Onward and Upward
Why economics -- the dismal science -- is far too pessimistic when it comes to analyzing the amazing gains in poverty eradication.
On Feb. 29, the World Bank came out with its latest estimates on global poverty. They suggest incredible worldwide progress against the scourge of absolute deprivation. In 1981, 52 percent of the planet lived on $1.25 a day or less according to the World Bank’s estimates; today it is around 20 percent. In 1990, around 65 percent of the population lived on less than $2 a day; by 2008 that number had fallen to 43 percent. This is not just a story about China — though 663 million people in that country alone have climbed out of poverty since the early 1980s. Poverty has been declining in every region, and for the first time since the World Bank began making estimates, less than half of the population of sub-Saharan Africa lives in absolute deprivation.
That may seem like news too good to be true, but in fact it’s probably too pessimistic. First off, many experts argue that the World Bank’s poverty numbers are too high — not due to any conspiracy, mind you, but just because poverty is very hard to measure. Calculating a global poverty rate takes two steps: first, using surveys to calculate how much households consume a day in their local currency (cedis in Ghana, rupees in India, and so on); second, trying to work out how much a cedi or rupee buys you compared with what a dollar buys in the United States — which is known as a currency’s purchasing power. Neither step is simple. In respect to the purchasing-power question, working out how much a cedi buys compared with a dollar is not a simple case of going to the bank to look at the exchange rate. As anyone who has traveled in a developing country will know, your dollar goes a lot further in a poorer country. (Try buying noodle soup for 60 cents at a New York City restaurant.) Princeton University economist and purchasing-power guru Angus Deaton argues that the price data used by the World Bank to measure income in China, in particular, is too high — making people there appear poorer in dollar terms than they really are. If that’s the case, global poverty is even lower than suggested by the World Bank’s latest numbers.
Similarly, economists Xavier Sala-i-Martin and Maxim Pinkovskiy of Columbia University and MIT, respectively, argue that the official poverty numbers for sub-Saharan Africa are far too pessimistic. They suggest that, on current trends, sub-Saharan Africa will halve the proportion of people living in absolute poverty between 1990 and 2015 — a stronger forecast than the World Bank’s estimates.
A second reason to think that the World Bank’s new poverty estimates are too conservative when it comes to measuring the quality of life of the world’s poorest is that the figures only measure private consumption of available goods. There is more to the quality of life — or even a full measure of income — than private consumption, and what people can buy changes over time. For example, in 1991, about 44 percent of children in the world’s low-income countries (with gross national incomes under $1,000 per capita) completed primary school, according to World Bank statistics. A little more than half were vaccinated against measles. Today, about two-thirds of children in those countries complete primary education, and nearly four-fifths are vaccinated against measles. People not only have more money, but thanks to improved government services, they have more education and better health too.
Meanwhile, China this week probably surpassed the 1 billion mobile-phone subscriber mark, with India on about 900 million. Two decades ago, the vast majority of people in both countries lived some distance from a fixed-line public phone, at best. But now, across the developing world, people are able to stay in touch with families, call for help, find out wholesale prices to sell their wares at market, and even get cash on demand — all advances that were unimaginable just 20 years ago. When it comes to mobile phones, the consumption-based poverty statistics only measure how much people spend on phone subscriptions and making calls. That significantly underestimates the impact that communications services have had on the quality of life of poor people worldwide. And it’s not just the mobile phone. A lot of other technologies have rolled out as well: new vaccines and pills, more efficient engines, bed nets, better batteries, solar lanterns — the list goes on.
All this good news in the march of global progress against poverty also has implications for the future. Not least, it suggests we should be far more optimistic than the average development economist about the likelihood of continued progress. Some of the most common tales told about development in economics classes involve the dead weight of history permanently depressing growth prospects across low- and middle-income countries. Slow-changing institutions — things like culture and legal systems — are now seen by many economists as the key to national and regional wealth. And a number of innovative, informative, and influential papers over the past few years have pushed back the date at which the current inequitable distribution of world income was determined by the impact of historical circumstances on those institutions.
Twelve years ago, Daron Acemoglu, Simon Johnson, and James A. Robinson argued that places where colonists could survive without succumbing to a range of tropical diseases developed into colonies with equitable institutions that fostered growth. Conversely, colonies that were a serious health hazard to European adventurers lent themselves more to smash-and-grab tactics — whatever institutions were created were bent only on extracting wealth, which left unequal and underdeveloped economies in their wake. In 2010, economists William Easterly, Diego Comin, and Erick Gong suggested that the outcomes fostered by the colonial era were the result of earlier technological and social factors that determined who was colonized and who did the colonizing. Their paper in American Economic Journal: Macroeconomics suggested the wealth of nations was largely determined in 1000 B.C. by factors such as who had writing and iron tools at the time. Enrico Spolaore and Romain Wacziarg upped the ante further, suggesting it really all came down to prehistory. They argued in the Quarterly Journal of Economics that it has to do with the migration of humankind out of Africa — countries with a comparatively short time elapsed since their populations’ last common ancestors are also closer in terms of modern incomes. Spolaore and Wacziarg suggest this relationship is due to shared, inherited, cultural values that underpin economic institutions. So, Iceland and Norway, where everyone in both countries can trace lineage back to Eric the Red, have closer incomes than Iceland and Tonga (despite sharing a strong seafaring heritage).
But the evidence of widespread global progress over the past 10 years suggests those tales can’t be the whole story. They might do a good job at explaining why some countries are richer than others today. But even poor countries are getting richer, fast. So the institutional impediments to growth must be less overpowering than usually suggested. Poor countries aren’t doomed to be poor forever because the ancestors of their current populations made the mistake of hanging out in the Rift Valley a little too long.
And a linked cause of pessimism — the poverty trap — also looks weaker after the past 10 years of global progress. Poverty traps have been a subject in over 16,000 academic papers since 2010 alone, according to Google Scholar. If a cycle of low incomes leading to limited investment in education — or health or roads — in turn leading to low growth was a major factor in development, every place that was poor would remain poor. But that’s simply not the case anymore, and thus the dreaded traps must be fairly easy to escape if the entire world is seeing less poverty. So economists should cheer up: The dismal science has got far too dismal on the subject of development.