Global Poverty 1

1
Global Poverty 1

• Lecture 22

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The Problem of Poverty

• Poverty is Increasingly an International Issue
• Prior to Postwar Period, the Largest Income Gaps
  Were Within Countries.
• Since World War II, Inequality Between Countries
  Has Become More Important.

3
Source Peter Lindert and Jeffrey Williamson.
2001. Does Globalization Make the World More
Unequal? NBER Working Paper 8228.
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Economic Indicators
Source World Bank. 2002. World Development
Indicators, 2001. Washington, D.C. The World
Bank.
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Quality of Life Indicators
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People Living on 1 Per Day(Millions)
Source World Bank. 2002. World Development
Indicators, 2001. Washington, D.C. The World
Bank.
7
People Living on 2 Per Day(Millions)
Source World Bank. 2002. World Development
Indicators, 2001. Washington, D.C. The World
Bank.
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Why the Income Gap?

• No Mystery to Raising Income
• Rising Incomes Come From Rising Productivity
• Productivity Comes From Investment
• Thus, Portion of Income Must be Saved
• Savings Must Be Invested in Productivity-Improving
  Things
• Physical Capital
• Human Capital
• Income Gap Thus Suggests a Problem in this
  Mechanism of Wealth Creation.

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Three Theories of Poverty

• The Poor are Poor Because they are Powerless and
  Exploited (Marxist Theories).
• The Poor are Poor Because they are Inefficient
  (Liberal Theories).
• The Poor are Poor Because they are Poor (Vicious
  Cycle Theories).

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Powerless and ExploitedThe Structuralist
Argument

• The World Capitalist System Divided into the Core
  and the Periphery.
• Core Produce and Export Manufactured Goods
• Periphery Produce and Export Primary Commodities
• Capitalist System is Systematically Biased in
  Favor of Core and Against Development of the
  Periphery.
• International Trade is Primary Mechanism of
  Exploitation.

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Terms of Trade Between Core and Periphery

• Terms of Trade Volume of Exports Needed to
  Acquire a Given Volume of Imports.
• Secular Decline in Terms of Trade
• Yearly Increase of the Export Cost of Imports.
• Falling Commodity Prices (Exports) and Stable
  Manufactured Goods Prices (Imports).
• Caused By...

• Terms of Trade for Primary Producing Countries
• 1801-1881 0.87
• 1882-1913 -0.42
• 1913-1986 -0.52/ -0.84
• Reason For Poverty
• Gains from Productivity Improvements Are
  Transferred to the Core
• Gains Not Translated into Higher Wages in
  Periphery.
• No Savings to Finance Investment.

Source for Terms of Trade Data James M. Cypher
and James L. Dietz 1997. The Process of Economic
Development. Page 87.
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Solutions to Structuralist Diagnosis of Poverty

• Adopt a Development Strategy That Would
  Restructure Periphery Economies.
• More Emphasis on Domestic Market, Less on Exports
• More Emphasis on Producing Manufactured Goods,
  Less on Primary Commodities.
• Structuralists Believed that Reform and Active
  Government Management Would Be Sufficient.
• Marxists Believed Radical Break with Global
  Capitalist System Would Be Required.

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Developing Country Responses, 1945-1980

• Domestic Response
• Import Substitution Industrialization.
• Substitute Local Production for Imports
• Most Developing Country Governments Adopted this
  Development Strategy.

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Import Substitution Industrialization

• Heavy Government Intervention to Shift Resources
  from Agriculture to Industry
• Taxation of Agricultural Sector
• Subsidization of Manufacturing Industries
• Variety of Instruments
• High Tariffs
• Exchange Rates
• Taxes and Subsidies
• State-Owned Industry

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International Response, 1960-73

• Group of 77 Formed in Early 1960s to Press for
  Reform of International Economic System
• Seek UN Conference to Examine Relationship
  Between Trade and Development.
• Results in UN Conference on Trade and Development
  (UNCTAD) in 1964

• Used UNCTAD to
• Try to Reduce GATTs Role in International Trade
• Try to Create Greater Role for UN in Trade
• Preferential Access to Advanced Countries
  Markets
• Create Commodity Cartels
• Not Very Successful

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The New International Economic Order,1973-1982

• The Oil Shock and Commodity Power
• Commodity Power Leads to Demands for The New
  International Economic Order (NIEO)
• Increase LDC Manufacturing to 25 of Total World
  Manufacturing by 2000
• LDCs Manufactured about 9 in 1978

• Specific Demands
• Increase LDC Control of Natural Resources
• Cheaper and Easier Access to Northern Technology
• Increased Foreign Aid (.7 of Norths GNP)
• Eliminate LDC Debt
• Greater Influence over IMF and World Bank