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The myths of dollar-a-day poverty

A multi-billion dollar industry has developed around the concept of absolute poverty as living on a dollar a day.

It turned out to be a brilliant marketing ploy by the World Bank and since it was coined in 1985 has spawned a huge global business based on government-funded and philanthropic aid.

Yet the biggest decline in poverty has occurred in a country that has hardly been touched by the aid industry – except in disaster relief – and has done it without any handouts.

This raises the question, and some experts have asked it, whether the aid industry actually perpetuates poverty rather than cures it.

This is certainly the conclusion one could reach from a recent BBC World Service radio documentary by Tim Harford – the Undercover Economist – when reporting the World Bank’s latest report.

It confounded some experts by finding that the global recession did not increase poverty but in fact reduced it.

Furthermore, the bank found the proportion of people living in extreme poverty — on less than $US1.25 a day (the inflation-adjusted version) — fell in every developing region between 2005 and 2008. Preliminary data from 2010 indicates this trend has continued.

The kicker is that most of this poverty reduction has been in China, which has moved nearly 700 million people out of poverty between 1981 and 2008, with the proportion of its population living in extreme poverty falling to 13% from 84% during that period.

Dr Harford picks up on this and poses questions to his interviewees. Unfortunately, I cannot find a transcript but, with the right softare program, you can listen here.

In a 2007 column, Harford quoted the work of MIT economists Banerjee and Duflo on the spending habits of the very poor in 13 countries. They concluded, Harford wrote,

that about a third of household income is spent on stuff other than food. The alternatives to simply trying to consume more calories include tobacco, alcohol, weddings, funerals and religious festivals. Radios and televisions are also popular.

Empty desk is waiting
The countries where poverty is still a major issue – such as India and Brazil – are pushing for a greater say at the World Bank, if not actually running it.

This is topical because Robert Zoellik, the latest in a string of mainly Americans, will step down in June, providing an opportunity to break the long-standing tradition that only the US is trustworthy enough to run the World Bank and Europeans doing the same at the IMF.

However, the problem is finding someone Brazil, India, et al, can agree on.

“I am sure the US will nominate an excellent candidate, but it is imperative that the process this time be contestable,” Reuters quotes Amar Bhattacharya as saying.

He is director of the G24 Secretariat, whose members include major developing and emerging economies. He hopes they will come up with a list of candidates by the deadline for nominees on March 23.

Hats off to Larry
One name on President Obama’s potential list is bound to be former Treasury Secretary Lawrence (Larry) Summers, who served in the Obama administration as director of the president's National Economic Council.

Now a Harvard professor, he will be best remembered for his evasion in the documentary The Inside Job on the causes of the global financial meltdown. He was also depicted in Too Big to Fail, the HBO re-enactment shown recently on Sky’s Rialto channel.

Mr Zoellick is no stranger to speaking his mind and did so on his recent visit to Beijing, where he described China's economic growth model as "unsustainable" He also urged deep reforms to avoid a sharp downturn in growth over the coming two decades.

The warning was issued at a conference where the World Bank and China’s government-backed think tank Development Research Centre presented a report, China 2030, that recommends sharp economic reforms.

In an executive summary, the report calls for "further reforms of state enterprises," including "separating ownership from management." This basically means asset managers will run state-owned firms.

It also says China should build several "world-class research universities," focus heavily on environmental technology, spend more heavily on social programmes, reform its fiscal system and play a central role in international economic issues.

Mr Zoellick told westerner reporters he thought China would engineer a "soft landing" in the next year or so, so growth would remain strong for now.

He was also hopeful the China 2030 report would be carried out by new leaders due to take office by next year, while noting powerful domestic interests would resist these reforms.

"There's a momentum behind reform in China," he said. "I think that in some form you'll see this [report] move ahead."

Putin and beyond
Western observers will wishing their benign reading of China’s future could replicated in Russia, where Vladimir Putin has engineered a successful, and probably popular, return to the presidency.

Mr Putin has come in for strong media criticism. Not the least have been highly unflattering profiles in Newsweek (a chapter on his youth from a longer biography) and the New Yorker (by its editor and one-time Moscow correspondent David Remnick).

An exception to this wave of commentary came from former UK foreign minister Sir Malcolm Rifkind, who provides a balance between Mr Putin’s few positives – stability and predictability – and his weaknesses – lack of imagination, blind nationalism and toleration of corruption.

Sir Malcolm threw up some surprise gems, too, such as the possible release of Mikhail Khodorkovsky, who was jailed on trumped up charges, and a realisation that Russia's backing for the brutal Assad regime in Syria has turned off many allies in the Arab world.

However, more than a few will have noticed that recent events in Syria have been modelled on Russia’s crackdown on Chechnya.

Ironically, events since the overthrow of repressive regimes in Egypt, Tunisia and Libya may have give some solace to those who advocate stability at all costs.

The Muslim vandals who attacked the war cemeteries in Libya are just the tip of anti-western developments there that had been suppressed until now.

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Comments and questions
14

Dear Nevil,

Thank you for choosing to write about the important issue of global poverty.

Unfortunately you have made a number of factual errors that detract from your efforts to shed light on this topic.

1. First, you claim that the World Bank's introduction of a dollar a day poverty line "spawned a huge global business based on government-funded and philanthropic aid".

This is incorrect. Aid has been given by governments since at least the end of the Second World War (with private philanthropy going back further still). No industry was 'spawned' in 1985. As it happens, aid as a percentage of rich country GNI fell in the late 1980s and early 90s.

2. Second, you use the example of China to imply that aid doesn't work. It is true that China has contributed in a major way to declining global poverty. You would expect it to: it's the world's largest country. It is also true that China's poverty reduction successes have not largely been a result of aid. However, as you yourself note - in a moment of apparent confusion - poverty has been falling in almost all of the poorest regions on Earth in recent years. What's more the best available evidence suggests that aid has played a modest but discernible role in this. See the following papers.
http://ideas.repec.org/p/unu/wpaper/wp2011-51.html
http://ideas.repec.org/p/unu/wpaper/wp2011-22.html
http://ideas.repec.org/p/unu/wpaper/wp2010-96.html

Aid's role has been modest because aid flows themselves have been modest. Official Development Assistance is more than one percent of GNI in only a few Scandinavian countries. In most OECD countries it falls far below this. In New Zealand's case, last time I checked, we gave about 0.3% of our GNI as aid. Or, to put it another way: 30 cents from every hundred dollars.

3. You criticise India and Brazil for seeking more say at the World Bank despite poverty being a major issue in these countries. Yet both countries, and particularly Brazil, have made great gains in poverty reduction in recent years (every bit as impressive as those you cite for China). Quite possibly, in the complicated world of poverty reduction, there is actually much that can be learnt from them. For some interesting insights into Brazil's success see: http://opinionator.blogs.nytimes.com/2011/01/03/to-beat-back-poverty-pay-the-poor/

4. You cite research from Banerjee and Duflo to suggest that poor countries are poor owing to the fecklessness of their people (and therefore, one presumes, that aid can do little to help). This is more than just wrong - it is mischievous.

It is indeed true that poor people do not always make economically rational decisions (something that should provide some pause for thought amongst those who advocate free market solutions to poverty - as such solutions are predicated on rational choice models of human behaviour). However, it is not true that the poor are poor simply because of the bad economic decisions they make.

If bad economic decisions were the primary cause of poverty then we would all be poor - because we all make them.

And, in fact, as the Brazilian example that I linked to above shows - one very effective way of reducing poverty is simply to give the poor more money. It turns out that they do not squander all of it - by quite some margin.

Indeed, Banerjee and Duflo, themselves do not lay the blame for global poverty at the feet of the poor. They simply call for a nuanced approach to understanding and trying to solve the problems of global poverty. An approach which is informed and driven by evidence.

You would do well to learn from their example.

Terence Wood

I enjoyed reading Terence W comment. Balanced and evidential writing.

The "poor" are that way because of bad choices by politicians, it has been long known.
You are absolutely correct re "aid industry" it is an international disgrace. And who is responsible? Politicians!!

Thank you Terence for an intelligent response to Nevil's misguided rant. India and China have lifted millions out of extreme poverty by increasing the health and education levels of many of its citizens. Until some of the worlds poorest nations can do the same they will struggle to attract foreign investment. Aid kick starts the process that enables trade to work. Look at South Korea, thanks to wisely investing aid they were able to begin climbing the ladder of economic development using trade.

By Paul Joseph Watson

Director of the White House’s national economic council Gary Sperling’s announcement that a plan for a “global minimum tax” is in the works continues the efforts of Barack Obama himself to oversee a massive transfer of wealth under the auspices of the UN.

The call also echoes similar rhetoric out of the United Nations which recently announced an agenda to impose a world tax on all financial transactions to “help the poor”.

“We need a global minimum tax so that people have the assurance that nobody is escaping doing their fair share as part of a race to the bottom or having our tax code actually subsidized and facilitate people moving their funds to tax havens,” Sperling said today at an official meeting.

He added that more details about the proposal would be forthcoming before the end of the month.

The fact that President Barack Obama’s economic advisors are now pushing a global tax should not be a surprise given the fact that Obama himself introduced a bill when he was in the Senate, the Global Poverty Act of 2007, which would have committed 0.7% of America’s gross national product, or an additional $845 billion over 13 years in addition to existing foreign aid expenditures, for the purposes of “reducing global poverty.”

Obama’s bill was introduced with the aim of satisfying the “[U.N.] Millennium Development Goal of reducing by one-half the proportion of people worldwide, between 1990 and 2015, who live on less than $1 per day.”

The United Nations has repeatedly tried but failed to piggy-back a global tax onto the back of climate change deals at successive summits in Copenhagen, Cancun and most recently in Durban.

The UN has also invoked the plight of the world’s poor in its bid to establish a system of global taxation.

The Commission on Social Development met earlier this month at UN headquarters in New York to advance the agenda for a world tax imposed on all financial transactions to fund a global model of social services that will provide “needy people” with a basic income, free healthcare, education and housing.

According to the report, the new global tax is designed to be a progressive scale, with higher earners paying more to help provide “all needy people with a basic income, healthcare, education and housing.”

The Obama administration’s plans for a global tax are in complete synergy with the United Nations agenda to achieve the same objective, which as a chilling 2010 UN blueprint made clear, revolved around a $45 trillion transfer of wealth from richer countries as part of a process that would enable the United Nations to build a structure of global governance in pursuit of a “Green World Order,” while lowering living standards in the west.

The timeline by which this goal had to be accomplished was June 2012, the date of the UN’s World Summit on Sustainable Development in Rio, which will mark the 20th anniversary since the notorious “Earth Summit” held in the same city.

In reply to: Paul Joseph Watson | Tuesday, March 13, 2012 - 4:18pm

Is this tax something to do with UN Agenda 21?

Those people are real communitarian freedom haters.

Paul Watson:

1. The tax that *Gene* Sperling was talking about would be one to prevent US companies circumventing US tax laws by moving their wealth to overseas tax havens. At a time of large deficits what exact is wrong with asking them to pay their fair share? Would you rather the burden be facilitated by ordinary working Americans?

2. Sperling's proposal is completely different from the global financial transaction tax. But, once again, what would be wrong with such a tax? Financial speculation caused the GFC and a economists including at least one Nobel Prize winner have proposed such taxes as a means of curtailing speculation for a long time. Do you really want to live in a world where global financial flows, rather than being directed to productive investment, continue to behave like the money of casino gamblers?

3. As for the Global Poverty act, what would be wrong with the World's wealthiest country devoting 70 cents out of every 100 dollars it earned to helping tackle global poverty? It's hardly an onerous or unaffordable commitment.

Terence...you appear to be a collectivist. Go away.

Terence do you support the redistributionist goals of UN Agenda 21 and what is your position on private property ownership? Thanks, N

Hi Niamh. I'd think Terence would support Agenda 21 as one of their core pillars is 'sustainable development' which the UN characterise as being reachable via upward and downward convergence i.e. the West massively transfer their wealth to the 'poor' nations and thus move downwards, whilst the recipients conversely move upwards until an imaginary equity is reached. In reality though the net effect would be to further impoverish the West's poor by transferring their wealth to the already rich 2nd and 3rd world elites.

Terence Wood is a shill for these guys as he's in the 'development' industry. Read his comments. He hates free trade and basically wants the West to fall.

You're right Holly Terence is a Frankfurt Schooler.

http://nzadds.org.nz/about/

They apparently apply critical theory to development issues.

http://en.wikipedia.org/wiki/Critical_theory

Bunch of anti West watermelons (green on the outside red on the inside).

Niamh,

What is UN Agenda 21?

Holly,

I don't hate free trade although I do think that in some cases infant industry protection via targeted tariffs might be a good strategy for some developing countries. It's what trade theory suggests and also seems to have played a role in the development of countries like South Korea.

Gem,

Actually, I only went to Hutt Valley High School (and despite that I still only very rarely want the West to fall...)

Niamh,

Sorry, forgot the other part of your question.

In an outcome sense I think private property rights are an important aspect of development, and that they appear to be essential to successful economic development. (In other words I'm in favour).

In an ethical sense I support them but I don't think they're absolute (i.e. I don't think taxation is theft).

Also, it's worth noting that, while private property rights are an important aspect of development they are often difficult to create and maintain in a way that is just and pro-development, in the contexts of many developing countries.

Nevil, could you clarify what your point is about the global recession and poverty? It's pretty well documented that developing countries were not as badly affected as the developed world. Is this an argument against aid? I see you wrote nothing about the least developed countries.