make your mark on the world:

1. Place _____ dots on the 3 POOREST countries in the world.

2. Place ______ dots on the 2 countries that have experienced the greatest DECREASE in poverty over the past 3 decades.

3. Place a ____ dot on the region of the world that has experienced the greatest INCREASE in poverty over the last 3 decades.

4. Place a “vote” on each of the surveys:

Survey 1: Since 1980, has the percentage (%) of the world’s population living in extreme poverty INCREASED or DECREASED?

Survey 2: Since 1980, has the number (#) of extremely poor people in the world INCREASED or DECREASED?

More Than 1 Billion People Live in Extreme PovertyWorld Bank

% of people in developing world•2010: 21%•1990: 43%•1981: 52%

$1.25/day pppWorld Bank Definition

# of people in developing world•2010: 1.22 billion•1990: 1.91 billion•1981: 1.94 billion

World Bank Poverty Overview, Apr. 2014http://www.worldbank.org/en/topic/poverty/overview

Economic Terminology

• Income

• Wealth

• GDP (Gross Domestic Product)

• Per capita GDP

Why do we use GDP to measure poverty?

Economic Terminology

• Absolute Poverty – measured against a designated minimum threshold of material well-being. The incomes of the poor fall below the minimum threshold. – Current standard = $1.25/day PPP

• Relative Poverty - identified by comparing levels of material well-being experienced by different individuals or groups, rather than by comparing the level of well-being to a standard.

% of Population in Absolute Poverty

Consumption Measure of Number of Poor by World Region

Poverty Can Be Measured by Either

Output (GDP) or Consumption

Regions 20005 2008  

East Asia and the Pacific 332 million 284 million 

Eastern Europe and Central Asia

6 million 2 million  

Latin America and the Caribbean

48 million 37 million  

Middle East and North Africa

11 million 9 million  

South Asia 598 million 571 million  

Sub-Saharan Africa 395 million 386 million  

Total 1.39 billion 1.289 billion  

Reduction in number of poor, 2005-2008: 101 million  

World Bank Poverty and Inequality http://www.worldbank.org/Data/Views/Reports/TableView.aspx

(5/1/2012)

Countries of the World; Low, Middle and High Income

http://kff.org/global-indicator/country-income-classification/#map (July, 2012)

The number of extreme poor has declined by 700 million

& 33% since 1981

• ..\..\..\Videos\RealPlayer Downloads\Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The Joy of Stats - BBC Four.flv

Height Is a Proxy for Economic Well-Being

~1750

Years of Life Expectancy at Birth

PlaceMiddle Ages

Select Years 1950-55 1975-80 2012

France ~30 (1800) 66 74 83

UK 20-30 ~36(1799-1803)

69 73 82

India 25(1901-11)

39 53 66

China 25-35(1929-31)

41 65 75

Africa 38 48 58

World 20-30 46 60 70

Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (2011); UNDP (2002) http://hdr.undp.org/statistics/data/indic/indic_1_1_1.html http://www.who.int/gho/mortality_burden_disease/life_tables/situation_trends_text/en/http://data.worldbank.org/indicator/SP.DYN.LE00.IN

Real Gross Domestic Product Per Capita ($ International PPP)

Area 1000 1500 1700 1820 1952 1995

Europe $400 ~$640 870 1,130 4,370 13,950

USA 600 1,260 10,650 23,380

India 530 530 610 1,570

China 450 600 600 600 540 3,200

Africa 400 400 400 400 1,220

World 420 550 600 670 2,270 5,190

Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 20032012 data: Index Mundi: www.indexmundi.com.

Real Gross Domestic Product Per Capita (2005$ International PPP)

1995 2001 2007 2010 2012

Europe $24,674 28,364 30,789 29,765 25,434

USA 33,903 39,602 41,260 40,650 49,000

India 1,452 1,832 2,685 3,240 3,700

China 1,849 2,868 5,239 6,810 8,500

Africa 1,498 1,589 1,914 2,022 NA

World 7,037 7,955 9,535 9,869 12,700

Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 20032012 data: Index Mundi: www.indexmundi.com..

Number of People Living on < $1.25/day(millions)

1981 1990 1999 2005 2008

East Asia & Pacific

1,096 926 656 332 284

Sub-Saharan Africa

205 290 376 395 386

Source: World Bank Poverty and Inequality Databasehttp://databank.worldbank.org/Data/Views/Reports/TableView.aspx (April 30, 2012)

The Good News and The Bad News

Poverty as Measured by China’s Poverty Line

http://www.indexmundi.com/g/g.aspx?c=ch&v=69

2011 new poverty lineRBM 2300($363 US)

Poverty as Measured by India’s Poverty Line

http://www.indexmundi.com/g/g.aspx?v=69&c=in&l=enhttp://indiatoday.intoday.in/story/poverty-line-planning-commission-tendulkar-methodology-congress/1/296149.html

rural poverty line:816 rupees/mo. =

$13.57/mo. or $162.86/yr.

urban poverty line:1000 rupees/mo. =

$16.63/mo. or $199.59/yr.

What does Capitalism

have to do with Poverty?

20

Measurement by Fraser Institute

Economic Freedom: 5 measurable indicators

• Size of government and taxation• Protection of private property & rule of law• Soundness of money• Trade regulation and tariffs• Regulation of business, labor & capital markets

21

Background: Economic Freedom Project

• 25 year project • Transparency is a highly valued part of the project• Based entirely on third party data from World Bank, International

Monetary Fund (IMF), Global Competitiveness Report, etc. (based on both objective and survey data)

• We rank 141 countries representing 95% of the world’s population according to the extent to which they permit their citizens to be economically free

www.freetheworld.com – updated each fall

Per Capita Income and Economic Freedom Quartile

$0$5,000

$10,000$15,000$20,000$25,000$30,000$35,000$40,000

GD

P P

er C

apit

a (p

pp

), 2

010

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, Sources: The Fraser Institute; The World Bank, World Development Indicators, 20132013

Most Free ……………. Least Free Most Free ……………. Least Free

Overall Economic Freedom Index and the Top 10

0 2 4 6 8 10

Score (out of 10)

Hong Kong

Singapore

New Zealand

Switzerland

Unit. Arab Em.

Mauritius

Finland

Bahrain

Canada

Australia

Source: The Fraser Institute, 2013

Overall Economic Freedom Index and the Bottom 10

0 2 4 6 8 10

Score (out of 10)

Algeria

Congo, Dem. R.

Burundi

Central Afr. Rep.

Angola

Chad

Zimbabwe

Congo, Rep. Of

Myanmar

Venezuela

Source: The Fraser Institute., 2013Source: The Fraser Institute., 2013

Growth in Developing Nations Per Capita and Economic Freedom Quartile

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Gro

wth

GD

P p

er

ca

pit

a

(av

era

ge

an

nu

al

%),

19

91

-

20

11

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013..

Most Free ……………. Least Free Most Free ……………. Least Free

%

Income Share of the Poorest 10% and Economic Freedom

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

Perc

en

tag

e s

hare

of

GD

P

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.

Most Free ……………. Least Free Most Free ……………. Least Free

Income of the Poorest 10% and Economic Freedom

$0

$2,000

$4,000

$6,000

$8,000

$10,000

$12,000

Inco

me o

f th

e L

ow

est

10%

, 2011

Least FreeQuartile

3rdQuartile

2ndQuartile

Most FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013..

Most Free ……………. Least Free Most Free ……………. Least Free

Life Expectancy at Birth and Economic Freedom Quartiles

45

55

65

75

85

Yea

rs

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.

Most Free ……………. Least Free Most Free ……………. Least Free

Economic Freedom and Life Satisfaction

3.03.54.04.55.05.56.06.57.0

Lif

e S

atis

fact

ion

o

f o

f 10

Least FreeQuartile

3rd Quartile2nd QuartileMost FreeQuartile

Sources: The Fraser Institute; Happy Planet Index 2012

Most Free ……………. Least Free Most Free ……………. Least Free

30

EFW mapEFW map

Economic Growth

improves the lives of the poor by making the pie bigger

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Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction.

• Private Property Rights• Rule of law• Open, competitive markets• Entrepreneurship and innovation

Proposition:

A nation’s institutions determine its ability to reduce poverty.

Lesson 2: “Property Rights and the Rule of Law”

Property RightsProperty Rights benefit the poor by making

owned capital secure and productive.

Formal Legal Characteristics

• Definable:

• Enforceable:

• Transferable:

An Important Note

• The term “Property Right” is shorthand for Human Rights.– The right to freely use and transfer

possessions including yourself.

• People, Not Property.– Recognition of people’s right of ownership to

themselves and their labor.

Defined but not Enforced

• A right that is defined but not enforced is useless.

Property Rights and Growth

• Property Right holders have an incentive to preserve their property.

• Owners consider the future.

• Owners will improve a property.– The value of improvements reside with the

owner.

Investment• Secure property rights make investment

more likely.

• Property Rights allow people to obtain debt.– Use of past and future incomes.– Collateralization is of greatest benefit to the

poor.

Property Rights and the Poor

• Property Rights are of the greatest benefit to the poor.– The rich can enforce rights over their

property. The poor cannot.• The definition and enforcement of Property

Rights gives the poor the same rights enjoyed by the rich.

• Secure property rights also contribute to economic growth by enabling the poor to shift effort from protective to productive activities.

Enforcing the Rules

• Rule of Force– Anarchy

• Rule of Men– Laws are enforced at the good will of the

enforcer.

• Rule of Law– Both the governed and the governing are

ruled by the same laws.

Big Picture

• Rights to property promote economic growth by encouraging preservation, improvement and investment in owned resources.

• In societies without clearly defined property rights the poor are disadvantaged because they lack the resources to enforce their rights.

• To effectively stimulate economic growth property rights must exist within a society characterized by stable and predictable rules of law.

Lesson 3: “Competition Opens Markets to the Poor”

The Role of Competition

To Compete or Not?

The question is not whether we

shall have competition, but what

forms it will take.

- Paul Heyne

• Competition will always occur. – Scarcity

• We cannot fulfill all our wants at no cost.

Non-Market Competition

• What determines participation?– Connections– Wealth

• What determines production?– No effective production signals.– No effective incentives to innovate.

Market Competition

• Suppliers compete with Suppliers.

• Demanders compete with Demanders

• All are trying to Maximize Profits– Profits draw a crowd

• Competition creates incentives to increasing revenue and lowering costs.

Revenue and Costs

• Demand curves slope downward – for producers, there are three ways to

increase profits.1. Sell more at lower prices.

2. Lower costs

3. Innovate new goods that can command a premium.

Prices and Production• Prices are determined by the interaction of the Supply and Demand for a

good.

D

S

Pe

Qe

D

S

Pe

Qe

P2e

Q2e

• An Increase in the Supply of a good increases quantity traded and lowers price

More Sellers More Supplied at Lower Prices

Innovation = Lower Costs = Increased Supply

$$$$$

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Communications

ConstructionEngineering

Opportunity

• The greatest impact on the poor comes from the opportunities that competitive markets provide.– Employment – Increased output – increased

labor usage.– Entrepreneurship – The poor can get in the

game – not restricted to approved classes.

Case Study – Opening Markets in China

1977-78 • 250 million Chinese peasants with incomes below

the country’s official poverty line of approximately 70 cents (U.S.) per day.

• 600-700 million Chinese living on less than $1 per day, the commonly used international poverty line.

• Most of the population were peasants, herded together into communal farms. This system produced very poor economic results with widespread poverty and periodic famines.

• Economic reforms begin: limited property rights and open markets

• Communes were broken up and families given individual plots of land and families were allowed to sell some of their output in farm markets.

• The right to enter the market with their produce drastically changed the incentives facing Chinese farmers.

• This institutional reform led to a dramatic surge in grain production in China and fueled spectacular poverty reduction.

The Big Picture

• Competition and Markets benefit the poor by– Providing more goods at lower prices.– Increasing the quality and variety of goods

available.– Providing opportunities for work.– Stimulating entrepreneurial activities.– Unleashing the talent and abilities that were

always there.

Conclusions & Caveats

Economic Growth Overcomes Poverty

Markets create wealth and foster economic growth

Provide the Framework and Incentives for the Creation of Wealth

•Property Rights•Rule of law•Competitive markets•Entrepreneurship / Innovation

Institutions of Capitalism

Ongoing Study . . .

Unequal Income Distribution

Income Mobility

Individualism of Property Rights

Barriers to the Institutions of Capitalism

The Mix of Institutions Matters

Importance of the Rule of Law

Capitalism and Markets

•Forge interdependence

•Promote other-regarding behavior

•Foster a civil society where anonymous cooperation is the norm

•Benefit the poor in ways that are most important to them, providing

Wealth, Dignity, and Mobility

New Research & Suggested Reading• TED Talk by Yale economist Keith Chen: language and economic behavior

– https://www.youtube.com/watch?v=lw3YTbubyjI

• Paul Collier: Exodus (migration and development)

• Tim Harford: Adapt – Why Success Always Starts With Failure

• William Easterly: Tyranny of Experts (failure of foreign aid, lack of respect for rights of the poor)

• David Dollar and Art Kray: “Growth is Still Good for the Poor,” August, 2013 – http://www-wds.worldbank.org/external/default/WDSContentServer/IW3P/IB/

2013/08/13/000158349_20130813100137/Rendered/PDF/WPS6568.pdf%20

• AfroBarometer – non-partisan, World Bank funded non-profit: “After a Decade of Growth in Africa, Little Change in Poverty at the Grassroots,” Oct. 2013 (growth insufficient in absence of other institutions)

– http://www.afrobarometer.org/files/documents/policy_brief/ab_r5_policybriefno1.pdf

– http://www.aljazeera.com/news/africa/2013/10/study-finds-growth-not-helping-africa-poor-201310115130119155.html

• “Counting and Multidimensional Poverty” 2011 Alkire & Foster study for OPHI – Oxford Poverty *& Human Development Initiative (the missing dimensions of poverty data)

– http://www.ifpri.org/sites/default/files/publications/oc63ch03.pdf