The End of PovertyJeffrey D. Sachs

Growth of Household Income• Household – 2 adults and four children

(2 boys & 2 girls)

• Live on two-hectare farm

• Grow maize

• Shelter in an adobe hut

• No other cash income

• Children collect fuel for cooking and water from spring

Production – Year 1

• 2 tons of maize per hectare – 4 tons total• Income assigned based on market value of

$150/ton• Annual income will be $600 ($150 x 4 tons)• Calculated in GNP• $100 per capita income ($600/6 people)

Increase GDP per Capita• Saving

• Trade

• Technology

• Resource Boom

Saving

• Consume 3 tons and take one to market

• With $150 they can invest in livestock– Livestock generates a new stream of income

Improved food yields from bull manure– Animal traction– Sale of milk– Sale of meat, eggs or hides

• Capital accumulation (livestock) which has increased household productivity

Trade

• Learn from another farmer they have appropriate farmland to produce vanilla bean

• Much higher income from vanilla

• Shifts to vanilla as cash crop

• Earns $800 in vanilla – uses $600 to buy four tons of grain for food

• As # of farmers of vanilla increases, group of trading firms forms specializing in shipping and storage of vanilla, food and farm inputs

• Adam Smith – markets – increased specialization – incomes rise – more specialization – businesses to support specialization – etc.

Technology• Agri extension officer teaches the farm

household how to manage soil nutrients in an improved manner by planting nitrogen-fixing trees that replenish soil nutrients

• And use improved grains

• New varieties mature faster and are pest resistant and flourish in improved soil

• Crop yield rises to three tons per hectare or total of six

• Income per capita increases to $150 (3 tons X 2 hectares @ $150 /6 people)

Resource Boom• Govt succeeds in controlling black flies

which spread African river blindness

• New farmland available

• Significant expansion of production capacity

• Incomes rise; hunger falls; each household triples its food output

Higher Income• These four pathways are main ways

economies grow.

• Rise in GDP is usually all working together.

• Operate through markets and collective actions through public policy and public investment.

Reduction in Household Income• Absence of trade

• Technology Reversed

• Natural Resource Decline

• Adverse Productivity Shock

• Population Growth

Absence of Trade• Hears of vanilla opportunity

• But can’t take advantage of it because no roads for transporting the good to market

• Trade can also be hampered by– Violence– Monetary chaos (money not accepted)– Price controls– Other forms of government

intervention that impede specialization and trade

Technology Reversal• Children lose parents to HIV/AIDS

• Oldest takes charge but doesn’t know proper farming

• Next crop fails

• Children depend on other households in village

• Family income declined to zero

• Technological know-how is not inherited

Natural Resource Decline• Existing farmland suffers environmental

decline

• Can’t afford fertilizer and doesn’t know about nitrogen fixing trees.

• Nitrogen is seriously depleted

• Only one hectare in production

• Household income falls to $50 per capita (2 tons times $150 per ton divided by 6)

Adverse Productivity Shock• Natural disaster wipes out household

income for a year−Flood−Drought−Heat wave−Frost−Pests−Disease

Population Growth• Generation passes

• Parents die

• 2 hectares are divided among 2 sons

• Each son has wife and four children

• Crop yield 2 hectares per ton

• Per capita income has declined by half because of doubling of population living on same farm