Category Archives: Development Economics

Raise, Don’t Level: New CEI Papers on Inequality and Poverty Relief

Economic inequality is one of today’s defining issues. How to address it? Iain Murray and I offer an unconventional approach in a new two-part CEI study, released today. The first part frames the issue. The title sums it up well enough: People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions. The second part,The Rising Tide: Answering the Right Questions in the Inequality Debate, outlines a concrete policy agenda to make the poor better off.

Anti-poverty activists routinely fret about the ratio between a CEO’s salary and her lowest-paid employee’s, or how the top one percent’s ratio of national income compares to the bottom one percent’s. Instead of mathematical ratios, we encourage activists to focus on human beings. Again, we plead: focus on people, not ratios.

Ratio-obsessed activists from Thomas Piketty to Naomi Klein ignore some obvious questions due to their monomania:

  • How are the poor actually doing?
  • Is their economic situation improving over time?
  • What policies can make the global poor better off over time?

We seek to fill these disappointing gaps. According to nearly all available data, poor people are better off than ever before in human history—keep at it, then! There is still lots to do, but ignoring the accomplishments people have already made, and what can make more accomplishments possible, only hurts the poor.

Over the course of the 20th century, infant mortality went down by more than 90 percent—just think of how many parents’ broken hearts have stayed whole thanks to modern technology and sanitary practices.

Life expectancy improved by 30 years during the 20th century. And that’s not the only type of length modernity has improved: from 1900 to 1950, the average American became three inches taller, thanks to better nutrition, food security, and health care. The process has only continued since then.

Even if it was only the top one percent that enjoyed zero infant mortality, lived a hundred years, and were all seven feet tall, their best efforts could not bias society-wide statistics nearly that much, despite their most conspiratorial plutocratic efforts. This is what mass prosperity looks like.

According to the Swedish economist Max Roser, since 1960 the number of people living in absolute poverty has declined from nearly two billion to about 700 million—a two-thirds decline. And this happened as total world population more than doubled! This is good news. Today’s most important task is to keep this great enrichment going, and to eliminate absolute poverty altogether.

The poor will never have as much as the rich—every curve has a bottom and a top ten percent, and always will. No changing that. But only the hardest heads deny that most poor people today live better lives than their parents or grandparents did—and that future generations can expect this wonderful trajectory to continue, if they’re allowed to.

This is both a reason to celebrate, and a reason to double down. Now that we haveasked the right questions about inequality, the second part of our study, The Rising Tide, seeks to answer them: what policies can continue to make the world’s poor better off?

There are a lot of answers. We don’t pretend to have all of them, but we offer a few. One is an honest price system: runaway-inflation countries such as Zimbabwe and Venezuela are universally poor. Keeping inflation in check and making sure prices convey honest information will help consumers and entrepreneurs make wise decisions that create value for people.

Affordable energy is another answer, allowing everything from clean home heating (natural gas is somewhat cleaner than dung and logs, especially indoors) to more and better transportation choices, which expands employment options.

Any aspiring entrepreneur needs access to capital—Dodd-Frank-style financial regulations openly insult every person trying to escape poverty. So do many governments’ resistance to granting formal property rights to their people.

Another answer—there really are a lot of them, and no single panacea—is occupational licensing reform. There is no legitimate reason for an interior decorator or a hair-braider to undergo hundreds of hours of training in something they already know how to do, in order to do for pay something they can do for free. Nearly a third of American workers require government permission to begin their day’s work. That is ethically wrong, and should be immediately reformed.

Inequality is a complicated issue. Properly addressing it requires both asking and answering the right questions. Ask how real-world people are doing, not abstract income ratios. And ask about policies that can help people escape poverty. The answers are numerous, and Iain’s and my papers do not pretend to have all of them.

But, we humbly submit, a general ethos of not stamping down on impoverished hands would be a good start. It would also be quite a change from current policy in the U.S. and many other countries.

For more, see our papers, People, Not Ratios: Why the Debate over Income Inequality Asks the Wrong Questions, and The Rising Tide: Answering the Right Questions in the Inequality Debate.

Economic Freedom of the World

Non-economists tend to be much more skeptical about economic freedom than economists are. This in itself is a powerful case for free markets. But empirical data present a far richer and more compelling argument in favor of freedom. That’s why I look forward each year to the release of an updated edition of the Economic Freedom of the World report, jointly published by our friends at the Cato Institute and the Vancouver-based Fraser Institute, with help from more than 30 think tanks around the world.

The report is nothing if not thorough. James Gwartney, Robert Lawson, Joshua Hall, and a small army of contributors assemble data on 144 countries, ranging from regulatory burdens to property rights protections to the amount of corruption. In all, each country is measured on 42 variables. Then each country is given a score from 1 to 10. The freer the economy, the higher the score.

If economic freedom had no bearing on wealth creation, then plotting the scores against per capita GDP would show no distinct pattern. It would be a random blob. What the data actually show is anything but random. As it turns out, poor countries all have something in common: little economic freedom. Countries in the bottom quartile of economic freedom have an average per capita GDP of $5,188. They are clustered in the lower left hand side of our graph.

Rich countries all have something in common, too. They have high scores. Countries in the top quartile of economic freedom have an average per capita GDP of $37,691. That extra freedom results in a seven-fold increase in wealth. If you value human well-being, economic freedom is extremely important. People can only prosper if they’re allowed to.

If that seven-fold difference in living standards doesn’t move you at least a little bit at the margin in favor of free markets, you probably have a hard head, a cold heart, or both. It is the difference between modern sanitation and open sewers. It is the difference between having respectable medical care and not. It is the difference between subsistence farming and an industrial/service-based economy.

Gwartney, et al have been putting out Economic Freedom of the World reports since 1996, so by now they some good long-run data. The trends are encouraging on one front: worldwide, economic freedom has been on the rise for some time. In 1980, the global average score was 5.30. By 2010, it rose to 6.83. Eastern Europe, especially the Baltic region, and southeast Asia have been the biggest stars. The world’s two freest economies are Hong Kong (8.90) and Singapore (8.69).

China (6.16) and India (6.42) are slowly moving in the direction of economic freedom – neither is there yet – and as a result, hundreds of millions of people have already been lifted out of poverty. Liberalization is the most effective anti-poverty program the world has ever seen. More would be nice.

Domestically, the situation is less encouraging. Presidents Bush and Obama have sharply increased spending and regulation over the last decade, and have worsened the government’s already poor financial health. The result is that the world’s second freest economy in 2000 fell to 18th in 2010, the latest year for which data is available. America’s score has fallen from 8.65 in 2000 to 7.70 in 2010. It is the first time the U.S. has been outside of the top ten.

The Bush-Obama years have been very bad for economic freedom. There is a lot of regulatory excess to roll back, and a lot of debt to pay off. It will take time to undo all the damage, but it can be done. Perhaps the U.S. can look to the examples set by economically freer countries such as Canada, the UK, Finland, and, surprisingly, Qatar.

From Poor and Sick to Healthy and Rich

Via Russ Roberts, this is an amazing video. I’m always impressed with creative, compelling ways to use data to tell a story. And this story is one of the most important in human history: how most of humanity went from being poor and sick to healthy and rich in just 200 years.

There is still a ways to go. But if past is prologue, I’m optimistic about the future.

Time to Leave Afghanistan

Bill Easterly’s surprisingly Hayekian take on Afghanistan is worth a read:

News sources say that President Obama will choose “escalate” with additional troops for Afghanistan in his speech at West Point tonight. I and many like-minded individuals find this disastrous.

“Like-minded” means that critics of top-down state plans for economic development are also not fans of top-down state plans for military development. If the Left likes the first, and the Right likes the second, that just shows you how incoherent Left and Right are.

Regulation of the Day 64: Starting a Business in Sacramento, California

Sit back and think for a minute about what man has the potential to create. Think about the magnitude of our achievements in just the last century. Life expectancy has doubled. Population has sextupled. For the first time in history, famine is primarily a political phenomenon, not a natural one. The human mind is capable of creating limitless, endless wealth.

Unfortunately, the human mind is nearly as adept at preventing that wealth from being created. Sacramento, California is home to some of the experts.

Katy Grimes researched what it would take to open a small factory there. “By the time I discovered that 22 government agencies would be involved in permitting and licensing, I realized that Sacramento is not an easy place to do business,” she writes.

She’s right. And when doing business is difficult, there is less of it. That means less wealth is created. Opportunities vanish into thin air. One of the tragedies of over-regulation is the amount of wealth, opportunity, and prosperity that never come to pass. Think of how many plants are never opened because of over-regulation. How many jobs are never created. How many products are never invented.

Supporters of strict business regulations say the rules keep people safe. Maybe that’s true. Maybe it isn’t. But they do keep us poorer.

Seems Obvious, Doesn’t It?

Bill Easterly on Afghanistan:

Transitionland had a thoughtful response to my cri de coeur on Afghanistan yesterday. Among her recommendations for improving things:(1) Stop the air strikes that are killing civilians,
(2) Crack down on corrupt contractors to USAID,
(3) Stop supporting Afghan warlords who are homicidal and/or corrupt.

So, after years of experimentation, we can now start applying these subtle, complex lessons:

(1) Don’t kill,
(2) Don’t steal,
(3) Don’t give aid to those who do.

Government, Technology, and Growth

I’m reading Bill Easterly’s The Elusive Quest for Growth for a class right now. It asks and answers the question of how to make poor countries rich. It’s a good read. I find I disagree with many details, but the core message is simple and true: people respond to incentives.

As I said, there are parts that I don’t buy into. Here’s an example:

Brazil moved more slowly into the computer revolution than necessary because of a government ban on PC imports, a misguided attempt to promote the domestic PC industry, a classic attempt by vested interests to hijack technological progress. (p. 186)

What does he conclude from this experience? “The government should subsidize technological imitation.” (ibid)

He ignores his own advice that incentives matter. As Brazil showed us, government’s incentives often hurt growth. Ask any public choice theorist.

Quibbles aside, it’s a good book. I recommend it.

And if any of my classmates read this, I’m interested in your thoughts.