation. In villages, many of the working male population are too ill to work. AIDs has devastated the area; guardians of the local children look after up to 15 orphaned children. Crops often fail and the local families who have depended on subsistence agriculture for centuries are left with nothing. Medical care is a 60 minute walk away – if a child catches malaria this is the walk that must be done by 60 year old women. There is no sanitation or water. AIDS drugs are available at a few clinics if you can afford the dollar a day for the cost – this means 400 out of the total 900,000 infected get the treatment they need. The average daily income is 50 cents per person a day. Malawians have tried desperately to combat the AIDS epidemic – they pitched strong proposals to donor governments to seriously tackle the problem. Malawi was told to scale back the problems as they were “too ambitious and too costly”. The nation eventually managed to receive enough funding to treat 25,000 in five years – they asked for funding to treat 300,000. UNICEF’s Craig Bellamy has described Malawi’s situation as the perfect storm – a storm that brings together climatic disaster, impoverishment, an AIDS pandemic and the long-standing burdens of malaria, schistosomiasis and other diseases.
  • Bangladesh – on the ladder of development: this is a land where poverty is against all odds, slowly being reduced. 140 million live here on the flood plains of the River Ganges and the River Brahmaputra. It won independence in 1971 from Pakistan and also experience massive famine and disarray. It is now heading in the right direction – per capita income has doubled since independence and child mortality has been massively reduced. There are nonetheless problems – the hundreds of thousands of young men and women that work in the textile industries, do so in terrible conditions. Protesters in the West are right to demand better working conditions, however they should also campaign for an end to trade protectionism in developed countries that prevents Bangladesh from gaining further jobs in this industry. The conditions in these factories are grim, but they much better than those found in Malawi. The reality for the young women working in the factories is that it has provided them with a massive opportunity – the other option would have been to enter an arranged marriage in a rural area at a very young age – employment in the city has offers personal freedom and empowerment unlike anything that have experienced before. Every successful country that has developed has gone through this initial stage of industrialisation. Micro-finance schemes have also been massively successful for allowing women to gain a small daily income. Such programmes has massively impacted on birth rates; it was common for women in the rural areas to conceive 6/7 children – the average for young women in the city is now 2, a change that has taken place in the last 30 years. Less children means higher average spending on the health and education of each child – this will massively increase the income of Bangladesh’s next generation. This is a nation that has successfully made it’s first step up the development ladder. 
  • India – Center of an Export Services Revolution: India has made several steps up the development ladder. The information technology revolution that has swept the country has fuelled unprecedented levels of economic growth. Companies here have international links and their workforce is well educated and young – they earn an income around 8 times that of the average agricultural worker whilst under-cutting similar workers in developed nations by approximately 10 times. Auto-mobile, electronic, pharmaceutical, apparel and textile industries have performed strongly in the last decade. Indian growth rates are beginning to catch up with China. The US has viewed Indo-Chinese growth as a danger to US interests. This is very dangerous thinking – the world is not a zero-sum struggle – rising Indian incomes simply means more Dell computers using Microsoft being bought by wealthy Indians.
  • China – The Rise of the Affluent: the nation experiencing development at full speed. Beijing is one of the world’s most important economic capitals. Annual income is $4,000 per capita. China’s rise in the last 25 years reflects how it has gone from a completely closed society to one of the greatest exporters in the world. Foreign investment and technology has flooded in and allowed highly competitive industries to develop. Chinese exports stood at $20 billion in 1980, they stood at $400 billion in 2004.
  • Ascending the Ladder of Economic Development: we can see the clear global divide in living standards that currently exists. Roughly 1 billion currently live in conditions similar to those found in Malawi. A further 1.5 billion struggle to survive, but make ends-meet such as those in Bangladeshi factories. Together these groups represent 40% of humanity. Add on another 2.5 billion who live in conditions similar to those of the Indian IT workers and we have those earning a ‘middle-income’. The top billion represents all those in the wealthiest states, as well as those who have profited from globalisation in urban areas across the earth (Sao Paulo, Shanghai, Mexico City). 5/6th of humanity is making economic progress; the great tragedy are those not. These populations cannot even put their feet on the ladder.
  • Who and where are the poor? We must distinguish between 3 types of poverty. Extereme (or absolute) poverty means be unable to meet basic needs – this is exclusively reserved to developing nations. Moderate poverty involves ownership of food, clothes and shelter but in often very difficult circumstances. Relative poverty is usually described as living on a household income below a certain cut-off of the national average. The World Bank uses income of $1 per day measured at purchasing power parity to measure the number globally living in extreme poverty.
  • Our Generation’s Challenge: the hardest part of development is the first step onto the ladder. When we talk of ending poverty our first priority is to enter a world in which everyone can enjoy basic standards of nutrition, health, water and sanitation, shelter and other minimum needs for survival, well-being and participation in society – the ending of extreme poverty. Our second priority should be that all the world’s poor (including those in moderate poverty) have the opportunity to climb the ladder of economic development. Reaching the UN MDGs is a crucial step in this process.  
  • We therefore have the economic possibilities of meeting the Millennium Development Goals by 2015, ending extreme poverty by 2025 and ensuring that well before 2025 that the world’s poor countries can get onto the development ladder.

2. The Spread of Economic Prosperity

  • It is an obvious statement but we have not always lived in a world of prosperity. The average income per person in Western Europe in 1820 was around 90% of the average African income today. Life expectancy in Western Europe and Japan as of 1800 was about 40 years.
  • The world is currently the most unequal it has ever been. European explorers wondered at the well ordered and prosperous settlements in West Africa, India and China. In 1820, the gap between the world’s richest (UK) and the world’s poorest (Africa) was a ration of 4 to 1 in per capital income. By 1998 this ratio had risen to 20 to 1.
  • The great divide occurred at the beginning of what Simon Kuznets has termed the period of modern economic growth, approximately year 1800.
  • During this period global population and income levels rose at a level never witnessed before.
  • African nations have grown at 0.7%/year, the US has grown at 1.7%/year – over 200 years this makes a substantial difference. It is therefore crucial to explain why there is this variation in economic growth rates.
  • This is not explained by the rich gaining wealth and resources at expense of the poor – this requires global income to remain the same – it has risen 50 fold. This is not to say the rich have behaved well in relation to the poor.
  • Technology has had a crucial role in sustaining growth. The Industrial Revolution gave the world prosperity – the steam engine allowed the mass production of goods at a scale never previously dreamt of.
  • Industry fuelled political power. Britain’s breakthrough allowed it achieve global dominance. The US has pursued the same path to global dominance.

Why was Britain first? 

  1. The early breakdown of restrictive societal structures that prevented growth. Feudal structures were severely weakened by around 1500.
  2. Britain’s strong belief in political liberty
  3. Europe and specifically Britain were at the centre of the scientific revolution
  4. Geographical advantages: proximity to European/N. American trade routes
  5. Britain maintained its sovereignty and prevented encroachment from it’s neighbours successfully (the ‘island’ factor).
  6. Britain had coal, which combined with invention of the steam engine, free society from energy constraints.
The Great Transformation
  • The Industrial Revolution was caused by new technologies, coal power and market forces.
  • This lead to one of the most revolutionary events of human history – the growth of economies beyond previous constraints; this changed the way people live in every fundamental sense.
  • It caused urbanisation, the switch between primarily agrarian economies to industrial activites, pushed up social mobility, created new family and gender roles, caused demographic changes & resulted in specialisation of labour.

The Spread of Modern Economic Growth

  • A combination of factors created unprecedented growth in England; why was the transition so difficult in other areas?
  • Economic growth required ‘change’ and not ‘more’.
  • The start of growth was marked by systematic and repeated confrontation between the newly emerging powers and the rest of the world.
  • Vast differences in power contributed to a faulty social theories that are still with us today. British/American’s believed their growth represented a deeper superiority. This lead to new forms racism and culturalism.
  • The gains from industrialisation diffuse – it was like a chain reaction.
  • Britain triggered growth in Europe, it diffused North to South & West to East. Europe had resources and a climate conductive to economic activity.
  • Britain’s trade with its colonies also gave them a huge advantage and helped spread growth.
  • Europe’s superior power was repeatedly used to compel actions by weaker societies on behalf of the richer overlords.
The Cascade of Technological Change
  • Living standards began to rise rapidly for those in growing economies.
  • For some, the rise out of poverty was slow and gradual, many are still stuck in the trap. 
  • The single most important reason why prosperity spread is the transmission of technology and the ideas underlying them.
  • The beauty of ideas is that they can be used over and over again, without ever being depleted. Economists call ideas non-rival in the sense that one person’s use of an idea does not diminish the ability of others to use it as well. This is why we can envisage a world in which everybody achieves prosperity. 
  • 1st wave (of Industrialisation): steam engine, large scale production, new steel production techniques, 
  • 2nd wave: ocean steamers, global trade & two huge infrastructure projects (Suez and Panama Canals). 
  • 3rd wave: electronification of industry and urban society.
  • These technological advancements diffused globally as Europe came to dominate the world. European Empire was the first stage of globalisation. 
  • The imagined natural order gave rise to the infamous “white man’s burden“, the right and obligation of European and European-descended whites to rule the lives of others around the world, which they blithely did with a contradictary mix of naivete, compassion and brutality. 

The Great Rupture

  • Globalisation viewed as inevitable at the beginning of the 20th C. Many believed war was a thing of the past – Norman Angell argued in The Great Illusion that economies had become so interdependent that war by any of the major powers could not possibly lead to economic benefits for the agressor.
  • This didn’t stop war from happening…
  • WW1 ended the era of European-led globalisation, lead to the destabilisation of the Russian czarist regime, created prolonged financial instability & created debt mountains that would embitter a generation of Germans.
  • The economic instability that followed created The Great Depression. The overhand of bad debts, shrunken trade within Europe and overstretched budgets of the European powers meant that inflation, stabilisation and austerity were the order of the 1920’s.
  • The gold standard it’s ‘rules of the game’ for monetary management made it impossible for the major economies to escape the slide.
  • The Great Depression in turn triggered a calamitous spread of protectionism and the rise of Nazism and military rule in Japan.
  • By the end of WW2, the pre-1914 global system was in pieces – national currencies could not even be converted. It looked as though the benefits of global market places had been buried under the two World Wars and the Great Depression.

Reconstructing a Global Economy

  • Physical reconstruction was required to rebuild key infrastructure projects.
  • The ‘plumbing’ of the world economy also required fixing through new currency arrangements and rules for international trade.
  • Europe, US  & Japan reconstructed a new international trading system under U.S. political leadership.
  • European currencies became convertible again in 1958.
  • Trade barriers were reduced through GATT.
  • The rich world emerged as the 1st World, in contrast to the Communist empire of the 2nd World.
  • The 3rd World was made up of nations now free from colonialism. They wanted independence and did not want to associated with either the 1st or 2nd Worlds.
  • The path chosen by the 2nd & 3rd World’s did not make economic sense.
  • Fortunately by the 1990s, the overwhelming majority of nations globally were saying “we need to be part of the global economy, let’s trade”.

4. Clinical Economics

  • Development Economics needs an overhaul in order to be much more like modern medicine, a profession of rigour, insight, and practicality.
  • In the past century when impoverished countries have pleaded with the rich world for help, they have been sent to see the world’s money doctor, the IMF.
  • The IMF has certain policy prescriptions it uses, leading to budgetary tightening. This has regularly lead to riots, coups and the collapse of public services. Fortunately, the IMF is beginning to change its approach.
  • I propose a new model, one called clinical economics. Economies should be treated much like patients.

Some Lessons From Clinical Medicine

  • The human body is a complex system
  • Complexity requires a differential diagnosis
  • All medicine is a family medicine – disease must be looked at in it’s social setting
  • Monitoring and evaluation are essential to successful treatment
  • Medicine is a profession, and as a profession requires strong norms, ethics and codes of conduct


5. Bolivia’s High Altitude Hyperinflation.

  • The third-world debt crisis arrived in 1983.
  • Sachs had studied previous accounts of hyperinflation and attended a seminar at Harvard concerning the burgeoning black market for foreign exchange in which huge stacks of Bolivian pesos were being traded for dollars on the streets ofLa Paz.
  • Sachs was asked at a Harvard seminar to advise the Bolivian government on the issue – he agreed and flew toLa Pazin July 1985.

Designing a stabilisation plan

  • The government was printing money to finance a large budget deficit. The Bolivian government was not credit-worthy to sell bonds to the private sector and was forced to sell them to the Central Bank ofBolivia.
  • It was like hyperinflation in the past – the government needed to pay the bills, so printed money and drove down the value of the currency, causing the price of goods to rise massively.
  • Each injection of pesos into the market fuelled the inflation – people took the currency straight to the black market and bought dollars.
  • In June 1983 it costs 5,000 pesos to buy a dollar, by July 1985 it cost 250,000 (when Sachs turned up).
  • Sachs believed the end of the hyperinflation would be very rapid and would occur as soon as the peso was stabilised relative to the dollar.
  • The fiscal package designed to take the government away from its dependence on the Central Bank was focused on the price of oil.
  • The national oil company, YPFB, set prices every few months and therefore oil remained cheap in comparison to other goods – this meant tax revenues from oil were low.
  • By August 1985, the price of a litre fell to $0.03 and lorry loads were being smuggled across the border toPeru.
  • Sachs’ team therefore proposed a sharp, one-time increase in the price of oil as the key element to stopping hyperinflation, combined with a package of other fiscal measures.
  • The political party that Sachs worked with, the ADN, failed to gain power at the next election, losing to Gonzalo Sanchez de Lozada of the MNR party.
  • The new president (who has been in office 4 times before) moved quickly to create a revolutionary plan, calling for Bolivia to move from a statist and closed economy – typical of third-world economies at the time – to market-based, open economy.
  • The president demanded tough discussions and quickly produced what was known as Supreme Decree 21060.
  • A sharp rise in oil prices was initiated on August 29th and gasoline prices soared, reducing the budget deficit. This lead to an immediate stabilisation of the exchange rate.
  • Within a week, the hyperinflation was over.
  • Circumstances were far more fragile and difficult than Sachs had imagined.

Cracks in the edifice

  • In October 1985 the London Metal Exchange suspended trading on tin, causing the tin cartel of which Boliviawas a member to go bankrupt. Prices fell 55%.
  • Exportation of tin was crucial to the Bolivian economy.
  • Sachs agreed to work with Victor Paz Estenssoro, the new president and received a call in the Xmas of 1985 – the hyperinflation was back.
  • He went straight to the Central Bank, finding that there had been a tremendous spike in the monetary supply during December.
  • The Bolivian Planning Minister had called for a 50% increase in wages to allow Bolivians to keep up with price rises before resigning.
  • The Central Bank also had to cover double monthly salaries as part of the Christmas package.
  • Sachs suggested the Central Bank sell its foreign exchange reserves into the currency market in return for the pesos that had just been issued and in doing so mop up wage increases announced whilst stabilising the exchange rate. It would be risky, but a return to hyperinflation would be more so.
  • The operation began and the currency began to strengthen.
  • Sachs was called into the IMF to explain why Boliviawas ‘wasting’ foreign currency reserves. They did not approve but the process was already in full-swing.

Consolidating the Victory over Hyperinflation

  • Crises create instability and Boliviastill had to overcome major obstacles.
  • The tin price crash continued to eat away at budget and macroeconomic stability. 5/6ths of tin labourers lost their jobs.
  • The debt crisis was another obstacle – the government could not service its debts to international banks and foreign governments. The IMF was pushing for a resumption of debt repayments that had been suspended a year earlier. Politically this was completely unviable and the people could not be subjected to further government cuts and taxation.
  • The IMF would not stand for it; it could not let Boliviaget away with it and set such an example to bigger debtors including Brazil, Argentinaor Mexico.
  • The IMF representatives were livid but the situation kick-started a process of debt-cancellation agreements with major commercial banks.
  • Tax reform was another obstacle – it was time for Bolivia’s upper classes to contribute to tax revenue. Land owners struggled to understand why they should be taxed but eventually reforms were passed and contributed to a fairer fiscal system.
  • A further problem was the establishment of an emergency social fund that could contribute to addressing some of the urgent social conditions of the nation. The World Bank agreed to finance this, providing a small safety net (e.g. jobs, village-level infrastructure).
  • A further problem came when the USmilitary decided to step up efforts to stop the Andean drug trade. Bolivian drug smugglers scurried off and a financial crisis ensued. Cocoa growers were politically organised and played a massive role in the economy. A team was set up to offer realistic alternatives for cocoa growers. The USSecretary of State explained that a country with a per capita income thirty times that of Boliviahad insufficient funding to offer anything other than military intervention in a process which would cause significant economic and political risk.

Waking up to geography

  • The World Bank consultant David Morawetz was sent to investigate whatBoliviacould export after tin and coca?
  • “This is a landlocked country, up in the Andean mountains, facing incredibly high transport costs. The only products thatBoliviahas ever been able to export are commodities with a very high value per unit weight because only those commodities can successfully overcome the high transport costs”
  • Boliviawas born in the Spanish colonial period exporting silver, then gold. It experienced a rubber boom in the mid-19th Century, the tin boom in the early 20th Century, a brief hydrocarbons boom in the 1960’s and 70’s and a coca boom in the 1980s – all these commodities had a very high value weight.

Bolivian Progress Since 1985

       

1985

2002

GDP Per Capita (constant 1995 $)

835

940

Adult Literacy Rate (%)  

74

87

Primary School Enrolment (%)  

91

94

Secondary School Enrolment (%)

29

67

TertiarySchoolEnrolment (%)  

21

39

Infant Mortality Rate (per 1,000 live births)

87

56

Under-5 Mortality Rate (per 1,000)

122

71

 

“A graduate student in an American Ph.D program in economics may very well study the development crisis in Africa without ever setting foot in the country or countries under study. An advisor may hand over data, say for Nigerian households, and ask the student to do a statistical analysis without the benefit of context, history or direct observation. Years late the student may have the opportunity to show up in the Nigeria for the first time”


Advertisements