Great news on global poverty

In: Uncategorized

23 Mar 2012

This is my Perspective column for 12 March. More material from Fund Strategy will be posted over the next few days.

How about some good news for a change? In fact some brilliant news.

The number of people living in extreme poverty in the world is steadily falling. This trend is clearly welcome to the poor themselves but it is also fantastically beneficial for the advanced economies such as Britain.

Admittedly there are many miserablists, including at least one reader of this magazine, who disagree. But there is a strong weight of evidence against them.

According to new estimates from the World Bank the proportion of the world’s population living below its benchmark for extreme poverty fell from 43.1% in 1990 to 22.4% in 2008.* Even more striking is the fall in the absolute numbers of those living in poverty from 1.9 billion to about 1.3 billion. So even though the world’s population rose the number of people living in extreme poverty fell sharply over the same period.

East Asia showed the greatest progress with the proportion living in extreme poverty falling from 77% in 1981 to 14% in 2008. Asia’s rapid economic growth clearly benefited more than a tiny ultra-rich elite.

Of course things are far from perfect and there is a long way to go before the developing world catches up with the West. At the current rate of progress about a billion people will still be living  in extreme poverty in 2015. Nor should it be forgotten that extreme poverty as defined by the World Bank is a meagre level.

Nevertheless the decline in poverty should be widely welcomed. If there is criticism to be made it is that it should go even further.

From a western perspective there are several possible reactions to the new figures. Some will no doubt see it as good for the developing world but of little relevance to the West. Others, particularly those of a greenish disposition, will view it as a nightmare.

From a green perspective the emergence of the developing economies means fewer resources for the West. Implicitly, and sometimes even explicitly, it would in their view be better if the emerging world stayed relatively poor.

One response to my recent Fundweb blog post entitled “Celebrate British decline” made a pervasive pessimistic argument. He insisted that a rise of living standards in the poor world would inevitably lead to an increase in the cost of living in Britain.

Although this is a popular argument in the West there are good reasons to believe otherwise. Indeed the mass of evidence of recent decades argues strongly in the opposite direction.

Take the example of China. The proportion of people living in extreme poverty fell from 84% in 1981 to 13% in 2008. It is certainly the case that China’s consumption of a wide range of goods surged over that time. But it is also true, and this is what greenish types forget, that the amount they produced rose sharply too.

Think of all those electronic goods made in China. Or the toys. Or the myriad of other products.

All of those goods would probably have been much more expensive if China had not started producing them on a huge scale. Therefore, in a direct sense, Chinese production has helped raise living standards in the West. Every pound of income in Britain can buy more than would have been the case otherwise. Indeed if it were not for western protectionism the prices of imports from emerging economies would be lower still.

But there are also indirect ways in which China has played an important role in driving the world economy forward for over a decade. That is even leaving aside its role as an increasingly important import market for western goods and services. China’s growth has in many respects made it the locomotive of the global economy in recent years.

America would have suffered a much sharper economic contraction if it were not for cheap Chinese exports and finance. That would in turn have had a damaging effect on the European economy.

Of course many greenish critics focus on Chinese consumption rather than production. They argue, for example, that Chinese demand is pushing up the cost of commodities from aluminium to pork bellies to zinc.

But this view is based on a one-sided understanding of economics. Rising demand does not necessarily lead to rising prices. If it did then living standards would have slumped over the long term as global consumption has risen enormously. But on the contrary, the long-term trend for the prices of most goods is strongly downwards.

The price of commodities should be understood in relation to the interaction of supply and demand rather than by consumption alone. If production rises faster than consumption then prices can be expected to fall.

Insufficient investment in developing production, rather than rising consumption in itself, has played a key role in driving up prices in some areas in recent years. This is clearly the case in such areas as energy and food.

Indeed green measures have helped push up prices by creating artificial scarcity. For example, by demanding that the West generates much of its energy from expensive sources such as wind and solar. There is nothing inherently wrong with such energy sources but insisting on their use when it is expensive pushes up costs.

On balance the development of the emerging economies should be hugely beneficial to global economy. Not only does it benefit the poor but it also helps create the conditions for greater prosperity for the world as a whole.

* The benchmark is $1.25 at purchasing power parity (adjusted to take into account differences in the cost of living in different countries) at 2005 prices.