Global Poverty 1 Lecture 22

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

Average Annual Per Capita Growth Economic 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 Source: World Bank. 2002. World Development Indicators, 2001. Washington, D.C.: The World Bank.

Quality of Life Indicators 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 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? No Mystery to Raising Income Rising Incomes Come From Rising Productivity Productivity Comes From Investment Thus, Portion of Income Must be Saved Savings 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 Industry Taxation of Agricultural Sector Subsidization of Manufacturing Industries Variety 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 System Seek 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 Trade Try to Create Greater Role for UN in Trade Preferential Access to Advanced Countries’ Markets Create Commodity Cartels Not Very Successful

The New International Economic Order,1973-1982 The Oil Shock and Commodity Power Commodity 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 Resources Cheaper and Easier Access to Northern Technology Increased Foreign Aid (.7% of North’s GNP) Eliminate LDC Debt Greater Influence over IMF and World Bank