is capitalism good for the poor ?
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Introduction: “What Is Poverty and Who Are the Poor? ”. Is Capitalism Good for the Poor ?. 1 Billion People Live in “Extreme Poverty” World Bank. 1,400,000,000 $1.25/day. 1,000,000,000 $1.00/day. World Bank 2010. Economic Terminology. Income Wealth GDP (Gross Domestic Product) - PowerPoint PPT PresentationTRANSCRIPT
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Introduction:
“What Is Poverty and Who Are the Poor? ”
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1,400,000,000 $1.25/day
1 Billion People Live in “Extreme Poverty”World Bank
1,000,000,000 $1.00/day
World Bank 2010
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Economic Terminology
• Income• Wealth• GDP (Gross Domestic Product)• Per capita GDP
Why do we use GDP to measure poverty?
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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/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.
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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
Sources: World Bank Poverty and Inequality http://www.worldbank.org/Data/Views/Reports/TableView.aspx (May 1,2012
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Countries of the World; Low, Middle and High Income
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The number of extreme poor has declined by 500 million
since 1981
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Share of World Population in Poverty, 1820 – 1998 ($1/day)
World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27
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Number of People Living on Less Than $1 Per Day, 1820 - 1998
1980
World BankDavid Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 27
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World Bank 2009
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• ..\..\..\Videos\RealPlayer Downloads\Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The Joy of Stats - BBC Four.flv
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Height Is a Proxy for Economic Well-Being
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~1750
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Years of Life Expectancy at Birth
PlaceMiddle Ages
Select Years 1950-55 1975-80 2005-10
France ~30 (1800) 66 74 81
UK 20-30 ~36(1799-1803)
69 73 79
India 25(1901-11)
39 53 64
China 25-35(1929-31)
41 65 73
Africa 38 48 51
World 20-30 46 60 67
Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (2011); UNDP (2002) http://hdr.undp.org/statistics/data/indic/indic_1_1_1.html
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Real Gross Domestic Product Per Capita (1990$ International PPP)
Area 1000 1500 1700 1820 1952 1995 2001
Europe $400 ~$640 870 1,130 4,370 13,950 19,256
USA 600 1,260 10,650 23,380 27,948
India 530 530 610 1,570 1,957
China 450 600 600 600 540 3,200 3,583
Africa 400 400 400 400 1,220 1,489
World 420 550 600 670 2,270 5,190 6,049
Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.
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Real Gross Domestic Product Per Capita (2005$ International PPP)
1995 2001 2007 2010
Europe $24,674 28,364 30,789 29,765
USA 33,903 39,602 41,260 40,650
India 1,452 1,832 2,685 3,240
China 1,849 2,868 5,239 6,810
Africa 1,498 1,589 1,914 2,022
World 7,037 7,955 9,535 9,869
Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.
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Number of People Living on Less than $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
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Poverty has declined according to China’s and India’s poverty lines
0
100
200
300
1977-78 1987 1993 1999
Millions of people
India
China
David Dollar, Development Research Group, World Bank. “Capitalism, Globalization and Poverty.” unpublished paper, written for The Foundation for Teaching Economics, March, 2003, p. 24.
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What does Capitalism
have to do with Poverty?
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Measurement: Fraser Institute
Economic Freedom:
• Size of government and taxation• Protection of private property and the rule of
law• Soundness of money• Trade regulation and tariffs• Regulation of business, labor and capital
markets
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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
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Per Capita Income and Economic Per Capita Income and Economic Freedom QuartileFreedom Quartile
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
GD
P P
er C
apit
a (p
pp
), 2
009
Least FreeQuartile
3rd Quartile2nd QuartileMost FreeQuartile
Most Free ……………. Least FreeMost Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development Sources: The Fraser Institute; The World Bank, World Development Indicators, Indicators, 20112011
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Overall Economic Freedom Index: Top Ten
0 2 4 6 8 10
Score (out of 10)
Hong Kong
Singapore
New Zealand
Switzerland
Australia
Canada
Chile
United Kingdom
Mauritius
United States
Source: The Fraser Institute 2011.Source: The Fraser Institute 2011.
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Overall Economic Freedom Index: Bottom Ten
0 2 4 6 8 10
Score (out of 10)
Chad
Burundi
Congo, Rep. Of
Guinea-Bissau
Central Afr. Rep.
Congo, Dem. R.
Angola
Venezuela
Myanmar
Zimbabwe
Source: The Fraser Institute 2011.Source: The Fraser Institute 2011.
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Per Capita Income and Economic Per Capita Income and Economic Freedom QuartileFreedom Quartile
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
GD
P P
er C
apit
a (p
pp
), 2
009
Least FreeQuartile
3rd Quartile2nd QuartileMost FreeQuartile
Most Free ……………. Least FreeMost Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development Sources: The Fraser Institute; The World Bank, World Development Indicators, Indicators, 20112011
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Most Free …………….. Least FreeMost Free …………….. Least FreeSources: The Fraser Institute; The World Bank, World Development Indicators, 2011.Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.
Income Share of the Poorest 10% and Economic
Freedom
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
Inco
me S
hare
Held
by
Lo
west
10%
, 1990-2
009
Least FreeQuartile
3rdQuartile
2ndQuartile
Most FreeQuartile
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Income of the Poorest 10% and Economic Income of the Poorest 10% and Economic FreedomFreedom
$0$1,000$2,000$3,000$4,000$5,000$6,000$7,000$8,000$9,000
Inco
me
of
the
Lo
wes
t 10
%,
1990
-200
9
Least FreeQuartile
3rdQuartile
2ndQuartile
Most FreeQuartile
Most Free ……………. Least FreeMost Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development Indicators, Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.2011.
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Most Free ……………..…… Least FreeMost Free ……………..…… Least FreeSources: The Fraser Institute; The World Bank, World Development Indicators, 2011.Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.
Growth in Real GDP Per Capita (developing nations) and Economic Freedom Quartile
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
GD
P P
er
Ca
pit
a %
Gro
wth
,
19
90
-20
09
Least FreeQuartile
3rd Quartile2nd QuartileMost FreeQuartile
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Most Free ……………. Least FreeMost Free ……………. Least Free
Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.Sources: The Fraser Institute; The World Bank, World Development Indicators, 2011.
Life Expectancy at Birth and Economic Freedom
Quartiles
0
20
40
60
80
Yea
rs
Least FreeQuartile
3rd Quartile2nd QuartileMost FreeQuartile
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Most Free …………………. Least FreeMost Free …………………. Least Free
Sources: The Fraser Institute; New Economic Foundation (2009), The (un)Happy Planet Sources: The Fraser Institute; New Economic Foundation (2009), The (un)Happy Planet Index 2.0. Why good lives don't have to cost the Earth.Index 2.0. Why good lives don't have to cost the Earth.
Economic Freedom and Life Satisfaction
Higher values indicate higher levels of satisfaction
0.01.02.03.04.05.06.07.08.0
Lif
e S
atis
fact
ion
(o
ut
of
10)
Least FreeQuartile
3rd Quartile2nd QuartileMost FreeQuartile
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EFW mapEFW map
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Economic Growth
improves the lives of the poor by making the pie bigger
Bigger “slices” mean higher standards of
living
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C:\Users\Public\Desktop\Gapminder Desktop.lnk
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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.
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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.
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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.
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Lesson 2: “Property Rights and the Rule of Law”
Property RightsProperty Rights benefit the poor by making
owned capital secure and productive.
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Formal Legal Characteristics
• Definable• Enforceable• Transferable
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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.
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Defined but not Enforced
• A right that is defined but not enforced is useless.
defending & enforcing Property Rights is paramount
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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.
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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.
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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 right enjoyed by the rich.
• Secure property rights also contribute to economic growth by enabling the poor to shift effort from protective to productive activities.
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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.
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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.
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Big Picture
• To effectively stimulate economic growth property rights must exist within a society characterized by stable and predictable rules of law.
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Lesson 3: “Competition Opens Markets to the Poor”
The Role of Competition
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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.
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Non-Market Competition
• What determines participation?– Connections– Wealth– Etc.
• What determines production?– No effective production signals.– No effective incentives to innovate.
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Market Competition
– Suppliers compete with Suppliers.– Demanders compete with Demanders– All are trying to Maximize Profits
• Profits draw a crowd
– It is about increasing revenue and lowering costs.
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Revenue and Costs
• Since demand curves slope downward, for producers, there are three ways to increase profits.– Sell more at lower prices.– Lower costs– Innovate new goods that can command a premium.
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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
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More Sellers More Supplied at Lower Prices
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Innovation = Lower Costs = Increased Supply
$$$$$
$$$
$
2 31
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$$$$$
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2 31
Graphing calculator
Communications
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ConstructionEngineering
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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.
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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.
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Case Study – Opening Markets in China
1978• 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.
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Decline in Numbers of People Living Below the Poverty Line in China, 1977 – 1999
0
100
200
300
1977-78 1987 1993 1999
Millions of people
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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.
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Economic Growth Overcomes Poverty
Markets create wealth and foster economic growth
Conclusions and Caveats
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Provide the Framework and Incentives for the Creation of Wealth
•Property Rights•Rule of law•Competitive markets•Entrepreneurship / Innovation
Institutions of Capitalism
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Questions that Remain
Unequal Income Distribution
Income Mobility
Individualism of Property Rights
Barriers to the Institutions of Capitalism
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Institutions of Capitalism
The Mix
Importance of the Rule of Law
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Capitalism and Markets
•Lock us in mutual dependence
•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