The End of Poverty: Not a Dream

The End of Poverty: Not a Dream
Progressive Policy Institute, January 28, 2009

Excerpts:

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From last Tuesday's inaugural address, the first inaugural pledge to fight poverty abroad since Kennedy's in 1961:

"To the people of poor nations, we pledge to work alongside you to make your farms flourish and let clean waters flow; to nourish starved bodies and feed hungry minds. And to those nations like ours that enjoy relative plenty, we say we can no longer afford indifference to suffering outside our borders."

Cynics ask whether such promises are ever realistic. Worried idealists wonder whether we can keep them now, with life at home suddenly so difficult and the financial crisis already pushing people into poverty overseas. Brief answers: A promise to ease poverty is entirely realistic; and though the poor abroad will not escape the crisis, better trade policy this year can ease the blow. Background first, then more information.

Background: In dollar terms, America's ties with poor nations span aid, charity, trade, and remittances. Government aid and private charity flows, at $22 billion and $9 billion, account for the least money but are essential in emergencies and can bolster public health, primary education, and other public services. Remittances are larger -- immigrants send at least $45 billion home from the United States each year, with Mexico, Central America, the Caribbean, and the Philippines especially large beneficiaries -- and complement aid by raising family incomes in rural districts and urban slums. Imports from low-income countries, excluding energy and goods from China, totaled $405 billion (or $35 billion per month) in 2007, spread across clothes, toys, Christmas decorations, coffee, mangoes, sports and fishing gear, TV sets, shrimp, flowers, and other goods. This is a much larger figure than those for aid, charity and remittances, but complements rather than replaces them by supporting tens of millions of middle-class and lower-middle class urban jobs and raising farm incomes, in poor countries.


Now the answers:

Question (1): Can we ever reduce poverty? Judged by facts, yes: the idealist's case is strong and the cynic's weak. The World Bank defines "absolute poverty" as life on $1.25 a day or less (in constant 1993 dollars) and has estimated poverty rates on this basis back to 1981. In that year, 52 percent of the world's people were very poor. By 1990, the figure was 42 percent. In 2005, the most recent year available, only 25 percent of the world's people were very poor. East Asia recorded the most progress, with the absolute-poverty rate falling from 78 percent in 1981, to 55 percent in 1990, and 16 percent in 2005. In one generation, then, Asian poverty fell from the near-universal experience of life to the sad exception. Drops elsewhere in the world have been slower but real: Since 1981, Latin America has cut absolute poverty from 13 percent to 8 percent; India and its neighbors from 60 percent to 40 percent; the Middle East from 8 percent to 4 percent; Africa from 54 percent to 51 percent. In eight low-to-middle-income countries without oil -- Chile, Jamaica, Mexico, Uruguay, Egypt, Jordan, Thailand, and Malaysia -- the absolute-poverty rate has fallen below two percent. Conclusion: if poor countries have good education, financial, infrastructure, anti-corruption, and other policies; if they are free of wars and coups; and if rich countries help through aid, trade and easy remittance, poverty often falls quickly and permanently.

Cambodia offers a human-scale and recent example. In 1996, after 25 years of first bombing, then genocide and famine, then endemic warfare, the country's gross national income was $14 billion, its per capita income was $1,240, and its infant mortality rate ran at 102 deaths per thousand live births annually. Cambodia has since received significant aid -- about $500 million annually, with Japan the largest donor -- and succeeded in trade, putting 350,000 young women to work through garment exports to American retailers. Earning three times the average national income as they sew shirts and pajamas, these garment-workers send a third of their pay money home, raising their rural relatives' "food security" from two months to a year. By last November's Rain Festival regatta on the Mekong, Cambodia's gross national income had in 12 years doubled to $29 billion, per capita income had risen by 60 percent to $2100, infant mortality had dropped by nearly half, and absolute poverty was down 20 percent.

Question (2): And in the midst of the current crisis? If cynics are wrong, are worried idealists right to fear that the achievement may slip away? Yes; and American policy can make matters worse or better.

Aid commitments have so far held up. With falling demand and unemployment in the United States, though, remittances are beginning to fall and trade is falling fast. Here again, Cambodia illustrates a general trend. Between October and November, as the crisis set in, America's imports from poor countries fell by $7 billion -- a 20 percent drop in a month. And as tourists and visitors from the rural districts watched the Rain Festival regatta, the garment factories that power Cambodia's growth were beginning to close down. According to The Phnom Penh Post, orders dropped by a third, 30 factories closed, and 20,000 young women lost work. The same things were happening in southern Africa, Central America, Pakistan, Mexico, the Philippines, Thailand, and many other countries. The effect in each is to suddenly increase poverty rates, raise the risk of rural hunger and urban sex-industry recruitment, and sometimes cause political instability.

No American policy can fully protect poor countries. But at minimum, Americans can avoid the trade protectionism and aid cuts that would worsen the blow to the poor; and with some energy, Congress and the new administration can ease it by making the U.S. trade regime more open and friendly to the poor.

In general, American trade policy is tougher on poor countries than rich ones, because tariffs and other barriers are relatively high on the cheap and simple manufactures and farm products poor countries provide, but low on services and high-tech products Americans buy from rich countries. On average, tariffs on poor-country imports are about twice as tariffs on rich-country goods. A series of "trade preference" programs partially ease the inequity by waiving some tariffs for poor countries. But the preferences are antiquated and in some ways ineffective, as they offer little help to low-income countries in Asia and the Muslim world, because it bars duty-free treatment for the clothes, shoes, and other light-industry products that account for most of their trade. In 2007, for example, Cambodia faced a $415 million tariff penalty on its $2.5 billion in clothes -- more than the $405 million penalty on Britain's $100 billion in medicines, aircraft parts, TV shows, insurance policies, and North Sea crude. Pakistan, Bangladesh, Lebanon, Sri Lanka, Laos, and others get similar exorbitant penalties.

Ending them through a better preference system would be easy and essentially cost free. The principal competitive effect would not be to raise total imports, but to give poor countries some help in dealing with much larger competitors; the main domestic consequence would be slightly lower clothing prices. A modest step, preference reform would give the people of poor nations some help as they manage a crisis they did not cause -- and over time, can help Americans keep a promise that, with some luck and good policy, we can fulfill in this generation.

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Further Reading:

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The World Bank charts the decline of poverty, 1981-2005: http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI08povertysupplement.pdf
And has a shorter note on the falling rate of malnutrition:http://siteresources.worldbank.org/INTPRH/Resources/childrenunderfive.pdf

PPI Trade & Global Markets Director Ed Gresser testifies last year at the Senate Finance Committee on preference policy:http://finance.senate.gov/sitepages/hearing061208.htm

The Center for Global Development's Kim Elliott has preference advice for the new administration:http://www.cgdev.org/content/publications/detail/967263

And the U.S. Trade Representative Office explains today's preference programs:http://www.ustr.gov/Trade_Development/Preference_Programs/Section_Index.html


Three views of Cambodia:

The Royal Ministry of Tourism tells the story of the water festival:http://www.mot.gov.kh/Hot_News/water_festival.html

The International Labor Organization's Cambodia factory-monitoring project reports on work conditions, pay and the social implications of the garment business:http://www.betterfactories.org/

The Phnom Penh Post reports on slipping sales, job loss and prospects for 2009:http://www.phnompenhpost.com/index.php/2009011923690/Business/Garment-factories-hunker-down-for-a-miserable-2009.html


The Kennedy legacy:

The 1961 inaugural: "To those peoples in the huts and villages across the globe struggling to break the bonds of mass misery, we pledge our best efforts to help them help themselves, for whatever period is required -- not because the Communists may be doing it, not because we seek their votes, but because it is right. If a free society cannot help the many who are poor, it cannot save the few who are rich."

The promise led to creation of the Agency for International Development, a 50 percent increase in foreign aid, the launch of the Peace Corps, and one of the most ambitious and successful efforts to reduce U.S. and world trade barriers since the Second World War. The Bank has not calculated $1.25-a-day figures for years before 1981, so evaluations aren't easy. But social indicators suggest that posterity should judge him well on results, as well as inspiration. Since 1960, global infant mortality has fallen by nearly two-thirds (from 126 to 50 infant deaths per thousand live births) and life expectancy has jumped from 50 years to 68 years.

The Peace Corps:http://www.peacecorps.gov/index.cfm?shell=learn.whatispc.history

The Agency for International Development:http://www.usaid.gov/


Aid and remittances:

The OECD has foreign-aid data by donor country and recipient:http://www.oecd.org/department/0,3355,en_2649_34447_1_1_1_1_1,00.html

The World Bank predicts remittance growth to slow next year, with payments to Africa and the Middle East likely to fall:http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21121930~menuPK:3145470~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html

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