Our Word is Our Weapon

A while ago I argued that the various pundits who denounced the measurement of poverty in terms relative to average incomes as a mendacious trick by sneaky leftists were out of touch with how most ordinary people view poverty. Most people thought there was ‘quite a lot’ of poverty about, around half said they themselves had previously lived in poverty, and trends in these subjective estimates of poverty seemed unrelated to trends in proportions below whatever fixed or absolute poverty line you care to choose.

Now we have Richard Waghorne of Ireland’s wonderful ‘Freedom Institute‘ coming out with the same arguments again. “The truth”, he declares, “is that poverty [in Ireland], by any defensible measure, is a thing of the past”. The use of relative poverty measures in Ireland (eg the proportion with incomes below 60% of the average) is a “statistical fiddle” encouraged by the “poverty industry”, ie “left-wing lobby groups”.

It’s interesting that Waghorne neglects to tell us how he would actually measure poverty, apart from some vague hand-waving about basic needs. I’d love to see him suggest the kind of fixed, absolute income level below which someone in Ireland is ‘truly’ poor, but I suspect that his reluctance to do so is partly because, deep down, he knows that the idea of a such a historically immutable poverty line is logically absurd. It’s true that some of the people who are ‘relatively’ poor today would not be considered poor by our grandparents’ standards. But it’s just as true that there were people considered poor in our parents’ day who would have been thought fairly comfortably off by their grandparents.

Look even further back and it’s clear that our concepts of poverty have shifted radically over time. In 1938, the American economist Carroll Daugherty, describing his work attempting to establish useful standards of well-being, said:

The [standard family] budget itself must also be changed occasionally, whenever there are significant shifts in the nature of the items concerned or whenever people’s objectives and standards change. A standard budget worked out in the [1890’s], for example, would have no place for electric appliances, automobiles, spinach, radios, and many other things which found a place on the 1938 comfort model. The budget of 1950 will undoubtedly make the present one look as antiquated as the hobble skirt.

In this excellent article, Gordon Fisher collects a wide array of evidence demonstrating that concepts of ‘absolute’ poverty are not static over time - in fact, they tend to rise in rough proportion to average incomes. For example, he compares a series of ‘absolute’ poverty lines derived by expert researchers with the 1963 official US poverty line:

• Poverty lines and minimum subsistence budgets before World War I were, in constant dollars, generally between 43 and 54 percent of Mollie Orshansky’s poverty threshold for 1963.
• By 1923, Dorothy Douglas’ “minimum of subsistence level” was equal to 53 percent to 68 percent of Orshansky’s threshold.
• A U.S. Works Progress Administration “emergency” budget for the Depression year of 1935 was equal to 65 percent of Orshansky’s poverty threshold.
• Robert Lampman’s low-income line for 1957 was equal to 88 percent of Orshansky’s poverty threshold.

Even more interesting are the views of the public over time:

Since 1946, the Gallup Poll has repeatedly asked the following question: “What is the smallest amount of money a family of four (husband, wife, and two children) needs each week to get along in this community?” The average response to this “get-along” question has been higher than the Orshansky poverty line, being quite close to Ornati’s minimum adequacy level. However, it seems reasonable to assume that the relationship between the “get-along” amount and family income is a good indicator of how the public’s perception of the poverty line would vary over time in relation to family income (if a “poverty” poll question had been asked). Half a dozen analyses have found that the “get-along” amount rises by between 0.6 and 1.0 percent for every 1.0 percent increase in the income of the general population. (The results vary, in part because the analyses used different measures of the income of the general population.)

(emphasis added)

So, the evidence demonstrates that successive poverty lines developed as absolute thresholds show a pattern of getting higher in real terms as the real income of the general population rises - that is, absolute poverty is really all relative. The reason is that our ideas about poverty are socially constructed. Here’s Fisher again:

As technology progresses and the general standard of living rises, new consumption items are introduced. They may at first be purchased and used only by upper-income families; however, they gradually diffuse to middle- and lower-income levels. Things originally viewed as luxuries — for instance, indoor plumbing, telephones, and automobiles — come to be seen as conveniences and then as necessities. In addition, changes in the ways in which society is organized (sometimes in response to new “necessities”) may make it more expensive for the poor to accomplish a given goal — as when widespread car ownership and increasing suburbanization lead to a deterioration in public transportation, and the poor are forced to buy cars or hire taxis in order to get to places where public transit used to take them. Finally, the general upgrading of social standards can make things more expensive for the poor — as when housing code requirements that all houses have indoor plumbing add to the cost of housing. In the light of these social processes, the only kind of American society in which it would be sociologically justified to have had the same fixed-constant-dollar poverty line since the mid-1960’s would be a society in which there had been essentially no technological change or innovation since 1960.

What I’m not trying to argue here is that concepts of basic needs or deprivation are worthless or unimportant. Obviously they’re not, but I’d say it’s as clear that relative poverty is a meaningful and important concept, and a worthy object of both study and policy. And I’d also say it’s ironic that Waghorne is so upset at the ‘poverty industry’ that he accuses of bigging up the numbers of the poor, since there seems to be just as large an ‘anti-poverty’ industry comprising well-funded think-tanks attempting to prove once and for all that ‘relative poverty’ is a fiddle. The only developed country where they’ve really got a hold is, of course, the USA, which since 1963 has measured poverty by the same absolute threshold, uprated only for inflation. The reasons it has not been increased in line with average incomes are entirely political, as Fisher describes:

The primary occasion when the official poverty line was not raised was in 1968-1969, when an interagency Poverty Level Review Committee was re-evaluating the poverty thresholds after the Social Security Administration had been forbidden to implement a decision to raise the thresholds by a modest 8 percent in real terms. The Committee’s records show that the primary objection to a higher poverty line was the fact that it would have resulted in a higher number of people being counted as poor. Having proclaimed a War on Poverty in 1964, the Johnson Administration was in 1968 able to boast of a three-year drop in the poverty population of 5.6 million persons. In that context it would have been politically embarrassing to have reported a 2.8 million “increase” in the poverty population resulting from raising the poverty line in real terms; too many people might have misinterpreted the “increase” as being the result of failed Administration anti-poverty policies, rather than as the statistical result of a redefinition of poverty.

What a fiddle! I’ll leave Fisher with the last word, too:

The earliest known British quotation relevant to the income elasticity of the poverty line goes back to the late eighteenth century, when Adam Smith wrote, “By necessaries I understand, not only the commodities which are indispensably necessary for the support of life, but whatever the custom of the country renders it indecent for creditable people, even of the lowest order, to be without….necessaries [include]…not only those things which nature, but those things which the established rules of decency have rendered necessary to the lowest rank of people.” Strictly speaking, of course, Smith was defining “necessaries,” not “poverty.” However, his concept of necessaries implies a definition of “poverty” that would be based not on an unchanging biological concept of subsistence but on whatever “the custom of the country” or “the established rules of decency” consider necessary. It is an irony of history that those today in Britain and America who aggressively identify themselves as disciples of Adam Smith are generally opposed to definitions of poverty that are consistent with their master’s definition of “necessaries.”

William Easterly, who I’ve discussed before here, here and here, has a new book coming out, and Amartya Sen reviews it in the current issue of Foreign Affairs. Some key excerpts:

Empirical evidence of the ineffectiveness of many grand development and poverty-alleviation schemes is undoubtedly worth discussing clearly and honestly, as Easterly does when he is not too busy looking for an aphorism so crushing that it will leave his targets gasping for breath…

As it happens, the empirical picture of the actual effects of international aid (which, incidentally, does not come only from white men, since Japan is a major participant in the effort) is far more complex than Easterly’s shotgun summary suggests…

Easterly’s book offers a line of analysis that could serve as the basis for a reasoned critique of the formulaic thinking and policy triumphalism of some of the literature on economic development. The wide-ranging and rich evidence — both anecdotal and statistical — that Easterly cites in his sharply presented arguments against grand designs of different kinds deserves serious consideration. In a less extreme form, they could have yielded an illuminating critical perspective on how and why things often do go wrong in the global efforts to help the world’s poor.

Unfortunately, Easterly gets swept up by the intoxicating power of purple prose (I could not avoid recollecting Kipling’s description of words as “the most powerful drug used by mankind”). He forgoes the opportunity for a much-needed dialogue, opting instead for a rhetorical drubbing of those whom he sees as well-intentioned enemies of the poor…

In some ways, the more interesting parts of Easterly’s analysis lie in his case studies of particular programs. Many of those detailed depictions of donors’ failures to foster development are indeed persuasive. And yet, there are very few cases cited in which aid has actually “done so much ill,” as Easterly claims. Rather, sometimes it has simply not done much good. (Presumably, Easterly would argue in his defense that the waste of resources is itself scandalous and that the belief that something good is being done can discourage a fresh examination of what is really needed to help the wretched of the earth.) There are also many examples that Easterly considers where aid helped rather than hindered — which could have led him not to the total dismissal of the importance of aid, but to a more subtle rendering of the overall picture. Such a more nuanced view could yield important insights for policy, including on the need for more emphasis on social institutions and individual incentives. On the basis of his own investigations, Easterly is in an excellent position to systematize such insights. But this does not quite happen here, despite Easterly’s occasional suggestions for how to make international aid more effective and less wasteful. Useful hints at balanced evaluation come amid deafening outbursts against the advocates of aid; again and again, unifocal extremism is snatched from the jaws of discriminating judgment…

As it happens, coordination is an issue that receives surprisingly little attention in this grandly conceived book. Easterly’s rejection of all plans disposes of not only grandiose “gosplans,” which will not be missed, but also all efforts to try to do things together without getting into one another’s hair…

Perhaps the weakest link in Easterly’s reasoning is his almost complete neglect of the distinctions between different types of economic problems. Easterly is well aware of the efficiency of market delivery when commodities are bought in a market and backed by suitable purchasing power, and he contrasts that with the usual infelicities and inefficiencies in getting aid to those who need it most. But the distinction between the two scenarios lies not only in the different ways of meeting the respective problems, but also in the nature of the problems themselves. There is something deeply misleading in the contrast he draws between them, which seems to have motivated his entire project: “There was no Marshall Plan for Harry Potter, no International financing Facility for books about underage wizards. It is heartbreaking that global society has evolved a highly efficient way to get entertainment to rich adults and children, while it can’t get twelve-cent medicine to dying poor children.” The disparity in the results is indeed heartbreaking. But jumping from there to arguing that the solution to the latter problem is along the same lines as the solution to the former reflects a misunderstanding of what makes the latter so much more difficult. (That major issue is clearly more important than the minor point that J. K. Rowling was on welfare support and received a grant from the Scottish Arts Council when writing the first Harry Potter novel.)

In his wholesale praise of “searchers” over “planners,” Easterly says, “Planners determine what to supply; Searchers find out what is in demand.” This may be just so, but there is a radical difference (of which Easterly is surely aware, judging from what he writes elsewhere in the book) between the enterprise of supplying “what is in demand” — which is integrally linked to the buyers’ ability to pay — and that of supplying needed goods and services to people whose income and wealth do not allow a need to be converted into a market demand…

And in conclusion:

There is much of merit in Easterly’s perceptive vision about initiatives, incentives, and communication. We should be grateful to Easterly for the wealth of material he has presented, thereby enriching the development literature. We may have less reason to celebrate — or even to accept — the diagnosis of idiocy and obduracy he gives to those whom he calls “planners.” But there is a strong case for judging a book by its best contributions, not its weakest points. My hope is that the “searchers” among the readers of The White Man’s Burden will look for the convincing arguments Easterly does provide rather than for those he does not.

My worry is that the most unconvincing arguments Easterly seems to be offering or implying - that aid mostly does no good, and that Jeff Sachs is a big nasty Stalinist - will be the ones that get picked up, and that Easterly will find his work and his reputation being used and abused by those who don’t want aid reaching the poor or anyone at all.

[PS, hat-tip to Adam Smithee for the link]

In “What’s So Special About China’s Exports?“, Dani Rodrik argues that China has grown so fast in large part because it exports like a much richer country:

China is an outlier in terms of the overall sophistication of its exports: its export bundle is that of a country with an income per capita level three times higher than China’s. China has somehow managed to latch on to advanced, high-productivity products that one would not normally expect a poor, labor-abundant country like China to produce, let alone export.

This is significant because, here as in an earlier paper, Rodrik argues that higher export quality leads to higher growth. Most poor countries are stuck producing relatively low-productivity goods, because:

in a poor developing country, investors contemplating entry into new, non-traditional activities face considerable uncertainty about the costs of operation … The risks that arise from such uncertainty are borne disproportionately by early entrants into new industries, who therefore provide valuable informational spillovers to the rest of the economy. If they are successful, later entrants can observe the profitability of the incumbents and emulate them. If they fail, they pay the full cost of their failure. This externality implies that market forces on their own generate too little investments in new activities; to use the terminology of Hausmann and Rodrik (2003), they induce too little “self-discovery.” The result is that low-income countries produce too few high productivity goods that they could be producing (and selling in world markets) and incomes are lower than they would otherwise be. Conversely, rapidly growing countries are those that are able to somehow generate the investments in these non-traditional, higher-productivity tradables.

According to Rodrik, the Chinese government promoted these investments with a combination of protection, subsidies, a relaxed attitude to intellectual property rights and some fairly unorthodox conditions imposed on foreign investment:

Early on, reliance was placed predominantly on state-owned national champions. Later, the government used a variety of carrots and sticks. Foreign investors were required to enter into joint ventures with domestic firms (in mobile phones and in computers). Domestic markets were protected to attract market-seeking investors, in addition to those that looked for cost savings. Weak enforcement of intellectual protection laws enabled domestic producers to reverse engineer and imitate foreign technologies with little fear of prosecution.

All of this left many Chinese companies in a very strong position when barriers were eventually lowered to a significant degree - as Rodrik says, “most of the significant firms [in China] tend to be joint ventures betwen foreign firms and domestic (mostly state-owned) entities”. Many state-owned companies did fail, but:

The essence of the self-discovery model of economic development is that you need only a few successes: once a small number of high-productivity activities are identified, they act as the lever for economic convergence by pulling resources in from lower productivity activities. Without state support and publicly funded R&D, a company like Lenovo (previously known as Legend) which became large and profitable enough to purchase IBM’s PC business recently would never have come into being.

Hopefully this paper will help knock on the head the implausible but still popular notion that China represents some sort of free market success story. Instead, it seems to be squarely in the tradition of heavily interventionist, politically dubious East Asian ‘developmental states’ that thrived on the basis of all the ‘wrong’ policies. Here’s Rodrik again:

The standard list of recommendations for countries pursuing [global integration] includes: dismantling quantitative restrictions on imports, reducing import tariffs and their dispersion, making the currency convertible for current account transactions, eliminating bureacratic red tape and other impediments to direct foreign investment, improving customs procedures, and establishing the rule of law. Measured by these guidelines, China’s policies resemble more those of a country that messed up big time than those of a country that became a formidable competitive threat in world markets to rich and poor countries alike. In brief, China opened up very gradually, and significant reforms lagged behind growth (in exports and overall incomes) by at least a decade or more. While monopoly state trading was liberalized relatively early (starting in the late 1970s), what took its place was a complex and highly restrictive set of tariffs, non-tariff barriers, and licenses. These were not substantially relaxed until the early 1990s.

Rodrik’s paper raises some interesting issues, but first I have some quibbles.

Firstly, there’s the problem of methodological nationalism: Looking at China as a whole, as Rodrik does, its export performance does seem way out of line with its average income. But most of China’s provinces are relatively poor and relatively small exporters. According to the figures in The State of China Atlas, nine provinces (Beijing plus eight on the coast) accounted in 2002 for 90% of China’s trade, 84% of its inward foreign direct investment, and together have a per capita income almost twice the national average, which according to this ranking would make them about as well off on average as Croatia.

Secondly, the cost discovery argument suggests to me that geography, culture and networks might be playing important roles in China’s FDI and export booms. China is a relatively poor country with several very rich neighbours, with some of whom it has extremely close cultural, historical, ethnic and financial ties. The most obvious example is Hong Kong, source of 30% of all FDI into mainland China in 2005. The Hong Kong firms that sent $18 billion in foreign investment into the mainland in 2005, most of them probably run by Chinese ex-pats, surely have much better contacts, much better information and therefore much lower ‘discovery costs’ when it comes to investment opportunities than their Western competitors. Again, another reason why apparent Chinese exceptionalism shouldn’t be that unexpected.

Do these concerns undermine Rodrik’s argument? Hard to say, but the basic facts of very high Chinese growth and a relatively quick move into more sophisticated exports are I think fairly unarguable, and raise some interesting issues for development theory and practice.

Does size matter? Rodrik suggests in his paper that the size of China allowed for more experimentation, which aided cost discovery, and for trade tariffs to be used to attract investors. Presumably Senegal isn’t going to do quite so well out of this kind of approach, then. Is this an argument for poorer countries joining together into zones with internal free trade and a joint strategic approach to investment and internal trade?

Can a democracy be a developmental state? Like the former regimes in South Korea and Taiwan, the other two most spectacular Asian examples of growth achieved with intensive but apparently disciplined state intervention, China’s government has been unhindered in its planning by anything so inconvenient as elections, significant property rights or a free press. As Rodrik says, the state won’t always pick winners, but does operating in a dictatorship make it easier to dump the losers? The standard view is that planners get ‘captured’ by the firms benefitting from subsidies and protection, but do firms only have ‘capture power’ in a democracy where they can hold politicians’ feet to the fire? If China-style intervention is a recipe for growth success, but democracy makes it impossible, doesn’t that make democracy bad for growth?

Planners as Searchers? In a recent paper, William Easterly drew a distinction between:

• ‘Planners’, incompetent boobs who “produce shoddy goods consumers don’t want, and heavily rationed and inferior public services that satisfy no-one, not to mention environmental disasters”, and
• ‘Searchers’, innovative, experimental, grass-rootsy people who listen to feedback from consumers and voters and develop the right products and services accordingly.

It’s not an entirely convincing argument, partly because Easterly can make it seem like the column you’re put into depends more on your results than your methods - if a government Planner has a good idea that helps people, then he must have been a Searcher all along. But if anyone is a Planner then it’s surely the detatched, dictatorial and unarguably top-down bureaucrats of the Chinese government. It’s interesting, then, that they appear to have been both so experimental and so succesful at achieving the objective of high, sustained growth - hallmarks of a fine bunch of Searchers, surely. If they succeeded partly because they selectively ignored one kind of feedback - the price mechanism - and were entirely insulated from the other - democratic opinion - then what does this mean for Easterly’s argument?

Conclusions
None of this is meant to suggest that poor countries shouldn’t democratise. Even if there is a trade-off between democratic rights and growth, it’s arguably a sacrifice well worth making (but perhaps, someone will always say, not yet). And China is unique enough that its particular path can’t provide any guaranteed blueprint for success. But it’s rather depressing that everything that makes it unique seems to represent a reason why everybody else will find it much harder to emulate that success.