Introduction: “What Is Poverty and Who Are the Poor? ”

Introduction:

“What Is Poverty and Who Are the Poor? ”

Definition of Poor

http://www.flatrock.org.nz/topics/odds_and_oddities/ultimate_in_unfair.htm

Economic Terminology

• Absolute Poverty – measured against a designated minimum threshold of material well-being. The incomes of the poor fall below the minimum threshold.

– Current standard = $1.25/day PPP

• Relative Poverty - identified by comparing levels of material well-being experienced by different individuals or groups, rather than by comparing the level of well-being to a standard.

1,000,000,000

($1.00)

Over 1 Billion People Live in “Extreme Poverty”World Bank

1,200,000,000($1.25)

Over 1 Billion People Live in “Extreme Poverty”World Bank

Source: http://www.worldbank.org/en/topic/poverty

Extreme/Absolute Poverty$1.25 per Day

• Unthinkable poverty in U.S. terms– In U.S., 80-90% of poor (below US poverty line)

• Color television, Microwave, Cell phone• Clean running water

• Extreme Poverty– Near 0% have above amenities

• Spend 73% of budget on food–over 50% of children malnourished

Economic Terminology

• Income• Wealth• GDP (Gross Domestic Product)• Per capita GDP

Why do we use GDP to measure poverty?

Low, Middle, & High Income Nations

http://databank.worldbank.org/data/views/reports/map.aspx2011 Data, 2012 Data not available as of 05.29.13

The number of extreme poor has declined by 650 million

since 1981

Share of World Population in Poverty, 1820 - 1998

Height Is a Proxy for Economic Well-Being

What does Capitalism

have to do with Poverty?

Economic Freedom of the World Index (Fraser Institute)

• Measure degree to which policies & institutions

are supportive of economic freedom

- Size of Government

- Legal Structure

- Security of Property Rights

- Access to Sound Money

- Freedom to trade Internationally

- Regulations of Credit, Labor and Business

Economic Freedom of the World Map2012 Annual Report (2010 Data)

Economic Freedom Ratings 2012 Annual Report (2010 Data)

Economic Freedom of the World Index

International News Release: http://www.freetheworld.com/release.html

Economic Freedom Ratings 2012 Annual Report (2010 Data)

Per Capita Income and Economic Freedom Quartile

Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.World Development Indicators, 2011.

Real Gross Domestic Product Per Capita (1990$)

Area 1000 1500 1700 1820 1952 1995 2001

Europe $400 ~$640 870 1,130 4,370 13,950 19,256

USA 600 1,260 10,650 23,380 27,948

India 530 530 610 1,570 1,957

China 450 600 600 600 540 3,200 3,583

Africa 400 400 400 400 1,220 1,489

World 420 550 600 670 2,270 5,190 6,049

Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, 2003.

Income Share of the Poorest 10% and Economic Freedom

Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.World Development Indicators, 2011.

Income Level of the Poorest 10% and Economic Freedom

Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.World Development Indicators, 2011.

Economic Growth and Economic Freedom (1990-2010)

Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.World Development Indicators, 2011.

Economic Growth

improves the lives of the poor by making the pie bigger

Bigger “slices” mean higher standards of

living

Life Expectancy and Economic Freedom

Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.World Development Indicators, 2011.

People live longer in richer Nations!

http://www.youtube.com/watch?v=jbkSRLYSojo

Years of Life Expectancy at Birth

PlaceMiddle Ages

Select Years

1950-55 1975-80 2012

France ~30 (1800) 66 74 81.7

UK 20-30 ~36(1799-1803)

69 73 80.3

India 25(1901-11)

39 53 65.8

China 25-35(1929-31)

41 65 73.7

Africa 38 48 50

World 20-30 46 60 67

Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (1998); UNDP(2012) http://hdr.undp.org/

Economic Freedom and CorruptionHigher values indicate lower levels of corruption

Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, Sources: The Fraser Institute, Economic Freedom of the World: 2012 Annual Report; World Bank, World Development Indicators, 2011.World Development Indicators, 2011.

Institutions: the formal and informal “rules of the game” that shape incentives and outline expected and acceptable forms of behavior in social interaction.

• Private Property Rights• Rule of law• Open, competitive markets• Entrepreneurship and innovation

Proposition:

A nation’s institutions determine its ability to reduce poverty.

Serious deprivations in many aspects of lifeDeveloping countriesHealth  968 million people without access to improved water sources (1998)  2.4 billion people without access to basic sanitation (1998)  34 million people living with HIV/AIDS (end of 2000)  2.2 million people dying annually from indoor air pollution (1996)Education  854 million illiterate adults, 543 million of them women (2000)  325 million children out of school at the primary and secondary levels, 183 mil. girls (2000) Children  163 million underweight children under age five (1998)  11 million children under five dying annually from preventable causes (1998)

Why Should We Care?

The Big Picture

• Until the 1750’s extreme poverty was the standard for all of human history.

• Since 1750 economic growth has lifted large sections of humanity to levels of wealth unheard of previously.

• The engine of economic growth is reducing poverty rates worldwide.

• Capitalism consists of institutions that help promote economic growth.

~1750

INTERNATIONAL LINKAGES

Goods and Services

Capital and Labor

Information and Technology

Money

UNITEDSTATES

ECONOMY

OTHERNATIONAL

ECONOMIES

Trade Flows

Resource Flows

Trade Choices

You have $500 to spend and your alternatives are to:

1. Purchase one U.S. made DVD player and one U.S. made bicycle.

or

2. Purchase one Japanese made DVD player and one Korean made bicycle and one case of French wine.

or

3. Use the $500 for investment in the stock of a Canadian company.

Which do you choose to do?

Bicycle

Italy

Japan Australia

USA

Taiwan

Taiwan

Trade? Why?

1- Dependence

2- Efficiency

3- Choices

Adam Smith: The Wealth of Nations (1776)

Brown Bag Trading GameInstructions

• Supplies:– Brown bags.– $1 items brought to class by the students or faculty.

• Items should be varied – if everyone brings same item there will be no trade!

Brown Bag Trading GameInstructions

• Instructions• Mark the bottom of the bags as A, B, C, D in equal proportions!

• Place items in the bags.• Distribute bags randomly to students.• Have students seat in the classroom by designated letter.

• Ask students to not share with others what is in the bag!

A B C D

B D

A C

Brown Bag Trading Game1st round – No Trade Value

VALUE INITIAL COMPARE A/B/C/D AB/CD ABCD

5 II

4 III

3 IIIII

2 IIIIIIII

1 IIIIIIIII

TOTAL

Brown Bag Trading GameRound 2 - Compare with Other Students

VALUE INITIAL COMPARE A/B/C/D AB/CD ABCD

5 II ?

4 III ?

3 IIIII ?

2 IIIIIIII ?

1 IIIIIIIII ?

TOTAL Sum

Brown Bag Trading GameRound 3 – Trade with Same Letters Only

VALUE INITIAL COMPARE A/B/C/D AB/CD ABCD

5 II ? III

4 III ? IIIII

3 IIIII ? IIIIIII

2 IIIIIIII ? IIIII

1 IIIIIIIII ? IIIII

TOTAL Sum

Brown Bag Trading GameRound 4 – Trade Zones

VALUE INITIAL COMPARE A/B/C/D AB/CD ABCD

5 II ? III IIIIII

4 III ? IIIII IIIIIII

3 IIIII ? IIIIIII IIIIII

2 IIIIIIII ? IIIII IIII

1 IIIIIIIII ? IIIII III

TOTAL Sum

Brown Bag Trading GameFREE TRADE

VALUE INITIAL COMPARE A/B/C/D AB/CD ABCD

5 II ? III IIIIII IIIIIIIII

4 III ? IIIII IIIIIII IIIIIII

3 IIIII ? IIIIIII IIIIII III

2 IIIIIIII ? IIIII IIII II

1 IIIIIIIII ? IIIII III I

TOTAL Sum

Lesson 2: “Property Rights and the Rule of Law”

Property Rights

Property Rights benefit the poor by making owned capital

secure and productive.

Formal Legal Characteristics

• Definable

• Enforceable

• Transferable

An Important Note

• The term “Property Right” is shorthand for Human Rights.– The right to freely use and transfer possessions

including yourself.

• People, Not Property.– Recognition of people’s right of ownership to

themselves and their labor.

Defined but not Enforced

• A right that is defined but not enforced is useless.

• Defending and enforcing Property Rights is paramount.

Property Rights and Growth

• Property Right holders have an incentive to preserve their property.

• Owners consider the future.

• Owners will improve a property.– The value of improvements reside with the owner.

Investment

• Secure property rights make investment more likely.

• Property Rights allow people to obtain debt.– Use of past and future incomes.– Collateralization is of greatest benefit to the poor.

Property Rights and the Poor

• Property Rights are of the greatest benefit to the poor.– The rich can enforce rights over their property.– The poor cannot.

• The definition and enforcement of Property Rights gives the poor the same right enjoyed by the rich.

• Secure property rights also contribute to economic growth by enabling the poor to shift effort from protective to productive activities.

Enforcing the Rules

• Rule of Force– Anarchy

• Rule of Men– Laws are enforced at the good will of the enforcer.

• Rule of Law– Both the governed and the governing are ruled by the

same laws.

Big Picture

• Rights to property promote economic growth by encouraging preservation, improvement and investment in owned resources.

• In societies without clearly defined property rights the poor are disadvantaged because they lack the resources to enforce their rights.

Big Picture

• To effectively stimulate economic growth property rights must exist within a society characterized by stable and predictable rules of law.

Lesson 3: “Competition Opens Markets to the Poor”

The Role of Competition

To Compete or Not?

The question is not whether we

shall have competition, but what

forms it will take. - Paul Heyne

• Competition will always occur. – Scarcity

• We cannot fulfill all our wants at no cost.

Methods of Rationing Methods of Rationing Scarce Goods and ServicesScarce Goods and Services

• pricesprices• command command

(someone decides)(someone decides)• majority rulemajority rule• contestscontests• by forceby force• votingvoting

• first-come-first-first-come-first-servedserved

• sharing equallysharing equally• lotterylottery• personal personal

characteristicscharacteristics• need or meritneed or merit

Non-Market Competition

• What determines participation?– Connections– Wealth– Etc.

• What determines production?– No effective production signals.– No effective incentives to innovate.

Market Competition

– Suppliers compete with Suppliers (Producers)

– Demanders compete with Demanders (Consumers)

– All are trying to Maximize Profits/Utility

Revenue and Costs

• Producers can increase profits by:

– Sell more at lower prices (Elastic Demand).

– Lower costs

– Innovate new goods that can command a premium.

Qo

D1

Quantity

Pri

ce

S1P

Q*

P*

Prices and Welfare

Consumer Surplus

Producer Surplus

Prices and Production• Prices are determined by the interaction of the Supply and Demand for a good.

D

S

Pe

Qe

D

S

Pe

Qe

P2e

Q2e

An Increase in the Supply of a good increases quantity traded and lowers price

QoD1

Quantity

Pri

ce

P

Q1 Q2

P1

P2

S2S1

Prices and Production

THE RESULT

Innovation:

Cost Cutting (processes)

Quality/product improvement

Case Study – Opening Markets in China

1977-78 • 250 million Chinese peasants with incomes below

the country’s official poverty line of approximately 70 cents (U.S.) per day.

• 600-700 million Chinese living on less than $1 per day, the commonly used international poverty line.

• Most of the population were peasants, herded together into communal farms. This system produced very poor economic results with widespread poverty and periodic famines.

Case Study – Opening Markets in China

1978• Economic reforms begin: limited property rights and

open markets • Communes were broken up and families given

individual plots of land and families were allowed to sell some of their output in farm markets.

• The right to enter the market with their produce drastically changed the incentives facing Chinese farmers.

• This institutional reform led to a dramatic surge in grain production in China and fueled spectacular poverty reduction.

Decline in Numbers of People Living Below the Poverty Line in China, 1977 – 1999

0

100

200

300

1977-78 1987 1993 1999

Millions of people

The Big Picture

• Competition and Markets benefit the poor by

– Providing more goods at lower prices.– Increasing the quality and variety of goods available.– Providing opportunities for work.– Stimulating entrepreneurial activities.– Unleashing the talent and abilities that were always

there.

•Markets create wealth and foster economic growth

•Benefit the poor in ways that are most important to them, providing

Wealth, Dignity, and Mobility

The Big Picture

Provide the Framework and Incentives for the Creation of Wealth

•Property Rights•Rule of law•Competitive markets•Entrepreneurship / Innovation

Institutions of Capitalism