Good governance, increased trade decrease poverty

Christopher Lingle, New Delhi

Just as death and taxes are always with us, so are the poor. To a certain extent, this is because poverty is as much a relative assessment as it is an absolute one. As it turns out, discussions about poverty are laden with value judgments and are often motivated by political rather than humanitarian concerns.

Perhaps the only thing worse that politicizing poverty measurements to serve partisan ends is when they are manipulated for the betterment of certain interest groups. As it turns out, some NGOs and national or international bureaucracies may overstate poverty measures because their incomes depend upon reinforcing impressions of the suffering of others.

In effect, most aid or charitable organizations suffer from a conflict of interest because they would need many fewer employees or smaller budgets if the world was convinced they have done their job. Instead, they have an incentive to provide stark images of people in distress who depend upon them rather than to announce improvements in well-being.

One problem with measuring the extent of worldwide poverty by international agencies is that they use earnings benchmarked in U.S. dollars. With this approach, the depreciation of a local currency could increase the number of poor. One in every five of the six billion people in the world live in abject poverty and another 1.2 billion are surviving on less than US$1 a day. However, this estimate provides limited information about local conditions and costs that might have changed little despite collapses in the foreign exchange value of the national currency.

One of the clearest lessons of globalization is that underdeveloped countries do not require billions of dollars of aid from wealthier countries to become prosperous. Ironically, most of the countries that provide foreign aid also maintain protectionist restrictions that reduce opportunities for poor countries to raise their incomes through expanded trade.

A study by the Cato Institute (Perpetuating Poverty) notes that the provision of aid may have little impact on impoverished countries. For example, despite receiving about $55 billion and being the largest single recipient of foreign aid since 1951, nearly 40 percent of India's population remains impoverished. Similarly, although sub-Saharan Africa has been the object of two decades of development planning financed largely by the IMF and World Bank, per capita income there is lower than when the aid started.

Although poverty cannot be eliminated, there are things that can be done to alleviate the burden on the poor that do not require throwing more money at NGOs or aid agencies. First, there is considerable evidence that poverty is the outcome of inappropriate policies and poorly-designed legal institutions. Resistance to change and poor choices made by politicians and other government officials are the principal source of the suffering of their own citizens.

Ironically, policies that are intended to redistribute income or wealth from the haves to the have-nots can be counter- productive. If taxes become confiscatory, the destruction of work incentives will make the relatively better-off members of the community less productive or they will be more inclined to avoid/evade taxes. These actions will deprive governments of the revenues they sought to pass on to the poor.

Institutional structures motivated by an intention to soften the impact market realities can also be self-defeating. For example, labor laws that make it hard to fire workers also make it costly to hire them. This problem is painfully evident in Western Europe where labor market rigidities contribute to stubbornly higher unemployment rates and slow job growth.

One advisable remedy is for governments to review their policies and institutional infrastructures to determine which changes are in the best interest of their citizens. A good place to start is to find ways to depoliticize the determinants of economic and social life.

Besides making changes in policies and institutions, governments should pursue strategies to ensure rapid economic growth. Contrary to some popular opinions, economic growth benefits the poor because it allows prosperity to be widely shared. According to a World Bank report (Growth Is Good for the Poor, D. Dollar and A. Kraay, Development Research Group, March 2000), each percentage increase in economic growth will cause the incomes of poor individuals to rise by the same proportion. This one-for-one ratio was observed as general relationship between incomes of the bottom fifth of the population and per capita GDP for data gathered from a sample of 80 countries observed during 40 years.

Another finding is that the incomes of the poor suffer no greater declines during economic crises than other income groups. On the reverse side, policy-induced growth benefits the poor as much as the entire economy, as measured by per capita GDP. This means that the beneficial impact of growth on the income of low- income individuals is the same in poor countries as in rich ones.

In particular, openness to foreign trade provides the poor with similar benefits than enjoyed by the rest of the economy. Similarly, following the rule of law and engaging in fiscal discipline benefit poor individuals as much as others. However, avoiding high inflation is a policy that serves the poor even better than the economy as a whole and, conversely, high inflation has a greater harmful effect upon the poor than overall per capita GDP.

It turns out that in absolute numbers, more people have been lifted out of poverty in the last 50 years than in the previous 5 centuries. It appears that most of this success has come from the economic growth brought about by increased trade and capital flows. Those who truly want to see fewer poor people should encourage governments to adopt policies that promote sustainable growth through increased access to markets.

The writer is Senior Fellow at the Centre for Civil Society in New Delhi and Professor of Economics at Universidad Francisco Marroquin in Guatemala.