Our Word is Our Weapon

SEED magazine has some beautiful graphics summarising a horrific situation.

The idea of a a poverty trap is a simple one: it is basically a vicious circle in which poverty breeds more poverty, the fact of being poor reducing your opportunities, your resources, and your income, making you more likely to stay that way. Or in economic terms, a persistent low level equilibrium.

Disagreements over whether such poverty traps really exist or if so whether they are all that significant underlie many of the classic ‘left-right’ debates over development. After all, if poverty traps are important than the poor might need outside help to get out of them, and if poverty traps aren’t important than they won’t. Just so we know where we are on the celebrity economist face-off, Jeffrey Sachs and his allies make a big deal out of Africa’s poverty trap, while unsurprisingly William Easterly tends to disagree.

Personally I think anyone who argues that there are no significant poverty traps is painting themselves into a corner. After all, isn’t the powerlessness of the voiceless poor in comparison to corrupt governments a form of poverty trap? But more than that, the argument against poverty traps can end up sounding like an argument that the poverty is simply the fault of the poor. It is this myth that Stephen Smith sets out to dispel in his book Ending Global Poverty: a guide to what works, and in this summary article for the Globalist he lists not one, not two but twelve different kinds of poverty trap afflicting the poor.

Family child labor traps: If parents are too unhealthy and unskilled to be productive enough to support their family, the children have to work. It has been estimated by the World Bank that, in 2003, more than 100 million children were unable to go to school due to their poverty. In this way, poverty is transmitted across generations.

Illiteracy traps: Even if the family cannot — or will not — send their children to work, parents may not send their children to school because they cannot afford transportation, school uniforms or a modest school fee. If a family could borrow this money, the higher incomes received a few years later by their then-literate children could pay back these loans easily. But if the poor lack access to credit, they may not be able to get loans to finance otherwise very productive schooling…

Debt bondage traps: While credit is needed, the wrong kind of debt from unscrupulous moneylenders can also be a trap. Colluding moneylenders calibrate loan amounts and interest payments to ensure that a family can never get out of debt. Sometimes, the rate of pay for impoverished people working for their creditors is so low that it is insufficient even to pay back the interest they owe…

Undernutrition and illness traps: If an undernourished person is too weak to work productively, her resulting wage is too small to pay for sufficient food, so she continues to work with low productivity for low wages. This is an undernutrition trap — an extreme form of structural poverty found in famines and deeply impoverished areas…

Low-skill traps: If there is no employer in the region who is seeking skilled workers for, as an example, basic manufacturing jobs, then there is no visible incentive for individuals to invest in attaining these skills…

High fertility traps: If everyone around you is having many children, and there are few decent jobs to go around, then you too must have many children, or face the likelihood that no one — no child of yours — will have the means and the willingness to take care of you when you are too old to work…

Subsistence traps: Specialization can be the key to increasing your productivity. But you can only specialize if you can trade for the other goods and services you need. If, for example, everyone in your region is practicing subsistence agriculture, there is no one to sell to, and you have to remain producing for subsistence with perhaps a little trading on the side…

Farm erosion traps: In farm erosion traps, the poor are so desperate for food that they have to overuse their land even though they know the results will be reduced soil fertility and productivity the next year — and eventually even desertification. In times of famine, impoverished farmers have been known to eat the seeds they have saved from the last harvest to plant in the next sowing season so that they do not starve before then. This is a metaphor for the basic problem. Even though you know you are overusing your soil and that it will degrade if you do not rest it or plant less aggressively, the degradation happens at some point in the future. You have to grow more food today to keep your family from becoming badly undernourished. You are simply trapped into a cycle of poverty.

Common property mismanagement traps: Lakes are overfished, forests are not managed sustainably, land is over-grazed. Part of the problem is that community management of common resources has broken down, often a legacy of greedy colonial practices, now all too often imitated by post-colonial regimes…

Criminality traps: Youths without access to useful education and who see little future in legitimate work are drawn to gang membership and other cultures of criminality. Emotional scars from the experience of violence reinforce this trend. The resulting fights, thefts and criminal activities then compound the community’s poverty trap by destroying assets, diverting resources to provide for personal and property security — and even taking the lives of able-bodied young men. Most of the victims are innocent and most are poor. Worsening social and economic conditions draw more people into criminality, a vicious circle that reinforces poverty.

Working Capital traps: Microentrepreners can only afford a tiny inventory, so their sales are so meager that they are unable to purchase a larger inventory the next day.

Mental Health traps:Many poor people are deeply ashamed of their poverty, even when it is not their fault. They commonly have to endure daily mocking and humiliation for their circumstances. And they usually feel terrible that they are unable to provide adequately for their children. This inability creates chronic feelings of hopelessness and anguish.

There’s a few things I’d take from this:

• Firstly, all of these sound perfectly plausible, and indeed variations on these themes are not unknown in rich countries. If there is a common thread running through them, maybe it’s that each poverty trap (or perhaps just most if you want to argue abou it) is based on a deficiency in some kind of ‘capital’, whether it be financial capital, natural capital (e.g. farmland), human capital (e.g. literacy) or social capital (e.g. sound political institutions, links to a diverse range of people).
• This in turn says to me that if a household is affected by more than one kind of poverty trap, attempts to address them one at a time may not succeed in breaking the cycle. That suggests that Sachs is right to reject piecemeal reforms in favour of “doable and practical things that can be done at once”.
• Finally, Smith might be the man to appeal to both aid proponents, who will be drawn to his optimisim and basically favourable view of some kinds of externally financed interventions, and sceptics, who should be able to respect his pragmatic commitment to evidence-based policy. His book is highly recommended.

Sooner or later someone is going to start up a blog which covers exactly my interests but posts more than once a week. Pienso comes close, having covered development economics, China, low-income housing and cycling in just its first couple of weeks. Nice layout too. Definitely one to keep an eye on.

So apparently I’m out of step with a consensus. A consensus Anthony defines around these words of Owen Barder’s:

Of course, every country should abolish all tariffs, quotas and subsidies, unilaterally and immediately, in their own interests as well as everyone else’s

I’m not so sure it is a consensus (unless Anthony just means a consensus among those who agree with him). Sure, most sensible commentators agree that the US, EU and other rich countries should open their markets, but to suggest that the same goes for every other country, no matter how poor, is nonsense. It’s widely recognised that different principles should apply to the poorest countries.

Why’s that? Well, ask a whole bunch of Third World farmers. Like it or not, a lot them currently benefit from some form of trade protection (a lot of them also suffer because of protection or trade-distorting subsidies by rich countries). Take that away all in one go, and you’ll have a lot of even poorer poor people on your hands (incidentally, another complicating factor is that abolishing all subsidies will also make food more expensive for some import-dependent African countries). Sure, eventually the theory might work out and they’ll be better off on average assuming they can look after themselves in the meantime of course (and hey, if their income disappears they can always move to a better life in the big city).

Which brings me onto the first good reason why trade changes should be less of a concern in rich countries than in poor ones - the welfare state. In most rich countries, it’s not really that big a deal if you lose your job - you’ll probably get enough benefits to make sure it doesn’t bite too hard, and you might even get some re-training to help you back on your feet. Without this kind of protection, of course, there would be much more opposition to losing the kind of protection that comes from trade policy. It puzzles me that many big fans of free trade either genuinely don’t realise this or choose to ignore it.

But anyway, the point is that such a comfortable safety net is absent in most developing countries, and indeed many of the people who would be affected are much closer to the literal breadline in the first place, which should immediately tell you that trade reform should be proceeded with on the basis of judicious caution. Of course, if free traders want to campaign for First-World levels of welfare provision in every poor country, I’d feel a lot more well-disposed towards their case. But, I think with the honourable exception of Owen, I’ve yet to see them even come close to doing that.

The second good reason why we in the rich countries should be quicker to go for trade liberalisation is that we’re ready for it. Our economies are more diversified, our companies more competitive, our workers more productive. That’s why liberalisation has usually come after a country has reached a relatively high level of development. Liberalise too early and developing industries can be destroyed by the competition - delivering cheaper goods for some consumers, no doubt, but potentially at the cost of condemning the country to serving its static comparative advantage producing cash-crops or raw materials for the low-to-no-value-added end of global production chains. The point at which liberalisation takes place is therefore crucial. Many economists like to snigger at the very idea that infant industry protection might work, but there’s actually good evidence for it if you care to look:

The paper analyses economic performance of a sample of developing countries that have undertaken trade liberalization and structural reforms since the early 1980s with the objective of expansion of exports and diversification in favour of manufacturing sector. The results obtained are varied. In a minority of these countries, mostly East Asian, rapid export growth was also accompanied with fast expansion of industrial supply capacity and upgrading.

By contrast, the experience of the majority of the sample countries, mostly in Africa and Latin America, has not been satisfactory. In fact, half of the sample, most of them low income countries, have faced de-industrialization … Slow growth of exports and deindustrialization
has also been accompanied by increased vulnerability of the economy … In the case of the majority group, trade liberalization has led to the development and re-orientation of the industrial sector in accordance with static comparative advantage, with the exception of industries that were near maturity.

A number of industries which had been dynamic during the import substitution era continued, however, to be dynamic in terms of production, exports and investment. The industries which were near maturity when the reform started, such as aerospace in Brazil, benefited from liberalization as the competitive pressure that emerged made them more efficient …

A major difference between the “minority” and the “majority” groups is that in the case of the former, i.e. East Asian NIEs, at least until recently economic reform, particularly trade liberalization, has taken place gradually and selectively as part of a long-term industrial policy, after they had reached a certain level of industrialization and development. By contrast, the “majority group” embarked, in the main, on a process of rapid structural reform including uniform and across-the-board liberalization.

My bottom line is that I’ll support just about anything that tilts the system in favour of the poor. In so far as selective trade protection does that, I’m in favour of it. In so far as it doesn’t, I’m not.

Having thought from time to time of applying to work for a development NGO here in the UK, I’ve often been put off by the apparent requirement that you first spend a long time accumulating ‘experience’ by working in the sector as an unpaid intern. Obviously this works out pretty well for the NGOs, but it is equally obviously unfair to those who might have a lot to offer can’t afford to work for free while living in London (where most of them are based). My friend Tom Allen, who was bright/hard-working/lucky/rich* enough to secure paid employment in the sector, agrees and has written a good article for the BOND Networker with Adam Davies arguing for a change.

*Just kidding - he got the job because he’s so good-looking**

** Kidding!

What happens when you give a smart economist a weblog and too much time on his hands? According to my comprehensive survey of one isolated example, it seems they will start to talk rubbish. That isolated example is Bryan Caplan, who tells us

The homeless are different from you and me, and it’s not because they have less money.

Right - it’s because they have less home. No, wait, according to Caplan

It’s because they are extraordinarily low in what personality psychologists call conscientiousness. That’s my theory, anyway. A quite watchable documentary on Showtime (and that’s high praise from me, I strongly prefer fiction) puts my theory to the test. It’s called “Reversal of Fortune,” and it’s got a simple set-up: The film-makers picked Ted, a homeless man in Pasadena, gave him $100,000, and filmed the results.

Perhaps unsurprisingly, this particular fellow, an alcoholic who has spent years on the street, is less than prudent with his windfall. The same must therefore go for all homeless people. And not just the homeless! Bryan concludes

ordinary prudence is enough to keep almost anyone out of poverty

In a way, he’s right - anyone smart enough to pick the right parents can go far in a country like the USA, home of the rigid class structure. Bryan doesn’t explain exactly how he thinks this lack of conscientiousness managed to concentrate itself in, for example, black kids, who tend not to do as well at school as their white counterparts, but fortunately there is evidence to hand to demonstrate that the fault all too often lies in their choosing to be raised by low-income families in shoddy or overcrowded housing. In fact,

when socioeconomic and housing conditions are held constant, African-Americans actually demonstrate an educational advantage over their non-black counterparts of almost four-tenths of a grade.

Doesn’t the fact that so many black students must know this and still choose the wrong background prove just how imprudent they are?

Interestingly, the very next day Bryan’s blogmate Arnold Kling posted this explanation of why bad ideas proliferate on campus:

1. some ideas are false…;

2. the false ideas cost little to the individual, because an individual vote does not matter, so there is no feedback loop to reward rational voting or punish irrational voting.

3. the false ideas benefit the individual, because the individual feels righteous.

4. the false ideas’ collective cost can be high, because they can lead to bad policies…

For some reason, Arnold seems to think this only applies to left-wing ideas. Perhaps he would think otherwise if he looked closer to home.

Humberto Lopez of the World Bank asks, “Did growth become less pro-poor in the 1990s?“. Apparently the answer is ‘yes’:

The author analyzes the stability of the empirical relationship between growth and changes in inequality over time. He concludes that while during the 1970s and 1980s the growth process was not accompanied by increases in inequality, during the 1990s a positive and significant correlation appears in the data. For this decade, he estimates that a 1 percent growth rate would be associated with an increase in the gini coefficient of between .3 to .5 percent. This positive correlation is hidden when one estimates the model without allowing for changes in the relationship over the different decades. The finding is robust to a number of departures from the basic specification including: (1) the use of alternative specifications to isolate decadal shifts; (2) the use of robust estimation techniques that address the potential influence of outliers; (3) restricting the sample to a balanced panel for the 1980s and 1990s to control for changes in the composition of the sample related to the unbalanced nature of the panel; and (4) considering the possibility of fixed effects in the data. The author also explores the impact of this structural change in the rate of poverty reduction and concludes that it is far from negligible.

‘Far from neglible’ is right. Here’s the relevant bit from the full pdf:

our estimates indicate that for a country with a gini coefficient of .5 and a per capita income of about $2200, in the post-1990 period a growth rate of 3.7 percent would have the same poverty impact than a 1 percent in the pre-1990 period.

That’s a very big change. Now, there are a couple of important caveats to point out: the sample of countries for the 1990s isn’t that big, and as far as I can see (correct me if I’m wrong) the data isn’t weighted, so the pro-poorness of growth of a small country is given the same weight as China’s (where the picture is a bit more complicated). But I think that’s excusable if you’re trying to work out the factors that are causing the trend across different countries. Lopez suggests looking at trade liberalisation, technological change and financial crises, to start with.