McGraw-Hill/Irwin ©2008 The McGraw-Hill Companies, All Rights Reserved Global Poverty Chapter 22

2 American Poverty Poverty, like beauty, is often in the eye of the beholder.

3 Official Poverty Thresholds The U.S. government sets the poverty threshold as how much money a family needs to purchase a minimally adequate diet. Poverty threshold (U.S) is an annual income of less than $20,000 for a family of four (2007, inflation adjusted). LO1

4 Inflation Adjustments The price of the poverty basket rises with inflation. The current $20,000 threshold breaks down in the following way: One third goes for food. Implied rent is about $ per month. LO1

5 U.S. Poverty Count Over 35 million U.S. households are poor making the poverty rate 12.5 percent. Poverty rate is the percentage of the population counted as poor.

6 How Poor is U.S. “Poor”? Critics of U.S. poverty statistics say that fewer Americans are poor and even fewer are really destitute. In-kind income. Material possessions. LO1

7 In-Kind Income The official tally only counts cash income and ignores in-kind transfers. In-kind transfers are direct transfers of goods and services, rather than cash, e.g., food stamps, Medicaid benefits, and housing subsidies. LO1

8 Material Possessions American poverty isn’t synonymous with homelessness, malnutrition, chronic illness, or social isolation. Many of America’s poor families have material possessions such as homes, motor vehicles, telephones, color TVs, major appliances, etc. LO1

9 Global Poverty American poverty is more about relative deprivation than absolute deprivation. In the rest of the world, poverty is all about absolute deprivation. LO1

10 Low Average Incomes Over three-fourths of the world’s population live in low-income or low- middle-income nations. Average income in those nations is under $4,000 per year – less than one- tenth of U.S. per capita GDP. LO1

11 World Bank Poverty Threshold Extreme poverty (world) is the World Bank standard of less than $1 per day per person (inflation adjusted). Severe poverty (world) is the World Bank standard of less than $2 per day per person (inflation adjusted). LO1

12 Inflation Adjustment World Bank poverty thresholds are adjusted each year for inflation and for changing consumption patterns. The $1/day standard of 1985 is about $1.50/day in today’s dollars. LO1

13 Global Poverty Counts The World Bank classifies over a billion people as being in extreme poverty. There are nearly 3 billion in severe poverty. LO2

14 Geography of Extreme Poverty LO2

15 Population in Severe Poverty (less than $2/day) LO2 CountryPercent Number (millions) Nigeria92129 Mali9111 Bangladesh83117 India80864 Ethiopia7855 China47611 World542,700

16 Social Indicators Living on less than $2/day means always being hungry, malnourished, ill- clothed, dirty, and unhealthy. Life expectancy is frighteningly short. Only one out of two women and two out of three men are literate. LO2

17 Persistent Poverty Global poverty is not only more desperate than American poverty, but is also more permanent. Social institutions and economic stagnation keep a lid on upward mobility. LO2

18 Goals and Strategies Global poverty is so extensive that no policy approach offers a quick solution. LO2

19 The U.N. Millennium Goal The millennium poverty goal is the United Nations goal of reducing the global rate of extreme poverty to 15 percent by LO2

20 Why Should We Care? Humanitarianism is a starting point for global concern for poor people. Poverty and inequality sow the seeds of social tension both within and across national borders. Poverty in other nations limits potential markets for international trade. Undeveloped human capital limits human creativity.

21 Glaring Inequalities LO1

22 Policy Strategies There are only two general approaches to reducing global poverty: Redistribution of income within and across nations. Economic growth that raises average incomes.

23 Income Redistribution The potential for redistribution is often exaggerated and its risks underestimated.

24 Within-Nation Redistribution Poor nations are so poor that redistributing income will not significantly help out the very poor.

25 Economic Risks Incentives to produce may be harmed if the rewards to saving, investment, entrepreneurship, and management are expropriated. LO3

26 Expenditure Reallocation Governments can reduce poverty by reallocating government expenditures: Reallocate resources from military to schools, health services, and infrastructure. Redirect resources to rural development and core infrastructure. LO3

27 Across-Nation Redistribution Redistribution across national borders can make even bigger dents in global poverty. LO3

28 Foreign Aid The United Nations’ millennium aid goal is to raise foreign aid levels to 0.7 percent of donor-country GDP.

29 Foreign Aid CountryTotal Aid ($millions)Percent of Donor Total Income Australia1, Canada2, Denmark2, France8, Japan8, Italy2, Norway2, United Kingdom7, United States19, Nations Total79, %

30 Nongovernmental Aid Official development assistance is augmented by private charities and other nongovernmental organizations.

31 Economic Growth Across-nation transfers alone cannot eliminate global poverty. The key to ending global poverty is economic growth. LO3

32 Increasing Total Income Redistributing existing income doesn’t do the job; total income has to increase. This is what economic growth is all about. Economic growth – an increase in output (real GDP); an expansion of production possibilities. LO3

33 Unique Needs Poor nations need the basics – the bricks and mortar elements of an economy such as water systems, roads, schools, and legal systems. LO3

34 Growth Potential Every percentage point of economic growth increases the total income of low-income and lower-middle-income nations by about $55 billion. Global poverty could be cut in half by 2015 if these nations could grow by 3.8 percent per year. LO3

35 Growth Potential The decline in Chinese poverty accounted for most of the reduction in global poverty from 30 percent in 1990 to 21 percent in LO3

36 Reducing Population Growth Reducing population growth rates in the poorest nations is one of the critical keys to reducing global poverty. LO3

37 Contraceptive Use (percent)

38 Growth Rates in Selected Countries, Average Annual Growth Rate ( ) of GDPPopulation Per Capita GDP High-income countries United States Canada Japan France

39 Growth Rates in Selected Countries, Average Annual Growth Rate ( ) of GDPPopulation Per Capita GDP Low-income countries China India Nigeria Ethiopia4.22.1

40 Growth Rates in Selected Countries, Average Annual Growth Rate ( ) of GDPPopulation Per Capita GDP Low-income countries Kenya Paraguay Venezuela Haiti

41 Human Capital Development The next key to reducing poverty is to increase human capital to make the existing population more productive. Human capital – the knowledge and skills possessed by the workforce. LO3

42 Education Few people in poor nations are literate. Educational deficiencies are greatest for females which creates an inequality trap for them. An inequality trap is the institutional barrier that impedes human and physical capital investment, particularly by the poorest segments of society. LO3

43 Education People in poor nations have unequal access to schools. Physical access to schools in rural areas is difficult. Children in the poorest families don’t go to school because they need to work to help support their families. LO3

44 School Attendance (6-11 Year-olds Not in School) LO3

45 Health Health care is a critical dimension of human capital development. Immunization rates are low. Water and sanitation facilities are in short supply. Professional health care is hard to find. LO3

46 Rostow’s 5 Stages of Development Stage 1: Traditional society – rigid institutions, low productivity, little infrastructure, dependence on subsistence agriculture. Stage 2: Preconditions for takeoff – improve institutional structure, increased agricultural productivity, emergence of an entrepreneurial class.

47 Rostow’s 5 Stages of Development Stage 3: Takeoff into sustained growth – increased saving and investment, rapid industrialization, growth-enhancing policies. Stage 4: Drive to maturity – spread of growth process to lagging industrial sectors.

48 Rostow’s 5 Stages of Development Stage 5: High mass consumption – high per capita GDP attained and accessible to most of population.

49 Meeting Basic Needs To get beyond Rostow’s stage 1, poor nations must substantially improve the health and education of the mass of poor people. LO3

50 Implied Costs The money needed to meet the basic needs of poor nations is modest. The challenge for poor nations is to get their resources applied to these basic needs. LO3

51 Capital Investment Poor nations need to sharply increase capital investment to reach Rostow’s Stages 2 and 3. LO3

52 Low Investment Rates LO3

53 Internal Financing If internally financed, increasing the investment rate requires poor nations to increase saving by cutting back on domestic consumption. Investment rate – the percentage of total output (GDP) allocated to the production of new plant, equipment and structures. LO3

54 Internal Financing Pervasive poverty in poor nations sharply limits their ability to increase savings. Microfinance can be critical to escaping poverty. Microfinance – the granting of small (micro), unsecured loans to small business and entrepreneurs. LO3

55 Inflation Financing Some nations have used inflation to shift resources from consumption to private investment. This inflation tax ultimately backfires when both domestic and foreign investors lose confidence in the nation’s currency. LO3

56 External Financing Poor nations have to get external funding to lift their investment rate. LO3

57 Agricultural Development Poor nations are heavily dependent on agriculture. LO3

58 Low Farm Productivity To grow their economies – to rise out of stage 1 – poor nations have to invest in agricultural development. Low productivity keeps poor nations dependent on agriculture. Productivity – output per unit of input, e.g. output per labor-hour. LO3

59 Agricultural Share of Output LO3

60 Low Farm Productivity $36,863 $118 $373 $103 $309 $168 $0$200$400$600$800$1,000 United States Ethiopia China Burundi Bangladesh Angola LO3

61 Institutional Reform A nation needs an institutional structure that promotes economic growth: Property rights. Entrepreneurial incentives. Equity. Business climate. LO3

62 Business Climates Affect Growth LO3

63 Investment Climate LO3

64 Investment Climate LO3

65 Investment Climate LO3

66 Investment Climate LO3

67 Investment Climate LO3

68 World Trade Rich nations lock poor nations out of export markets in which they have a comparative advantage – especially agricultural export markets. Comparative advantage – the ability of a country to produce a specific good at a lower opportunity cost than its trading partners. LO3

69 World Trade Some rich nations use import quotas to protect their domestic farmers from imports from global competition. Import quota – a limit on the quantity of a good that may be imported in a given time period. LO3

70 World Trade Trade barriers in rich nations impede poor nations from pursuing agricultural development that is a prerequisite for growth.

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