Slide 1. Slide 2. Slide 3. More Than 1 Billion People Live in Extreme Poverty. $1.25/day ppp World Bank Definition. % of people in developing world

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1 1 Slide 1 Slide 2 1. Place dots on the 3 POOREST countries in the world. 2. Place dots on the 2 countries that have experienced the greatest DECREASE in poverty over the past 3 decades. 3. Place a dot on the region of the world that has experienced the greatest INCREASE in poverty over the last 3 decades. 4. Place a vote on each of the surveys: Survey 1: Since 1980, has the percentage (%) of the world s population living in extreme poverty INCREASED or DECREASED? Survey 2: Since 1980, has the number (#) of extremely poor people in the world INCREASED or DECREASED? Slide 3 More Than 1 Billion People Live in Extreme Poverty $1.25/day ppp World Bank Definition World Bank # of people in developing world % of people in developing world 2010: 1.22 billion 2010: 21% 1990: 1.91 billion 1990: 43% 1981: 1.94 billion 1981: 52% World Bank Poverty Overview, Apr

2 2 Slide 4 Economic Terminology Income Wealth GDP (Gross Domestic Product) Per capita GDP Why do we use GDP to measure poverty? Slide 5 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. Slide 6 % of Population in Absolute Poverty

3 3 Slide 7 Poverty Can Be Measured by Either Output (GDP) or Consumption Consumption Measure of Number of Poor by World Region Regions East Asia and the Pacific 332 million 284 million Eastern Europe and Central 6 million 2 million Asia Latin America and the 48 million 37 million Caribbean Middle East and North 11 million 9 million Africa South Asia 598 million 571 million Sub-Saharan Africa 395 million 386 million Total 1.39 billion billion Reduction in number of poor, : 101 million World Bank Poverty and Inequality (5/1/2012) Slide 8 Countries of the World; Low, Middle and High Income (July, 2012) Slide 9 The number of extreme poor has declined by 700 million & 33% since 1981

4 4 Slide 10..\..\..\Videos\RealPlayer Downloads\Hans Rosling's 200 Countries, 200 Years, 4 Minutes - The Joy of Stats - BBC Four.flv Slide 11 Height Is a Proxy for Economic Well-Being Slide 12 ~1750

5 5 Slide 13 Place Years of Life Expectancy at Birth Middle Ages Select Years France ~30 (1800) UK ~36 ( ) India 25 ( ) China ( ) Africa World Sources: Lee and Feng (1999); Peterson (1995); Wrigley and Schofield (1981, 529); World Resources Institute (2011); UNDP (2002) Slide 14 Real Gross Domestic Product Per Capita ($ International PPP) Area Europe $400 ~$ ,130 4,370 13,950 USA 600 1,260 10,650 23,380 India ,570 China ,200 Africa ,220 World ,270 5,190 Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, data: Index Mundi: Slide 15 Real Gross Domestic Product Per Capita (2005$ International PPP) Europe $24,674 28,364 30,789 29,765 25,434 USA 33,903 39,602 41,260 40,650 49,000 India 1,452 1,832 2,685 3,240 3,700 China 1,849 2,868 5,239 6,810 8,500 Africa 1,498 1,589 1,914 2,022 NA World 7,037 7,955 9,535 9,869 12,700 Sources: Maddison (1998, 1999) Development Centre Studies The World Economy: Historical Statistics, Maddison, data: Index Mundi:

6 6 Slide 16 The Good News and The Bad News East Asia & Pacific Sub- Saharan Africa Number of People Living on < $1.25/day (millions) , Source: World Bank Poverty and Inequality Database (April 30, 2012) Slide 17 Poverty as Measured by China s Poverty Line 2011 new poverty line RBM 2300 ($363 US) Slide 18 Poverty as Measured by India s Poverty Line rural poverty line: urban poverty line: 816 rupees/mo. = 1000 rupees/mo. = $13.57/mo. or $162.86/yr. $16.63/mo. or $199.59/yr.

7 7 Slide 19 What does Capitalism have to do with Poverty? Slide 20 Measurement by Fraser Institute Economic Freedom: 5 measurable indicators Size of government and taxation Protection of private property & rule of law Soundness of money Trade regulation and tariffs Regulation of business, labor & capital markets 20 Slide 21 Background: Economic Freedom Project 25 year project Transparency is a highly valued part of the project Based entirely on third party data from World Bank, International Monetary Fund (IMF), Global Competitiveness Report, etc. (based on both objective and survey data) We rank 141 countries representing 95% of the world s population according to the extent to which they permit their citizens to be economically free updated each fall 21

8 8 Slide 22 GDP Per Capita (ppp), 2010 Per Capita Income and Economic Freedom $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 $0 Most Free 2nd 3rd Most Free. Least Free Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013 Slide 23 Overall Economic Freedom Index and the Top 10 Hong Kong Singapore New Zealand Switzerland Unit. Arab Em. Mauritius Finland Bahrain Canada Australia Source: The Fraser Institute, 2013 Score (out of 10) Slide 24 Overall Economic Freedom Index and the Bottom 10 Algeria Congo, Dem. R. Burundi Central Afr. Rep. Angola Chad Zimbabwe Congo, Rep. Of Myanmar Venezuela Source: The Fraser Institute., Score (out of 10)

9 9 Slide 25 Growth in Developing Nations Per Capita and Economic Freedom % Most Free 2nd 3rd Least Free Most Free. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, Growth GDP per capita (average annual %), Slide 26 Percentage share of GDP Income Share of the Poorest 10% and Economic Freedom 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Most Free 2nd 3rd Least Free Most Free. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, Slide 27 Income of the Lowest 10%, 2011 Income of the Poorest 10% and Economic Freedom $12,000 $10,000 $8,000 $6,000 $4,000 $2,000 $0 Most Free 2nd 3rd Least Free Most Free. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, 2013.

10 10 Slide 28 Life Expectancy at Birth and Economic Freedom s Years Most Free 2nd 3rd Least Free Most Free. Least Free Sources: The Fraser Institute; The World Bank, World Development Indicators, Slide 29 Life Satisfaction of of Economic Freedom and Life Satisfaction Most Free 2nd Sources: The Fraser Institute; Happy Planet Index rd Least Free Most Free. Least Free Slide 30 EFW map 30

11 11 Slide 31 Economic Growth improves the lives of the poor by making the pie bigger Slide 32 C:\Users\Public\Desktop\Gap minder Desktop.lnk Slide 33 Proposition: A nation s institutions determine its ability to reduce poverty. 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

12 12 Slide 34 Property Rights Property Rights benefit the poor by making owned capital secure and productive. Lesson 2: Property Rights and the Rule of Law Slide 35 Formal Legal Characteristics Definable: Enforceable: Transferable: Slide 36 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.

13 13 Slide 37 Defined but not Enforced A right that is defined but not enforced is useless. Slide 38 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. Slide 39 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.

14 14 Slide 40 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 rights enjoyed by the rich. Secure property rights also contribute to economic growth by enabling the poor to shift effort from protective to productive activities. Slide 41 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. Slide 42 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. To effectively stimulate economic growth property rights must exist within a society characterized by stable and predictable rules of law.

15 15 Slide 43 The Role of Competition Lesson 3: Competition Opens Markets to the Poor Slide 44 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. Slide 45 Non-Market Competition What determines participation? Connections Wealth What determines production? No effective production signals. No effective incentives to innovate.

16 16 Slide 46 Market Competition Suppliers compete with Suppliers. Demanders compete with Demanders All are trying to Maximize Profits Profits draw a crowd Competition creates incentives to increasing revenue and lowering costs. Slide 47 Revenue and Costs Demand curves slope downward for producers, there are three ways to increase profits. 1. Sell more at lower prices. 2. Lower costs 3. Innovate new goods that can command a premium. Slide 48 Prices and Production Prices are determined by the interaction of the Supply and Demand for a good. S S P e D P e P 2 e D Q e An Increase in the Supply of a good increases quantity traded and lowers price Q e Q 2 e

17 17 Slide 49 More Sellers More Supplied at Lower Prices Slide 50 Innovation = Lower Costs = Increased Supply $$$$$ $$$ $ Slide 51

18 18 Slide 52 $$$$$ Graphing calculator Communications $$$ $ Slide 53 Construction Engineering Slide 54 Opportunity The greatest impact on the poor comes from the opportunities that competitive markets provide. Employment Increased output increased labor usage. Entrepreneurship The poor can get in the game not restricted to approved classes.

19 19 Slide 55 Case Study Opening Markets in China million Chinese peasants with incomes below the country s official poverty line of approximately 70 cents (U.S.) per day 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. Slide 56 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. Slide 57 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.

20 20 Slide 58 Conclusions & Caveats Slide 59 Economic Growth Overcomes Poverty Markets create wealth and foster economic growth Slide 60 Institutions of Capitalism Provide the Framework and Incentives for the Creation of Wealth Property Rights Rule of law Competitive markets Entrepreneurship / Innovation

21 21 Slide 61 Ongoing Study... Unequal Income Distribution Income Mobility Individualism of Property Rights Barriers to the Institutions of Capitalism The Mix of Institutions Matters Importance of the Rule of Law Slide 62 Capitalism and Markets Forge interdependence Promote other-regarding behavior Foster a civil society where anonymous cooperation is the norm Benefit the poor in ways that are most important to them, providing Wealth, Dignity, and Mobility Slide 63 New Research & Suggested Reading TED Talk by Yale economist Keith Chen: language and economic behavior Paul Collier: Exodus (migration and development) Tim Harford: Adapt Why Success Always Starts With Failure William Easterly: Tyranny of Experts (failure of foreign aid, lack of respect for rights of the poor) David Dollar and Art Kray: Growth is Still Good for the Poor, August, /Rendered/PDF/WPS6568.pdf%20 AfroBarometer non-partisan, World Bank funded non-profit: After a Decade of Growth in Africa, Little Change in Poverty at the Grassroots, Oct (growth insufficient in absence of other institutions) html Counting and Multidimensional Poverty 2011 Alkire & Foster study for OPHI Oxford Poverty *& Human Development Initiative (the missing dimensions of poverty data)