Chapter 37:Global Poverty

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

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Global Poverty

• The World Bank has stated that a third of the world’s population lacks the barest of life’s necessities.– Malnourished.– Poorly sheltered.– Minimally clothed.– At risk of debilitating diseases.– Low life expectancy.

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Learning Objectives

• 37-01. Know how U.S. and global poverty are defined.

• 37-02. Know how many people in the world are poor.

• 37-03. Know what factors impede or promote poverty reduction.

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American Poverty• The official poverty threshold in the United

States is an annual income of less than three times the cost of a “minimally adequate” diet.– In 2010, for a family of four, that was about

$22,000. It is adjusted annually to compensate for inflation.

– It assumes that 1/3 of a family’s spending goes to food and the other 2/3 to other necessities.

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American Poverty• This threshold was adopted as part of the War

on Poverty, which was started in Lyndon Johnson’s Great Society legislation in 1963.

• After early success in bringing the poverty rate down, the official poverty rate in the United States has stayed in a narrow range of 11 to 15 percent of families.– There are about 75 million family units, so that

means 8 to 11 million families are officially living in poverty in the United States.

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American Poverty• Critics of official poverty statistics say there

are fewer families living in poverty. – The statistics include only cash income. – In-kind transfers are not included.• Food stamps.• Medicaid/Medicare.• Rent subsidies and public housing.

– Include these transfers, and the percentage living in poverty drops to 9 to 11 percent.

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American Poverty• Other critics object to poverty being defined on

income alone. Perhaps wealth is a better guide.– Many U.S. families in poverty have material

possessions: • 40 percent own their homes.• 70 percent own a car or truck.• 30 percent own two vehicles.• Phones, color TVs, dryers, AC, microwaves are common

possessions.

– Few poor families in the United States miss their rent or have a food deficiency.

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Global Poverty• Compared to the global problem, American

poverty is more about relative deprivation than absolute deprivation.

• World Bank data indicates that over three-fourths of the world’s people live in nations where the average income is under $4,000 per year.– By U.S. standards, all of those people would be poor.– By world standards, no American would be poor.

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Global Poverty

• The World Bank defines a rock-bottom threshold of physical deprivation – of absolute poverty.

• These thresholds are• For extreme poverty, income of less than $1.25 per day

per person.• Over 1 billion of the 7 billion people worldwide.• For severe poverty, income of less than $2 per day per

person.• Nearly 2.5 billion of the 7 billion people worldwide.

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Global Poverty• In the United States there are few

“permanently poor.” Income mobility studies indicate that fewer than 5 percent of those in poverty stay there. They better themselves and move up the income ladder.

• In other parts of the world, poverty is much more permanent.– Institutional forces in some countries make it

nearly impossible for people to escape poverty.

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Global Poverty

• Institutional barriers:– A caste system.– Blocked access to health care, education, and

jobs.– Class warfare.– Lack of property rights.– Inability to enter the legal commercial activity

in the country.

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Goals and Strategies

• The United Nations set its Millennium Goals in 2000, one of which is to reduce the global rate of extreme poverty to 15% by 2015.– Will it succeed?

• Two general approaches to global poverty reduction:– Redistribution of incomes within and across

nations.– Economic growth that raises average incomes.

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Income Redistribution• In each country, should income or wealth be

transferred from the rich few to the poor many?– By what method? Voluntary? Confiscation?– What would the effect be?

• Possible elimination of economic incentive?• A not-so-significant reduction in absolute poverty?

• In each country, should government expenditures be redirected from, say, the military to improving the lives and opportunities for the poor?

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Income Redistribution

• Should the developed nations deliver more foreign aid to the countries that have absolute poverty?– This is a U.N. Millennium Aid goal.– The developed nations are approaching the

goal.– Will added aid help much?– Will it end up being directed to those who need

it, or to the people in power?

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Income Redistribution

• Should nongovernmental agencies (NGOs) step up their efforts to reduce global poverty?– Private charities.– Church groups.– Foundations.– International Red Cross.– Oxfam.

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Economic Growth

• In order to increase economic growth in poverty-stricken nations, the World Bank states,– “Developing nations hold the keys to their

prosperity; global action cannot substitute for equitable and efficient domestic policies and institutions.”

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Economic Growth

• Economic growth theory prescribes increased resources and improved technology.

• In developed countries, economic growth has transformed itself into “brain power” – that is, technological advancement.

• In poverty-stricken nations, however, the needs are much more basic: access to food, water, schools, markets, opportunities.

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Economic Growth

• Simply unchaining the natural talents of a country’s population would generate a large growth potential.– Enabling entrepreneurs.– Increasing human capital through education

and training.

• Reducing population growth rates can also contribute to reducing global poverty.

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Economic Growth

• Literacy rates are low in poverty-stricken nations. – Improve education facilities and increase

education opportunities.

• Health care is almost nonexistent in poverty-stricken nations.– Create health and sanitation facilities.– Provide a potable water supply.– Provide medical assistance.

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Economic Growth• Five stages of development (Walt Rostow):– 1. Traditional society:

• Rigid institutions.• Low productivity.• Little infrastructure.• Dependence on subsistence agriculture.

– Many of the poorest nations are stuck here.– They must start providing for basic needs.– As a first step, the health and education of the mass

of poor people must be substantially improved.

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Economic Growth

• Five stages of development (Walt Rostow):– 2. Preconditions for takeoff:• Improved institutional structure.• Increased agricultural productivity.• Emergence of an entrepreneurial class.

– Institutional reforms are needed to provide property rights and ownership, and entrepreneurial incentive.

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Economic Growth• Five stages of development (Walt Rostow):– 3. Takeoff into sustained growth:• Increased saving and investment.• Rapid industrialization.• Growth-enhancing policies.

– Internal financing cannot occur until some move above subsistence living and begin to save.

– Financing from abroad can be attracted by adopting growth-enhancing policies.

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Economic Growth

• Five stages of development (Walt Rostow):– 4. Drive to maturity:• Spread of growth process to lagging industrial

sectors.

– Early investment must be in the sectors vital to the survival of the people – for example, agriculture. Once it is growing, the nation can turn to other sectors.

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Economic Growth

• Five stages of development (Walt Rostow):– 5. High mass consumption:• High per capita GDP attained and accessible to most

of population.

– To attain and then sustain this stage, the economy must be freed up to enable the natural entrepreneurial talents of the people to blossom.

– Class rigidities and privileges must be removed.