Blog

Poverty: New Thinking About an Old Problem

Geoff Riley

25th January 2014

Here are some notes taken from a talk given by Peter Coy, Economics Editor for Bloomberg Businessweek, at the Marshall Society Economics Conference in Cambridge in January 2015

Will there be another significant phase of extreme poverty reduction in the global economy over the next fifteen years? Or will recent progress slow down and come up against a wall?

The pessimistic view

Poverty is historical and embedded in society. Why Nations Fail is a book that focuses on some of these issues. Those who have power (i.e. extractive elites) make choices that create poverty on purpose, the power elites benefit from the conditions of poverty that they create. They hoard and seal economic resources.

Significant poverty reduction is extremely hard - it requires time and luck. For example, peasants in England became the owners of the precious commodity (labour) during the Black Plague and allowed them to assert their independence. Chance events can have effects that can last for centuries afterwards.

The optimistic view

Reverse the Curse is a new study published by McKinsey and it offers some insights into how countries rich in natural resources can harness revenues to sustain poverty reduction. Access it here: http://www.mckinsey.com/insights/energy_resources_...

Countries driven by resources account for 27% of GDP (up from 18% in 1995) but 69% of people in extreme poverty are also in resource-driven economies.

"Rising resource prices and expanded production have raised the number of countries where the resource sector represents a major share of the economy, from 58 in 1995 to 81 in 2011 .....To date, resource-driven countries have tended to underperform those without significant resources: almost 80 percent of the former have a per-capita income below the global average.!

The McKinsey prescription for reversing the curse is built around the following

  1. Build institutions and governments, stable regulation, exposure to competition
  2. Removing infrastructure bottlenecks which hamper trade and growth
  3. Robust fiscal policy and supply-side policies
  4. Supporting local content suppliers where possible
  5. Spend the windfall wisely - difficult in countries whose commodities are volatile in price

The over-arching strategy should be to transform the economy to broaden development (this is easy to type, tremendously tough to achieve)

Some countries have reversed the curse - many already well known - Botswana, Malaysia, South Africa, Kuwait - much attention now focusing on development in resource-rich countries in sub Saharan Africa.

Both the IMF and World Bank have improved their policies and moved away from the strict Washington Consensus - this has important consequences for policy-making. The IMF for example prepared to accept limited capital controls as it did with Iceland following their devaluation and collapse of the banking system

Mexico

Now a middle income country, Mexico's unit labour costs will be 30% lower than China next year - auto-making and auto-parts supplies now scaled up and a significant contributor to the economy. Mexico has more auto manufacturing than the US mid-west. According to their WTO trade profile, Mexico's economy is closely tied to the United States, destination for nearly 80 percent of local factory exports. Most of Mexico's exports are manufactured goods.

Facts on the ground suggest that countries can rise up from poverty and pull themselves up by their boot-straps. Manufacturing allied to innovative design and supply-chain clusters can create significant value-added for an economy.

Bill Gates - 3 Myths that Hold Back Progress

  1. Countries are doomed to stay poor - by 2035 there will be almost no low-income countries left in the world
  2. Fighting poverty is a big waste - consider the success of vaccinations in eradicating polio, by 2035 child mortality worldwide will be down to the level that the USA managed to reach in 1980
  3. The myth of over-population - countries with the highest mortality rates have the fastest growing populations e.g. Afghanistan where over 10% of children die in childhood.

Suggestions for further reading on these topics

Geoff Riley

Geoff Riley FRSA has been teaching Economics for over thirty years. He has over twenty years experience as Head of Economics at leading schools. He writes extensively and is a contributor and presenter on CPD conferences in the UK and overseas.

@tutor2uGeoff

You might also like

© 2002-2024 Tutor2u Limited. Company Reg no: 04489574. VAT reg no 816865400.

Back to top