Global Poverty 1

Lecture 22

The Problem of PovertyThe Problem of PovertyPoverty is Increasingly an International Issue

Prior to Postwar Period, the Largest Income Gaps Were Within Countries.

Since World War II, Inequality Between Countries Has Become More Important.

Source: Peter Lindert and Jeffrey Williamson. 2001. “Does Globalization Make the World More Unequal?”NBER Working Paper 8228.

Economic IndicatorsEconomic Indicators

Per Capita GNP

1999

Average Annual Per

Capita Growth

1965-1999

World $5,020 1.6

Low-Income Economies

$420 1.8

Middle-Income Economies

$1,980 2.4

High-Income Economies

$26,440 2.4

Source: World Bank. 2002. World Development Indicators, 2001. Washington, D.C.: The World Bank.

Quality of Life Quality of Life IndicatorsIndicators

Life Expectancy at Birth, 1999

Adult Literacy (Percent of people above age 15)

World 66

Low-income 59 M: 71 F: 52

Middle Income 69 M: 91 F: 80

High Income 78 M: 95 F: 95

Source: World Bank. 2002. World Development Indicators, 2001. Washington, D.C. The World Bank.

People Living on $1 Per Day(Millions)

1990 1999 2015

East Asia and Pacific 452 267 101

Excluding China 92 54 20

Europe and Central Asia 7 18 9

Latin America and the Caribbean 74 61 58

Middle East And North Africa 6 6 6

South Asia 495 522 411

Sub-Saharan Africa 242 302 426

Total 1,276 1,175 1,011

Total Excluding China 916 961 931

Source: World Bank. 2002. World Development Indicators, 2001. Washington, D.C.: The World Bank.

People Living on $2 Per Day(Millions)

1990 1999 2015

East Asia and Pacific 1,084 885 472

Excluding China 285 252 187

Europe and Central Asia 44 98 58

Latin America and the Caribbean 167 159 162

Middle East And North Africa 59 85 80

South Asia 976 1,095 1,214

Sub-Saharan Africa 388 489 690

Total 2,718 2,812 2,675

Total Excluding China 1,919 2,179 2,390

Source: World Bank. 2002. World Development Indicators, 2001. Washington, D.C.: The World Bank.

Why the Income Gap?Why the Income Gap?

No Mystery to Raising Income Rising Incomes Come From Rising Productivity Productivity Comes From Investment

Thus, Portion of Income Must be SavedSavings Must Be Invested in Productivity-Improving Things Physical Capital Human Capital

Income Gap Thus Suggests a Problem in this Mechanism of Wealth Creation.

Three “Theories” of Poverty

The Poor are Poor Because they are Powerless and Exploited (Marxist Theories).

The Poor are Poor Because they are Inefficient (Liberal Theories).

The Poor are Poor Because they are Poor (Vicious Cycle Theories).

Powerless and Exploited:The Structuralist Argument

The World Capitalist System Divided into the Core and the Periphery. Core: Produce and Export Manufactured Goods Periphery: Produce and Export Primary

Commodities

Capitalist System is Systematically Biased in Favor of Core and Against Development of the Periphery.

International Trade is Primary Mechanism of Exploitation.

Terms of Trade Between Core and Periphery

Terms of Trade: Volume of Exports Needed to Acquire a Given Volume of Imports.

Secular Decline in Terms of Trade: Yearly Increase of the

Export Cost of Imports. Falling Commodity Prices

(Exports) and Stable Manufactured Goods Prices (Imports).

Caused By...

Terms of Trade for Primary Producing Countries 1801-1881: 0.87% 1882-1913: -0.42% 1913-1986: -0.52/ -0.84%

Reason For Poverty: Gains from Productivity

Improvements Are Transferred to the Core

Gains Not Translated into Higher Wages in Periphery.

No Savings to Finance Investment.

Source for Terms of Trade Data: James M. Cypher and James L. Dietz 1997. The Process of Economic Development. Page 87.

Solutions to Structuralist Diagnosis of Poverty

Adopt a Development Strategy That Would Restructure Periphery Economies. More Emphasis on Domestic Market, Less on Exports More Emphasis on Producing Manufactured Goods, Less on

Primary Commodities.

Structuralists Believed that Reform and Active Government Management Would Be Sufficient.

Marxists Believed Radical Break with Global Capitalist System Would Be Required.

Developing Country Responses, 1945-1980

Domestic Response:

Import Substitution Industrialization.

Substitute Local Production for Imports

Most Developing Country Governments Adopted this Development Strategy.

Import Substitution Industrialization

Heavy Government Intervention to Shift Resources from Agriculture to IndustryTaxation of Agricultural SectorSubsidization of Manufacturing IndustriesVariety of Instruments High Tariffs Exchange Rates Taxes and Subsidies State-Owned Industry

International Response, 1960-73

Group of 77 Formed in Early 1960s to Press for Reform of International Economic SystemSeek UN Conference to Examine Relationship Between Trade and Development.Results in UN Conference on Trade and Development (UNCTAD) in 1964

Used UNCTAD to:Try to Reduce GATT’s Role in International TradeTry to Create Greater Role for UN in TradePreferential Access to Advanced Countries’ MarketsCreate Commodity CartelsNot Very Successful

The New International Economic Order,1973-1982The Oil Shock and Commodity PowerCommodity Power Leads to Demands for The New International Economic Order (NIEO) Increase LDC

Manufacturing to 25% of Total World Manufacturing by 2000

LDCs Manufactured about 9% in 1978

Specific Demands:Increase LDC Control of Natural ResourcesCheaper and Easier Access to Northern TechnologyIncreased Foreign Aid (.7% of North’s GNP)Eliminate LDC DebtGreater Influence over IMF and World Bank