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A Framework for Understanding
    the Economics of Global Poverty



                       Jim Donahue
                  ...
Overview




           2
3
How are rich and poor countries defined? How can poor countries become rich?
- The chart below compares the relative wealt...
GNI/Capita – Global Distribution

- This diagram makes it clear that the vast majority of the people on the planet do not ...
Extreme poverty has been reduced in recent years, but nearly half of
   the world still lives in poverty

- Global levels ...
7
There of numerous examples of countries moving from being poor countries to rich countries
                               ...
Europe
-Europe is one of the prime regions of the world where many countries have moved from being poor to
being rich:
   ...
Key steps to poverty reduction through growth
- The model shown below for reducing poverty is based on the World Bank’s Po...
Six types of underlying factors help to explain a country’s ability to attract investment
 Many factors have a direct corr...
Examples of the framework applied to two rich countries - United Kingdom vs. France

-The economies of France and UK are s...
United Kingdom vs. France
The model applied to France and the UK highlights the key factors that correlate to rich country...
Asia

-The big story of the 80’s was Japan, and the focus of the 90’s was the Asian Tigers, but since the financial crisis...
China and India

- From an economic perspective, China and India have similar levels of GNI/capita, but with China having ...
China and India
                                          Infrastructure, Health and Education

The model shows that India...
India is struggling to improve its poor infrastructure




                                                         17
18
Sub-Saharan Africa is not on track to meet the UN Millennium Development Goals by 2015


- The Millennium Development Goal...
30 out of 48 African countries have GNI/capita less than $2,000 and are not well
                          integrated into...
Paul Collier proposes a model of four traps to explain why some countries are
                               unable to gro...
Malawi’s economy reflects challenges typical of many African countries
                                          Infrastru...
Malawi Poverty Reduction Strategy 2004/2005
- Malawi’s Poverty Reduction Strategy is now subsumed by a broader Malawi Deve...
Political instability and poor governance have been problems in many African countries
- but many conflicts are ending and...
Africa’s economic growth since the mid-1990’s is more promising for poverty reduction,
  but diversification away from com...
South Africa’s diversified economy still has its issues but provides hope for African growth
                             ...
27
Mobile telephony has a broad range of benefits appropriate to fighting poverty in
                                 develop...
Vodacom in the Democratic Republic of Congo (DRC) is an example of how private
            investment in mobile telephony ...
30
The Optimists: Poverty can be eliminated in Africa – more aid is needed for a ‘big push’
- Nearly everyone has heard about...
Jeffery Sachs advocates a number of simultaneous interventions at the village
                         level for sustainab...
The Pessimists: Aid has not been effective

The scepticism for such large aid projects is well known, and the latest attac...
Paul Collier proposes a balanced agenda for action to tackle poverty in the poorest
                                     c...
7 things you can do to help fight global poverty
Finally, many people feel that global poverty is such a large and complex...
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Notes Global Poverty Presentation 15 May 08

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  1. 1. A Framework for Understanding the Economics of Global Poverty Jim Donahue 15th May 2008 jimdonahue7@yahoo.co.uk © 2008 Jim Donahue
  2. 2. Overview 2
  3. 3. 3
  4. 4. How are rich and poor countries defined? How can poor countries become rich? - The chart below compares the relative wealth of countries red for low income (poor) countries, green for high income (rich) countries and yellow and amber for middle income countries. -Why shouldn’t all countries be rich ‘green’ countries? Would it be a better world if all countries were rich? Will it make people happy? Aren’t many people in poor countries happy without money (and many rich people miserable)? - Many countries have moved from being poor countries to rich ones such as ‘Asian Tigers’ in East Asia and many European countries such as Italy and Ireland. Many more are rapidly growing and are likely to join the elite rich club in the future such as China and the new Eastern European members of the European Union. One of the big questions today is why so many countries appear unable to demonstrate the rapid growth required to move from being a low income country to a rich one, particularly in Africa. -In this diagram, a country’s wealth is measured by Gross National Income (GNI) per capita. GNI is a measurement of the total finished goods and services that a country's economy produces in a given year. GNI per Capita is equal to the county’s GNI divided by the total population. It is thus a good way to compare how well off individuals are in a given country relative to those in other countries. The measurements in this chart also take the relative cost of goods into account using Purchasing Power Parity. For example, a Big Mac costs $3.15 in America, but only $1.30 in China. So while GNI/Capita in China in 2004 was only $1,500 per person, if you take the fact that most things are much less expensive in China, the PPP GNI/capita is actually $5,890/person, making China an amber coloured lower middle income country instead of a red poor country. While there is a correlation between average salary and GNI/Capita, GNI/capita does not equate average annual salary per person. Average salary varies a great deal on a country by country depending on a number of factors, including how labour-intensive industries are, the level of inequality between rich and poor people, differences in government taxes and investments, and average family size. -There are other measurements of ‘Human Development’ and ‘Quality of Life’ that include such factors life expectancy, depletion of natural resources, and education levels to measure a county’s well-being, however, GNI/Capita is at least a good way to compare ‘apples to apples’ to try to understand differences in relative wealth of different countries. - The global capitalist economic system of ever increasing international trade, often referred to as Globalisation, is now helping many countries grow from being poor to rich though international trade, such as in East Asia and Europe. By allowing more countries to become rich, globalisation can be credited with making the world more equal on a country to country basis, however, it is also blamed with creating growing inequality of incomes within countries, as a minority of people become very rich, and many of the poor remain unable to climb the economic ladder. 4
  5. 5. GNI/Capita – Global Distribution - This diagram makes it clear that the vast majority of the people on the planet do not live the ‘rich country’ lives that we experience in Western Europe and North America. -Only 33 of world’s 200 countries, with a total population of 1 billion people, have GNI/Capita greater than $20,000. - The vast majority of the world, about 5 billion people, live in ‘developing countries’ with average incomes of less that $10,000 GNI per capita, even after the Purchasing Power Parity is taken into account to increase GNI due to lower prices of local goods. - Approximately 3 billion people, about half of the world’s population, live on less than $2 per day. 1 billion of these people live on less that $1 per day, on what is considered the international measurement of extreme poverty. - On less than $1 per day, people generally have no money for any food other than what they grow, or any clothing and shelter other that what they can build and make themselves or barter for. They do not have a formal job and are typically sustenance farmers selling the odd spare produce in markets to scrape by. They may go through periods of hunger while waiting for harvests to come in, and are highly susceptible to poor health and disease, unable to pay for life saving drugs we take for granted. They have little hope of giving their children a good education as all must help out with farming and chores to help them survive. - Appendix B provides some visual and written examples of what it is like to live at different levels of the economic development ladders. Each of four figures shows a family at an average level for countries at different level of development with all of their worldly possessions laid out in front of their home. 5
  6. 6. Extreme poverty has been reduced in recent years, but nearly half of the world still lives in poverty - Global levels of poverty were reduced in absolute and relative terms for the first time in world history since 1980. As we will see in the next section, this poverty reduction was due largely to economic growth aided by the large increase in international trade in several countries. China being the largest country showing rapid growth in this period, providing the majority of the reduction in extreme poverty. 6
  7. 7. 7
  8. 8. There of numerous examples of countries moving from being poor countries to rich countries Europe The term Greek economic miracle has been used to describe the impressive rate of economic and social development in Greece from the early 1950s to the mid-1970s. Between 1950 and 1973, the country had an average economic growth rate of 7%, second only to Japan's during the same period. The reasons for the rapid recovery after World War II and the Greek Civil War, included a drastic devaluation of the Drachma, attraction of foreign investment, significant development of the chemical industry, development of the tourist and services industries, and a massive construction activity connected with the rebuilding of the infrastructure of Greek cities. Known and the Celtic Tiger, Ireland grew from being one of Europe’s poorer countries in the early 1990’s to one of its richest, by 2001. The reasons for this growth are largely attributed to low corporate tax rates, decades of investment in higher education, a low-cost labour market, a policy of restraint in government spending, in addition to transfer payments from the European Union used for infrastructure. While Spain's economy has often been criticised for high inflation, a large underground economy, and a relatively poor education system, it has also been credited with creating more than half of all new jobs in the EU from 2000-2005. It has avoided the virtually zero growth rate of some of its larger EU partners, attracting large amounts of foreign investment during this period, thanks in part to its growing tourist industry, and the global real estate boom. Japan and the Asian Tigers Japan’s economic miracle resulted during a period of high economic growth from the 1960’s to 1980s. This growth is largely credited with close government-industry cooperation, a strong work ethic, mastery of high technology, and a relatively small defence budget. Perhaps the best know examples of countries moving from poverty to prosperity are the East Asian Tigers of Taiwan, South Korea, Hong Kong, and Singapore. These countries maintained high growth rates and rapid industrialisation between the early 1960s and 1990s. They pursued export-driven economic development, focussing on developing goods for export to highly-industrialised nations. Domestic consumption was discouraged through government policies such as high tariffs, and a tradition of high savings rates. They had a strong focus on using education to improve productivity by ensuring that children attended primary and secondary education, and through investing in university and college education. They also initially had a relatively cheap labour costs. Today’s Emerging Markets Today’s rapidly growing Emerging Markets seek to follow these past successes to use rapid economic development as a route to prosperity. Examples include the new EU member states in Eastern Europe, China and India, and other rapidly growing economies in Asia and Latin America.
  9. 9. Europe -Europe is one of the prime regions of the world where many countries have moved from being poor to being rich: -- As shown in the previous diagram, countries like Italy, Ireland, Spain and Greece were not previously considered rich countries after WW II, and most of the new central and eastern European EU member states are now upper middle income countries and expected to grow to becoming rich countries in the near future. -- This growth has been supported in the EU by free trade policies, cross-country subsidisation, and numerous other policies and projects aimed at making commerce easier amongst other European trading partners. --There are ongoing debates about whether the EU is doing enough for new member states today, and whether it can accommodate more, but new members such as the recently joined Romania and Bulgaria, and other applicants such as Turkey and many Balkan states still find membership highly desirable as a way of ensuring future prosperity. - The embedded chart shows that the number of years for a country to double the size of its economy is directly linked to its economic growth rate: -- Countries such as France, Germany, and the UK that are already rich are considered to be ‘Developed Markets’. For these countries, annual GNI growth rates of 1-3% are typical targets to maintain employment levels, stabilise inflation, and provide incremental improvements in standards of living. These countries had periods of rapid growth in the past, typically during the industrial revolution or post-war economic boom periods. -- Countries that would like to move up the economic ladder from poor to rich, need to grow at a faster rate to catch up to rich countries. They need economic growth rates of at least 4-6%. -- Countries like China and India with 8-10% economic growth are doubling the size of their economies every 7-9 years and are steadily moving up the economic ladder. -- Countries classified as ‘Newly Emerging Markets’ are countries that are not currently rich, but have high or potentially high growth rates typically between 5 and 10%. - The clear importance of economic growth is why many poor or middle income countries today concentrate so much energy looking for ways to achieve these higher growth rates. 9
  10. 10. Key steps to poverty reduction through growth - The model shown below for reducing poverty is based on the World Bank’s Poverty Reduction Strategy defined in the 2001 World Development Report. The overall strategy is to reduce poverty through the two pillars of creating sustainable growth and then empowering people to participate in it. 1. The first step is to build a climate for investment, jobs, and sustainable growth. The key factors that both foreign and local investors look for when making an investment decision include: -- Infrastructure to support industry, such as reliable and modern roads, power, water, and telecommunications, and also export-oriented capabilities such as ports, rail, and air -- Education levels to support a skilled workforce, including not just factory workers, but also skilled technical specialists, and managers and administrators -- A health care system that ensures a healthy working environment -- Public sector governance to ensure all these services are available and maintained and provide the necessary laws, regulations, and enforcement conducive to doing business. It goes without saying that high levels of corruption, conflict, and political instability greatly increase the risk of doing business and are a detractions from investment. -- Geography, people, and cultural factors also influence investment decisions, but are considered to be indirect factors. Factories and call centres can now be built anywhere in the world given the right transport and telecommunications infrastructure, and language and cultural factors are rarely barriers that cannot be overcome through education. 2. Private sector investment is the only sustainable way to create formal sector jobs to increase the country’s standard of living and grow the size of the economy. In many poor countries, only a small percentage of the population is actively employed in the formal private economy. In Malawi this is estimated to be 50,000 people out of a population of 12 million. In Mozambique, 350,000 out of a population of 20 million (World Bank, Doing Business Report 2007). The rest are civil servants, sustenance farmers, private market traders, or are in other odd jobs not reported as part of the country’s GNI. In India, the vast majority of the country is still engaged in the informal economy. Even in China, where growth is rapidly growing and hundreds of millions have moved into the formal economy jobs in recent years, there are still perhaps 20-40% of the population making a living in sustenance farming and other informal activities. 3. Finally, to help move people from poverty into formal sector jobs, they often need support to be empowered through education, health care, and the inclusion of women. Unless people are healthy, with a certain level of education they cannot actively engage in private sector jobs. Rapid and sustained growth requires large number of highly educate business leaders, managers, and entrepreneurs to make the economy competitive. And without participation of women in the workplace, the economy’s productivity will suffer. 10
  11. 11. Six types of underlying factors help to explain a country’s ability to attract investment Many factors have a direct correlation to a country’s economic growth and help to explain the underlying reasons that some countries are poor and others are rich. The following factors are some of the most important. 1. Geography 3. Governance Access to Land-locked countries or those far from rich countries to Democracy Democratic countries tend to be richer, but trade routes trade with have higher export costs making them less autocratic governments can support rapid competitive economic growth at least in early stages of development such as in China and Vietnam. Natural Many poor countries depend on natural resource exports Resources as a primary source of revenue, particularly in Africa. But Political Stability This is important to allow businesses to plan and dependence on natural resources can have a negative markets to forecast return on investment. impact on long-term growth and many countries such as Governance rating This World Bank rating (100% is best rating) looks Taiwan have developed successfully with few natural a number of factors correlated to economic growth resources. including level of corruption, effectiveness of Arable land Important in early stages of a county’s development. institutions and regulatory quality. Competitiveness/ The World Economic Forum ranks many countries Climate Countries in hot climates tend to be poor. While the Ease of Doing competitiveness (1 being the best) based on a reasons for this have often been debated, this is partly Business number of factors related to economic because it is harder to work in hot climates where air performance, government policies, business conditioning is not available, but also because hot productivity, and infrastructure including weather makes certain diseases more prevalent and is technology, health and education. associated with desertification. 2. People 5. Infrastructure and 6.Education Immigration Economies benefit in many ways from the inflow of migrant Rates workers. Countries suffering from negative migration suffer Companies looking to invest in a country (e.g. Nike building a factory) economic consequences from ‘brain drain.’ need: Number of Countries with large families tend to be poorer because -Reliable power and other utility supplies, good transportation Children families cannot afford to give all children the best nutrition, systems for supplies and exports. education, and attention. - Skilled employees not only to work in the factory but to manage it and handle all aspects of operations including finance, shipping, and supply Religion/ Religions or cultures that value hard work, education, and chain management. Culture thrift have positive economic benefits Education in all aspects of life is generally seen as fundamental in 4. Health improving a country’s quality of life in health care, better governance, Health Companies require healthy employees, and at the same time, management skills, business productivity, and technical capabilities being poor in itself prevents people from getting the health needed for businesses. care, proper nutrition, and water and sanitation infrastructure Information and Communications technologies are also needed by that they need to maintain a healthy lifestyle. Countries in businesses and their prevalence in society has a direct correlation to Africa with high rates of AIDS suffer from short life spans, economic development. absenteeism, and shortage of skills.
  12. 12. Examples of the framework applied to two rich countries - United Kingdom vs. France -The economies of France and UK are similar in many ways: -- Both have GNI of about US$ 2 trillion -- Almost identical population of 60 million people -- Hence similar GNI per capita of $30,000 per person - UK being the 14th richest county and France the 20th richest - The economic sectors reflect typical modern rich economies: -Dominated by the services sector, where richer consumers can afford services such as retail consumer goods, travel and tourism, telecommunications, finance and insurance. Britain’s world leading financial district and international airports and airlines are example of the growing importance of this sector. - A declining industrial sector of approximately 25% of GDP due to competition from newly developed Asian and Eastern European countries. France and Britain have many world leading companies in this area but many of the manufacturing jobs are increasingly outsourced to countries with lower cost basis. - Small agricultural sector focussing on niche markets where competitive advantage still remains such as wine and organic locally produced products. France’s agricultural sector is three time the size of the UK’s due to a surface area that is double that of the UK, a better climate, a traditional of fine cuisine and food products, and a system of EU agricultural subsidies and local polices aimed at preserving the way of life for many small farmers. - Economic growth rate since 1990 highlights the differences in economic competitiveness: -- The UK previously had a smaller economy that France, but overtook it in international rankings since just after 2000 due to its faster average growth rate of 2.7% vs. 1.9%. The UK and continues to outgrow it today. -- France has had persistently high unemployment of around 10% during the period since 1990. - What are the underlying reasons for this difference in economic growth? Many of the factors highlighted in the economic model on the following page help to explain this. Differences in growth between two already rich countries tend to be in government economic policies and programs and the degree to which they create an environment that supports efficient and competitive industries. 12
  13. 13. United Kingdom vs. France The model applied to France and the UK highlights the key factors that correlate to rich country economies. Both countries underlying factors show ‘green’ for all key indicators showing a positive correlation to rich countries at the top of the economic ladder. Infrastructure, Health and Education The factors shown for the UK and France are indicative of what is required of all rich countries and is consistent with our experiences: 100% paved roads, high mobile telephony and internet penetration, high life expectancies, near 100% literary and high levels of secondary and tertiary education. Governance Both countries rate highly in the World Bank government effectiveness ratings, but in overall economic competitiveness and ease of doing business, the UK rates significantly higher than France which is the key area that is usually attributed to France’s slower growth and higher unemployment rate compared to the UK. Further investigation into France’s slow growth shows some of the key underlying factors being: the weight of the public sector, high taxation, and a rigid labour market. Example policies include the 35-hour work week, which was intended to create the need for more jobs by decreasing the amount that everyone worked, but has proven to only reduce salary increases and caused employers with absentee problems. As the Economist magazine puts it:‘France's private sector boasts some of the world's leading companies, in industries such as cars, handbags, shampoo, yoghurt and insurance. Yet these firms tend to manage by employing relatively few people. Jobs are so thickly protected that employers hesitate to create them. Many resort to temporary or short-term contracts, or to interns. The upshot is a two-tier labour market: sheltered jobs for those who have them, and precariousness or joblessness for the rest.’ People • Birth rates of just under 2 births per woman also correlate to wealthier countries. France’s birth rate of 1.9 children per woman is actually the highest in Europe which gives it better demographics for future economic development compared to many European countries were birth rates have declined to point where aging populations threatens future growth. • Positive immigration rates also correlate to higher economic growth. There has been much debate as to how much it really helps an economy in additional growth, but there are many clear benefits such as the addition of new skills and ideas, and people willing to take lower wage jobs others do not want, highlighting a misconception about immigrants taking jobs from local people. France’s high unemployment rate is due to government policies and need for reform discussed above, not immigrants stealing jobs. Geography Both countries have temperate climates and are located with excellent access to international trading routes. Being located next to other rich trading partners in the EU benefits them as well as other EU member states. As noted earlier, France has a larger surface area and warmer climate for more arable land helping its agricultural industry, particularly industries such as wine and other 13 luxury foodstuffs that have long been a competitive advantage.
  14. 14. Asia -The big story of the 80’s was Japan, and the focus of the 90’s was the Asian Tigers, but since the financial crisis of 1997, the economic spotlight has shown on the two Asian giants China and India. As the diagram shows, China and India are also where nearly all of the world’s net reduction in extreme poverty has taken place since 1980. - So while China and India are seen as economic success stories and formidable players in the global economy, it is important to realise that about a third of China’s 1.3 billion people still live on less than $2/day, and about a third of India’s 1.1 billion people still live in extreme poverty. - While China, India, and several over Asian countries such as Vietnam and Thailand are considered high growth emerging markets, all but Japan and the Asian Tigers of the 1990’s are still very much developing countries. 14
  15. 15. China and India - From an economic perspective, China and India have similar levels of GNI/capita, but with China having a 10-20 year advantage of rapid economic growth in the 80’s and 90’s. India is now growing at rates close to China’s 10% per year, but has a long way to go to catch up, as the overall poverty levels indicate. - The other interesting thing to note is China’s large industrial sector compared to India’s large service sector. Everyone knows that China is now ‘manufacturer to the world’ and India’s growth is dominated by services such as outsourced call centres and software development, but this economic breakdown is unusual for countries at their stage of development. A typical development lifecycle is to move from an agricultural economy to a manufacturing and industrial focus, followed by expansion of a services industry as consumer demand for services rises along with wealth and education levels. While China’s industrial development is important in its overall economic development, countries at this stage of development typically have a larger services sector. Some attribute this to China’s culture of saving, and mentality that manufacturing as the basis for business. Some say that India’s manufacturing base is too small and needs to expand significantly before any sustained economic development and poverty reduction can take place. 15
  16. 16. China and India Infrastructure, Health and Education The model shows that India clearly faces significant challenges in developing its infrastructure, health care system, and education if it wants to develop at the rate that China is. These advantages help explain China’s more advanced manufacturing focus, compared to India service and outsourcing focus which mainly enabled by cheap international telecommunications links without the need for shipping and transport infrastructure. India’s high tech skills are also explained by its advantage over China in tertiary education levels as a result of its network of technology institutes. Governance Both have governance ratings typical of developing countries. Corruption is relatively high in both countries, but India’s democratic system helps to give it a higher overall rating. While most rich countries are democratic, there are some examples of countries such as China and Vietnam that are aided in their development by autocratic governance in early stages of development. India rates low on ease of doing business partly because of its factious democratic system where there are many vested interests and broad economic reform is difficult. China’s leaders can drive through reform much more easily, but as it is not democratic, the people must trust the government to make wise policy decisions. People One of the big differences between China and India is the birth rate. China’s one child policy is responsible for its low birth rate and relatively aging population compared to India. India’s population will continue to grow and is targeted to overtake China as the world’s largest country in 10-20 years. While the rapid population growth will continue to provide challenges, India’s young workforce will be an advantage economically in the future when China is grappling with the issues of supporting an aging population. Geography Both countries have good coastal access near trade routes, but both suffer from overcrowding and limited availability of arable land per capita. Limited land is one of he things that has forced agricultural productivity improvements in Asia compared to Africa. Good irrigation from Himalaya mountain water run-off also benefits Asian agriculture compared to Africa. While both countries have diverse climates, India suffers from larger areas of tropical and dry regions which correlate to lower growth levels. 16
  17. 17. India is struggling to improve its poor infrastructure 17
  18. 18. 18
  19. 19. Sub-Saharan Africa is not on track to meet the UN Millennium Development Goals by 2015 - The Millennium Development Goals (MDGs) were agreed by all of UN member states at a plenary session in September 2000. Achievement of most of these goals is set for 2015 based on targets to measured against progress from 1990. - The most well known and probably most ambitious target is to halve extreme poverty by 2015. As the table below shows, while South East Asia (led by China) and South Asia (led by India) are on track to meet these goals, sub-Saharan Africa is not. This is clearly due to the growth story discussed earlier. China and India are examples of countries that are growing rapidly as emerging markets in the global economy, where sub-Saharan African countries appear unable to go the same route. The reasons behind this this are the subject of this section. - While Africa is showing some progress in areas like achieving universal primary education, it is severely lacking in goals related to health such as reducing child mortality rates and combating HIV/AIDS, Malaria, and other diseases such as tuberculosis. 19
  20. 20. 30 out of 48 African countries have GNI/capita less than $2,000 and are not well integrated into the global economy - In contrast to Europe, where many of the richest countries in the world are located, there are no rich countries in Africa. South Africa is the richest country in Africa at $12,120 per capita. - Botswana and Namibia are the only two other southern African countries not at the bottom of the economic ladder and are considered economic success stories in the region. They are both sparsely populated countries that include large portions of desert including the Kalahari and Namib deserts. Their relative economic success is down to a few key factors: -- Natural resource abundance. Diamonds in Botswana and other minerals such as Uranium in Namibia. This represent at least half of Botswana and Namibia’s exports. -- While Botswana is landlocked, is has benefited from close ties to South Africa markets, mining industries and other infrastructure. Both countries are members of the Southern African Customs Union trading block. -- Relatively stable and effective governments since 1990 when Namibia gained independent from South Africa. Botswana has been independent since 1967 and was rated the least corrupt government in Africa by Transparency International since 2004 ahead of many European countries, and also the best place to do business in Africa by the World Bank in the past few years. It has wisely reinvested revenues from the diamond industry back into infrastructure and health and educational services. Support for AIDS treatment and education is a particular priority as one third of the population has HIV. -- Despite the relative economic success in these countries, about half of the still populations lives on less that $2 per day, and approximately 20-30%live in absolute poverty of less than $1 per day. 20
  21. 21. Paul Collier proposes a model of four traps to explain why some countries are unable to grow out of poverty - Paul Collier’s recent book, ‘The Bottom Billion: Why the Poorest Countries are Failing and what can be done about it’ focuses on why the poorest countries, such as those in Africa, have not been able to integrate into the global economy and emulate the success of other countries in Europe and Asia. He identifies the following traps: - The Conflict Trap - Countries facing civil war or coups do not attract investment so growth is not possible. Damage to the economy and infrastructure takes years to recover from. Once war ends, countries face a high risk of recurring conflicts. Factors contributing to a civil war recurring are poverty, low economic growth, and dependence on natural resources. - The Resource Trap – Countries dependent on one or two natural resources as their major export also fail to grow for a number of reasons. Increasing exports of a major commodity such as oil tends to make the currency appreciate making other exports less competitive (know as the Dutch disease). Volatility of commodity prices can also plunge an economy into recession. The revenues from these exports are also easy to exploit by governments, encouraging autocracy and corruption further decreasing chances of economic development. - Landlocked with Bad Neighbours – Economists agree that landlocked countries have higher transport costs for exports correlating to lower economic growth rates (by at least 0.5%). Compounding this problem for many African landlocked countries is that their immediate neighbours may be poor trading partners due to conflicts, bad governance, or weak economic prospects. They are also dependent on the transport infrastructure of their neighbours who may not have the same incentive for improving infrastructure as they do. - Bad Governance - Governance and economic policies clearly impact a country’s opportunities for economic growth. Some countries such as Malawi may have relatively good governance and policies but still can’t develop rapidly due to limited opportunities and resources. Other countries such as Nigeria, Chad, and Bangladesh may have very high corruption ratings but may still have relatively good economic growth due to abundant resources or sound economic policies. More worryingly, even those countries that manage to break free from these traps face new forces of globalisation that tend to keep many poor countries poor : -Now that India and China have developed low-wage manufacturing capacity, it will be very difficult for poor African countries to compete against them. It may be several decades before wage rises in Asia make Africa significantly more attractive from a wage perspective. - Globalisation facilitates ‘capital flight’ where local wealth can be invested abroad more easily instead of back into the 21 economy. Foreign investors also tend to rate investment in these countries as highly risky. - Emigration tends to work against poor countries due to ‘brain drain’ of the most talented individuals.
  22. 22. Malawi’s economy reflects challenges typical of many African countries Infrastructure, Health and Education • Malawi’s infrastructure is poor internally, making commerce difficult. Due to its landlocked status, it also struggles to work with neighbours such as Mozambique to improve coastal access to allow exports to be more competitive. •AIDS is a big problem, decimating certain sectors of the workforce and creating a generation of orphans – in Malawi there are estimated to be 1 million orphans out of a population of 13 million. • Education is probably the most important route out of poverty for individuals and to grow the economy as a whole, and it is in need of improvement. Prospects of women getting even a primary education in Malawi are low. Governance • While it is a historically peaceful country, corruption and government effectiveness are still a problem in Malawi. This seems to be improving under its President Mutharika who was elected in 2004. • Malawi’s competitiveness and ease of doing business index’s are quite low reflecting reluctance of foreign investors. The fees to start a business are equivalent to almost two year’s average salary [Malawi Growth Strategy 2005]. People • Malawi’s high birth rate is typical of many poor countries. Large families are desirable to those with an agrarian lifestyle to help with the many chores on the farm with the women required to spend most days carrying water and other chores. A family with 6 children in this situation will be lucky if 2 of them are able to attend primary school the others are needed for household or farming duties or may suffer from ill health. • Brain drain results for the dream of many to emigrate to South Africa, Europe, or America, and often the brightest and most successful are the ones that do so instead of staying to create opportunities at home. Geography • Malawi’s chief resource is its land for agriculture, but even this is threatened by overpopulation and misuse. • It’s landlocked status can be overcome through infrastructure initiatives such the efforts to build up the corridor to Mozambique’s port of Nacala, but this is dependent on outside investors, aid agencies and the government of Mozambique. Economy • According to some estimates [Malawi Growth Strategy 2005], there are only 50,000 jobs in the formal private business sector out of a population of 13 million people. The vast majority of Malawians work in subsistence farming and fishing, or other informal business activities that are not reported as part of the GNI. For these reasons it is difficult to know the true level of unemployment, which has a different meaning in Malawi. A more accurate accounting of the economy would put a even greater percentage of economic focus on agriculture than the 38% reported officially. 22 • Major exports are tobacco, tea, and sugar. Mining and manufacturing is underdeveloped, as are the service industries, with further development of tourism as one of the few hopes for the future. (see case study on Malawi)
  23. 23. Malawi Poverty Reduction Strategy 2004/2005 - Malawi’s Poverty Reduction Strategy is now subsumed by a broader Malawi Development and Growth Strategy (MDGS) – From Poverty to Prosperity: 2006 – 2011. A country seeking aid is now required to have a clear poverty reduction strategy by the World Band and IMF as part of their funding requirements and as a way of evaluating eligibility for debt relief. The initiatives identified in documents like the MGDS show the country’s government and business leaders appear to understand the issues and know what generally needs to be done to achieve growth. The question is how effective will they be in addressing the issues. - The diagram shows a mapping many of the key initiatives identified in these strategies to the framework for understanding the root causes of Malawi’s economic position. Geography and people aspects have been left off the model as they are more difficult to change and are not the primary factors for investment decisions. On the positive side, the initiatives address many of the issues causing underlying issues associated with their poor economic development. On the downside, these initiatives are unlikely to bring Malawi into rapid economic development in the near future. I have highlighted each initiatives with a red, amber, or green background to indicate whether the initiative was successful according to the assessment in the latest poverty reduction strategy. Most of the initiatives have been proven to be less than fully effective due to one or more of the following factors: - Not fully funded or cancelled or postponed due to budget shortfalls - Not ambitious enough in scope also due to budget limitations - Ineffectively implemented due to lack of skills, government effectiveness, or corruption and red tape - One obvious solution to lack of funding for these initiatives would appear to be foreign aid. And of course aid can help in many of these areas if provided effectively. Malawi is a big receiver of aid from many of the international aid organisations listed above in blue boxes. Malawi receives approximately $500m in foreign aid per year which equates to approximately $45 per person per year (World Bank Development Indicators, 2005). This is about 3 times the average level of aid given to other low income countries. As Malawi is a landlocked country, and it’s governance level can be considered better than many, it is a good candidate for aid and will likely require aid for many years to come. -The one area highlighted in green below in private investment in mobile telephony. As noted earlier, the key way to sustained economic growth is to attract private investment to create new jobs. The two mobile telecom operators, Celtel and Telkom are investing heavily in network infrastructure and creating jobs due to their 100% annual growth rate. This investment is in addition to the benefits of mobile telephony in terms of infrastructure and business productivity. Although the penetration rate is still quite low, it at least shows one area where rapid economic growth is possible. 23
  24. 24. Political instability and poor governance have been problems in many African countries - but many conflicts are ending and governance is improving - Countries like Somalia, Chad, and Sudan may be still embroiled in conflict, but many countries have recently resolved long periods of civil war and conflict. Mozambique and Rwanda, once sites of bitter conflict, are now considered economic success stories. Others such as DRC, Sierra Leone, and Angola, have stabilised politically and are hopeful of more prosperous times. It will be important for the West to support these countries as they emerge from conflict to encourage their development. - Africa is also known for its history of poor governance and corrupt leaders. While the countries shown in red below are amongst the worst rated governments in the world, there are encouraging signs of improvement in many countries in the past 10 years. The World Bank’s Governance Indicators have only been in place reliably since 1996, but 10 years later, it shows how many African countries have improved in several areas. The key areas that the indicators rate are: • Political Stability • Control of Corruption • Democracy - Voice of Citizens & Accountability of Government • Rule of Law • Government Effectiveness • Regulatory Quality - The diagram shows that the DRC, while still emerging from a long civil war, was rated significantly higher on Voice and Accountability and Regulatory Quality. Both Botswana and Madagascar have shown improvements in Control of Corruption over the same period. - I hope the message that you will take away from this diagram is that Africa is not a homogenous continent of corrupt governments rife with conflict, genocide, and coups. The majority of African nations have had democratically elected, multi-party governments for at least 10 years now. The level of governance is not up to the standard of the richest countries, and there are still a handful of basket cases, but most governments rate about the same level as the majority of developing countries, including economic success stories of China and India, which we saw were rated at 38% and 43% respectively. 24
  25. 25. Africa’s economic growth since the mid-1990’s is more promising for poverty reduction, but diversification away from commodities is still a challenge - Most people have been pleasantly surprised to see the encouraging economic growth figures from many African countries since the mid-1990’s. In addition to growth, inflation is down (barring Zimbabwe, Ivory Coast, and Somalia) and foreign investment is up. What is the cause of this growth? - On the plus side, the peace deals and governance improvement mentioned on the previous slide play a part in this. South Africa's diversified economy is also has a positive influence. - Debt relief and increased foreign aid also play a role in this recovery. -On the downside, increased prices in oil, minerals, and other commodities in recent years explains much of the growth. (Economist, 24th June 2006 – A glimmer of light at last?) . About a third of Africa’s population live in countries whose growth is dominated by oil exports. -As highlighted by Paul Collier’s model, the Natural Resource Trap means that while rising commodity prices bring in much needed revenue, it can have the effect of appreciating the currency and crowding out other exports needed to diversify and grow the economy. It can also invite corruption, coups, and other problems. -Another downside of the recent boom in commodity prices is that China is one of the leading developing countries hungry for these resources. And while China’s investment in many countries is much needed, there is controversy related to the form that this investment takes. China’s investment in Angola oil and rail infrastructure is very secretive and is considered ‘no strings attached’, meaning that China is willing to turn a blind eye to any government corruption related to these investments. China’s investments have also been know to go the Chinese suppliers exporting much of the labour to Chinese workers instead of local workers. - Despite concerns on commodity dependency, there are now emerging a handful of ‘stars’ that have shown sustained economic growth and have relatively diversified economies exporting more than one or two major commodities. As shown in the figure, these growing ‘stars’ make up about a third of Africa’s population. They are on the route to poverty reduction. -Finally, about a third of Africa’s population live in countries that still have low growth in the past 10 years due to conflicts, poor governance or dependence on one or two major exports. These are the countries with high levels of poverty that will be unable to grow out of poverty without more investments, aid, and economic and political reform. 25
  26. 26. South Africa’s diversified economy still has its issues but provides hope for African growth Infrastructure, Health and Education • South Africa has a modern infrastructure, localised around four main areas: Cape Town, Port Elizabeth, Durban, and Pretoria/ Johannesburg. Beyond these four economic centres, development is marginal and poverty still predominates despite government efforts. There are also regular power outages, some of which are quite severe putting most of the country in darkness. • AIDS is a big problem, decimating certain sectors of the workforce. • Education is probably the most important route out of poverty for individuals and to grow the economy as a whole, and is in need of improvement . At least nearly everyone can now get a primary school education, but the prospects of blacks going on to secondary and higher education are very low. Governance • Corruption and government effectiveness has improved in South Africa since the end of apartheid in 1994. South Africa's government has struggled to provide economic opportunity for blacks since the country's first all-race election brought the African National Congress to power in 1994. Inequality has worsened, despite the emergence of a new black middle class. • Crime is persistently high, with one of the highest murder rates in the world. Economy • As with other developed economies, it is dominated by services industries including well-developed financial, legal, communications, energy, and transport sectors, a stock exchange that ranks among the top twenty in the world, and extremely high potential tourist destination that is rapidly expanding into what is being referred to as ‘the new gold.’ • The government has worked hard to address massive unemployment, but at the same time, educational deficiencies and apartheid's legacy have caused a severe skills shortage. • It is a resource rich country and strengths in industry and manufacturing include traditional dominance of the world's gold and diamond markets; uranium and other metal mining; coal mining which is the major source of energy; and vehicle, hi- tech, and textile manufacturing. • The agricultural industry contributes a relatively low percentage of GNI compared to other parts of Africa. Due to the aridity of the land, only 13.5% can be used for crop production [wikipedia], but it is he eighth largest wine producer in the world, and the eleventh largest producer of sunflower seed. South Africa is a net exporter of agricultural products and foodstuffs, the largest number of exported items being sugar, grapes, citrus, nectarines, wine and deciduous fruit. • South Africa recently approved an ambitious ‘Accelerated Shared Growth initiative for South Africa’ with a target of reaching sustain economic growth rated of 6% by 2010. 26
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  28. 28. Mobile telephony has a broad range of benefits appropriate to fighting poverty in developing countries - Mobile Telephony is an important tool to fighting global poverty from a number of perspectives. - It is the most effective way to develop telecommunications infrastructure where none exists or to leap-frog fixed land line systems that can be expensive and slow to provision. While internet access via mobile telephony is not available in many poor countries yet, this is potentially a very cost effective way for people to get their first access to internet services either on internet enable mobile devices or using the phones as a modem to a PC. - It can provide access to important health care services where no local qualified doctors are available for emergency care saving lives. Even routine calls to a remote doctor can save patients worry or unnecessary costs travelling. With internet access, there is no shortage a medical advice that would be made available to patents remotely. Mobile telephony can provide internet access points to villages, schools, and local businesses. - There are a growing number of examples of mobile telephony helping productivity of rural farmers, fishermen, or countless other small business. From accessing the latest commodity prices to decide whether to spend precious money on transporting goods to market, to running a taxi, an auto mechanic business, to sex workers, mobile telephony is seen as an essential tool for doing business in Africa. - And perhaps the biggest investments and growth are from the mobile telecom industry itself. MTN, Celtel, and Vodacom are all making heavy investments setting up and expanding mobile networks across Africa. Vodafone is said to be considering investing up to $10 billion to extend its control of Vodacom (Financial Times, September 2007). And while penetration is low in many countries, 3.3% for example in Malawi, it is often growing at rates of 100% or more a year (ITU World Telecommunication/ICT Indicators, 2006), creating jobs across the continent. - Mobile banking is the latest in a number of innovations that promises to change the way Africans do business as new systems allow previously ‘un-banked’ customers access to banking services through the use of pre-paid vouchers. Subscribers can pay for services in local shops using banking services on mobile phones. Transfer of international remittances via mobile phones is another example. All kinds of new text services from market prices to weather reports are being innovated in Africa and other developing countries first. - An finally studies confirm the benefits of mobile telephony to growth of the overall economy. One widely published study by the London Business School showed that an increase of 10 mobile phones per 100 people in a developing country boosts GDP growth by 0.6%. So a country like the Philippines with 27% penetration should expect long term growth 1% higher than a country like Indonesia, with only 9% penetration. (Waverman, Meschi, Fuss: The 28 impact of Telecoms on Economic Growth in Developing Countries, March 2005)
  29. 29. Vodacom in the Democratic Republic of Congo (DRC) is an example of how private investment in mobile telephony can create jobs in Africa 29
  30. 30. 30
  31. 31. The Optimists: Poverty can be eliminated in Africa – more aid is needed for a ‘big push’ - Nearly everyone has heard about the War on Poverty or the campaign to Make Poverty History. But what does it all mean and how are they going to end poverty? - The Make Poverty History campaign has its roots in the recommendations of a task force organised by then UN Secretary General Kofi Annan to address how to meet the Millennium Development Goals, of which a central target is to halve extreme poverty by 2015. The task force included over 250 development experts and was headed by well known development economist Jeffery Sachs. The task force issued its recommendations in January 2005 saying that most of these goals could be achieved if its broad range of recommendations were implemented, including calls for global aid levels to double in 2006 from $65 billion to $135 billion and growing to almost $200 billion a year by 2015. One of the central tenets was that the poorest countries needed a ‘Big Push’ to address all related aspects of development including infrastructure, health, education, and improved governance to allow them to create viable livelihoods and get on the road to sustainable economic growth. - In the UK, Tony Blair also initiated a Commission on Africa in 2005 to look specifically at the problems of poverty in Africa at the instigation of Bob Geldof who sat on the commission. This commission has its own long list of recommendations of how poverty could ultimately be eradicated in Africa. - Action from these two reports culminated in the July 2005 G8 summit, at Glen Eagles Scotland , where leaders of the G8 nations agreed to double the amount of collective aid they provide to developing countries by 2010 from $25 billion to $50 billion a year. This level of spending is below was is needed to meet the MDG Task Force recommendations, but was welcomed as an important step forward. How that aid is actually spent was not detailed, but it seems to be largely left up the donor governments through their usual channels of development agencies and support for international organisations. The G8 leaders also agreed to cancel international debt for 18 of the poor countries. - The Live 8 concerts organised by Bob Geldof just prior to the G8 summit were intended to gain support for funding of increases to development aid recommended by the commissions and did not request any donations other than to put pressure on the G8 leaders to provide more aid. - Bono has been a big advocate for increased development aid for quite some time. He led the Jubilee 2000 campaign to cancel international debt to the poorest countries, and has worked closely with Jeffery Sachs on a number of initiatives and was instrumental in gaining commitments of aid from the Bush administration. - Bill Gates of course is another big spender, focussing on preventable and treatable diseases such as malaria and tuberculosis, and antiretroviral medicine for those with HIV/AIDS. The Gate foundation includes the billions from Bill Gates’ fortune as well as $33billion Warren Buffet recently transferred to the Gates foundation. 31
  32. 32. Jeffery Sachs advocates a number of simultaneous interventions at the village level for sustainable development Shortly after his task force on the Millennium Development Goals issues its recommendation in 2005, Jeffrey Sachs released his book called The End of Poverty in which he spelled out his vision for ending extreme poverty completely by 2025, ten years after the MDGs target of halving poverty by 2015. Like Paul Collier, Sachs lists many of the reasons some countries fail to achieve economic growth. His main culprits are: • The Poverty Trap: They do not have the ability to get out of poverty by themselves. They lack of trucks, paved roads, power generators, irrigation channels. They have low human capital as people are hungry, disease-ridden, illiterate villagers struggling for survival. Their natural capital is depleted: trees have been cut down and soil nutrients exhausted. They are unable to save to invest in improving these conditions. • Poor geography: Countries that are landlocked, dominated by high mountain ranges, lack or navigable rivers, long coastlines, or good natural harbours have high transport costs. Poor agricultural climate and topography is also difficult to irrigate and poor country projects are often prone to tropical disease. • Government failure: Cannot provide its core functions to invest in basic infrastructure and provide basic social services such as health and education or create environment conducive to investments by private business. • Cultural barriers: Where women do not have rights of education or political and economic rights and lack of education means few labour force options encouraging larger family sizes. • The Demographic Trap: There is a direct correlation between higher economic development and lower birth rates. Jeffrey Sachs’ approach fight poverty is for a big push to invest simultaneously in all elements of needed to foster businesses, sustainable economic development ,and a prosperous society: - Human capital: health, nutrition, and skills for each person to become economically productive - Business capital: machinery, facilities, motorised transport used in agriculture, industry, and services - Infrastructure: roads, power, water and sanitation, airports and seaports, telecommunications and power - Natural capital: arable land, healthy soils, biodiversity, and well-functioning ecosystems - Public institutional capital: commercial law, judicial systems, government services, and policing - Knowledge capital: scientific and technical know-how to raise business productivity This approach is best demonstrated in his Millennium Village concept shown in the diagram below. Meant as a test case for a global strategy to attack poverty, the initial village pilots in Sauri, Kenya have already succeeded in improving the education levels from a ranking of 68th to 7th in the district. He has since received funding from the Soros Foundation and 32 other sources and has now 79 millennium village project planned or in operation.
  33. 33. The Pessimists: Aid has not been effective The scepticism for such large aid projects is well known, and the latest attack on large aid projects comes from William Easterly in his book ‘The White Man’s Burden: why the West’s efforts to aid the rest have done so much ill and so little good.‘ The main argument of the book is that aid (2.3 trillion US dollars in the last five decades in 2005 dollars) has been, and will be, useless to reduce poverty and bring development to poor nations. He calls for small-scale pragmatic, bottoms up approaches as being much more effective than grand, top-down, ‘messianic visions’, such as Sachs’ that have always failed in the past. It runs squarely in the face of Jeffrey Sachs’ approach outlined in his book which argues that a fundamental reason that aid has not halted poverty to date is that there has been too little of it. Sachs argues that the aid levels have been insufficient to address the poor country issues, and the aid that has been provided has mostly gone to things like temporary famine or refugee relief, donor country consultants, servicing of debts that would never be paid, or for projects that do not address the core issues of infrastructure or basic health and education services. The historic examples of African dictators squirreling money away in Swiss bank accounts and waste and corruption are notorious in aid projects. Paul Collier even cites an example on a project he audited in Chad were he found that only 1% of funding donated for a health care project actually reached the clinics. Ineffective use of aid is indeed one of the great challenges with development projects in general. Jeffrey Sachs chooses to have a goal oriented can-do approach to solving one of today’s great challenges, where others, such as William Easterly, a 16 year veteran the of the World Bank, allegedly sacked unknown reasons, chooses to highlight the past failures. 33
  34. 34. Paul Collier proposes a balanced agenda for action to tackle poverty in the poorest countries Paul Collier’s Agenda for Action to address poverty is a more balanced approach to aid as a solution to global poverty. He calls for more aid in certain circumstances but also identifies areas where it can be detrimental, and then recommends other tools such as the appropriate use of military intervention, and the establishment of several international norms and standards: - Aid should be used for poor landlocked countries to help them build transport infrastructure to overcome their landlocked status. Aid should also be provided to neighbouring countries on whose transport corridors the landlocked countries depend. These countries will also continue to need aid for basic health and education as they are likely to remain poor for the foreseeable future. - Aid can also be effective in helping coastal countries that may have broken free from conflict and governance traps to help them build world class export-based infrastructure for things like ports and airports that will help to be competitive with the Asian giants. These countries also need temporary trade protection from Asian countries, in the form of preferential tariffs in Europe and North America to help them overcome their current competitive disadvantage. - He is clear that aid is not appropriate for resource rich countries. An inflow if foreign aid acts as a form of foreign exchange, which can make the local currency appreciate, making exports less completive and exacerbating the effect of the ‘Dutch disease’ where the country has difficulty diversifying away from the few commodity based products. To help wean countries off of resource exports, he calls for international charter for Natural Resource Revenue, encouraging developed countries oil and mineral extraction companies to be transparent in their dealings and for resource country governments to effectively use of this revenue to develop the economy and diversify their exports. - He is also bold in recommending intelligent use of military intervention where it can help countries break free from the conflict trap. He cites the British support for suppression the rebel group RUF in Sierra Leone in 2000 as a benchmark examples for a cheap, confident, sustained, intervention that was welcomed by the government and people. In situations where military intervention has been proven to be effective such as maintaining order in post-conflict situations or when used as a threat to dissuade would-be coups. He also calls for a Charter on Post-conflict Situations to guide the behaviour of donors, military support, and reconciliation. Finally, as the title of his book implies, he believes the international community should focus in ‘the bottom billion’ people in the poorest of countries, as opposed to the entire developing world, which comprises approximately 5 billion out of the 6 billion people on the planet. He cites this as a problem of focus for the current Millennium Development Goals. Efforts to address poverty would be much more effective if focussed on those most in 34 need of being helped to be more effectively integrated into the global marketplace and start to grow out of poverty.
  35. 35. 7 things you can do to help fight global poverty Finally, many people feel that global poverty is such a large and complex issue that there is really nothing that they can do to stop it. Well there are things that everyone can do, and just by listening to this presentation you have taken an important step to helped to inform yourself on this important issue. To conclude, it is important for everyone to think what difference that they can make in war on poverty. I am always interested in people’s thoughts and ideas on how to best tackle this problem. 35

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