Flunking Economics 101: The not-so-new UK policy for international poverty reduction

13 Oct

There has been a considerable amount of noise about the new directions for international development under the coalition government – not least the keenness it has shown in ringfencing the GDP aid target as part of keeping up its ethical and progressive image, and the enthusiasm it has seemingly shown in pushing for fairer trade practices within the context of the Doha round of negotiations. Last night, in a policy-focused speech to a packed Sheikh Zayed Theatre at the LSE, the new Minister for International Development, Andrew Mitchell, laid out his vision for poverty reduction through mechanisms of growth and wealth creation, which would be driven through the encouragement of the private sector in the context of pursuing the Millennium Development Goals.  This policy would be centred around a re-orientation towards private-sector driven growth and enterprise, through which the poorest in developing countries could ‘lift themselves out of poverty’.

He began, as many speeches do at the LSE, with an aphorism attributed to George Bernard Shaw: “The greatest of evils and worst of crimes is poverty”, a phrase dripping with urgent moral responsibility and irreproachable purpose, before going on to promise that the new government’s international development strategy would be ‘non-ideological’ and committed to ‘what works’ in poverty reduction. It is a very great shame, however, that he did not begin with some basic definitions of poverty, since this would have clearly exposed the intellectual, and ultimately political, black hole at the centre of a poverty reduction strategy based primarily on growth.

Put very, very simply it is this: Poverty, if it means anything at all, is by definition a relational concept¸ defined in terms of relative purchasing power within an economy. This, in a very general sense, is a function of income, i.e. how much money you have, and price, i.e. how much stuff costs in the marketplace. Prices reflect the basic interaction of demand, i.e. what people are willing and able to pay for things, and supply, what things cost to produce. The key element here is about the relationship between incomes and prices as defining relative purchasing power in the economy.

Many of the critiques of contemporary poverty reduction strategies, from the groves of academe to the streets of African capitals highlight exactly this critical point – increases in income mean nothing if the prices of the goods you need increase disproportionately to this.  This is most critical around the issue of food prices, but also relates to questions of fuel, housing, transport and education. When there is economic growth in terms of GDP that is not equitably distributed, the relative purchasing power of the poorest falls in real terms.

For example, the recent troubles that Mozambique has been experiencing around the impact of rising food prices must be set in the context of its own strategy for growth which has prioritised the production of biofuels for export. Whilst the effect on the economy may show an increased value of goods produced, and thus higher GDP figures, the net effect has been an increase in poverty because the relative ability of the poor to purchase food has decreased. This is in part because the gains from biofuel production are unequally shared, meaning that the rise in food prices caused by decreased supply is not offset by a broad-based increase in income levels, i.e. purchasing power.

Occupying a central position in the assumptions around this debate is the example of China as a model for poverty reduction through economic growth. The Minister related with enthusiasm that China had managed to lift more than 400 million out of poverty over the last two decades, and enthused that this had come about through their engagement with the global economy. Yet, this claim is rendered vacuous by the World Bank’s own research on the causes of poverty reduction in China, which demonstrate that growth alone did not reduce poverty, and that external trade had little immediate impact; rather policies which actively attempted to reduce inequalities through local government spending were key in reducing rural poverty, which accounts for the majority of poverty reduction.

The new poverty reduction policy ruthlessly ignores, however, of all of the many years of detailed research that have been spent on defining and understanding what poverty is and how it works, and how recent ‘successes’ in poverty reduction have been achieved. The answer to the problem of global poverty for this government is through the exciting innovations of the private sector – mobile phone banking, the private provision of maternity hospitals in India, the involvement of non-governmental organisations in public service provision.  The main premise is that private sector growth creates jobs through which people ‘can lift themselves out of poverty’ and not rely on hand-outs [because, of course, when you have any sort of job, you are not poor].*  Yet, if we look again at the definition of poverty as a relational concept, the generation of economic growth is simply no effective strategy of poverty reduction unless the relative incomes and purchasing power of the poorest are improved.

At last night’s lecture, after a few captains of industry in the front rows wrestled to congratulate the Minister on this new policy direction, I was fortunate enough through some determined hand-waving to put this question to him: if the basic definition of poverty is about improving the relative purchasing power of the poor, why is it that your policy to reduce poverty does not address the distribution of incomes within or between countries?

The Minister, unsurprisingly, simply dodged the question of the logical fallacy, returning instead to his report of having been in a village in Ethiopia, where a family had, as a result of the Millennium Development Goals activism by ActionAid and others, been able to send children to school, access electricity and so forth. Nonetheless, according to our caring Minister, they remained ‘grindingly poor’ and would do so until able to lift themselves out of poverty in the context of a free and fair market.

If Shaw was right to say that the worst of evils and greatest of crimes is poverty, this government’s deliberate attempt to avoid dealing with its logical requirements whilst claiming the momentum of its moral purpose in the name of our international ethical commitments cannot be too far behind.

* A whole new absurd level of irony was reached immediately afterwards in the Minister’s trenchant critique of the previous activities of the Commonwealth Development Corporation, who had apparently been too focused on profits, remuneration and low-risk returns to invest in projects with real developmental impact on the poor, such as transport and infrastructure. As a member of the audience pointed out, this was somewhat confusing given that he had spent the previous fifteen minutes extolling the virtues of the private sector as the only source of ultimately sustainable development.

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10 Responses to “Flunking Economics 101: The not-so-new UK policy for international poverty reduction”

  1. Douglas October 13, 2010 at 1:48 pm #

    Without wishing to defend UK Development policy or Andrew Mitchell, I nevertheless feel compelled to point out that your argument will return to haunt you. The simple point you make about poverty being ‘by definition a relative concept’ is true, but only insofar as money has no intrinsic value (a point proved recently in a carefully researched piece in The Onion). The debate about whether poverty should be measured in relative or absolute terms remains unaddressed by your piece. If one wished to defend an absolute definition of poverty, one would do so by setting out what this would mean in terms of food, shelter, access to healthcare etc. And this might be given a monetary value, or a value in terms of income just for the sake of convenience, but this could only be meaningful if expressed in terms of Purchasing Power Parity. This doesn’t necessarily imply that povery is ‘by definition a relative concept.’ Furthermore, the point you make about people becoming poorer even though the economy is growing is an important one, but that would also be important because these people have become poorer in absolute, not relative terms. In other words, they can afford less food, less shelter, and less healthcare. They may have become poorer both in absolute and relative terms, but that is not quite the point you make. Therefore the argument you end up making is actually a defence of an absolute definition of poverty. If you want to measure poverty in relative terms, then you must do so in terms of median income or something, which paradoxically can show increasing poverty at the same time as increasing ability to buy food and shelter, and better access to healthcare. And if you wish to defend a relative definition of poverty, then you would need to criticise a policy that made people better off in absolute terms, but worse off in relative terms, i.e. in relation to other people in the economy, not the price of bread.

    • Douglas October 13, 2010 at 1:56 pm #

      I see I have transposed ‘relative’ for ‘relational’. Forgive me, but my point remains the same.

      • Meera October 13, 2010 at 2:28 pm #

        Douglas,

        You raise an important point which deserves clarification. I resisted the urge to do so extensively in the post for the purpose of brevity but will do so here:

        In the post, I talk about poverty as being a necessarily relational – or to use the more common term – relative concept, as being derived from the proposition that whether one is poor or not depends on the relationship between your income and the price of things you need. The logic of poverty as a necessarily relative concept is based on the following assumptions, all of which I think apply in significant ways to international poverty reduction:

        a) the basic assumption that goods in the economy are scarce / finite, and that prices reflect competition for those goods.

        b) that income is the essential determinant of purchasing power, particularly for goods that are not imported;

        c) that that the vast majority of goods show an income elasticity of demand – that is that people demand and consume more of them when their incomes rise. This is clearly the case in the instances of food and housing, for example, but also true of healthcare, which for the purposes of the discussion are the important ones.

        d) this means that for ‘normal’ goods (in the economic sense), when incomes rise, all things being equal, prices will rise for normal goods. Again, this is intuitively the case when it comes to many goods, and logically, particularly those that are supply inelastic (i.e. supply cannot react quickly to increased demand – food, housing and healthcare fall into these categories).

        e) economic growth implies, by definition that income is rising in at least some sectors of the economy.

        f) inequitable economic growth means that the relative purchasing power of those with higher incomes increases both in relative and absolute terms compared to those with lower incomes.

        Your key point is that my post leaves open the question of whether we should use absolute or relative definitions of poverty; my point is that all definitions of poverty are logically relative because income inequality directly impacts one’s ability to consume goods and services, since the price of goods and services – even essential ones – in the economy are income elastic.

        Of course, there are ways to control the prices of key goods and services, such as healthcare and housing, as all mixed economies end up doing. But these are deliberately redistributive insofar as they essential seek to reduce the market price of these goods and/or subsidise incomes to the point where they can cover these goods. They do not undo the problem of the essentially relational nature of poverty.

  2. Robbie October 13, 2010 at 2:43 pm #

    awesome post Meera. Relating to Douglas’s comment, in your opinion, what is the difference (is there?) between poverty and destitution, and which one (if any, or both) did capitalism manufacture?

    • Douglas October 13, 2010 at 3:48 pm #

      This is all admirably clear, but there are alot of ‘all things being equal’ thrown into your explanation. Incomes rising would entail rising prices of a fixed amount of a normal good, or a good whose supply was inelastic. And my point remains the same, that you end up defending what is recognisably an absolute definition of poverty, even if you say that poverty is fundamentally ‘relational’. Is it not possible that growth can reflect greater productivity within an economy, and even perhaps falling prices for key goods? A good harvest (due to the absence of war for example) would result in economic growth, cheaper food, an appreciating currency, and greater purchasing power for imported goods like medecines perhaps? Therefore, relational or not, this would result in likely fall in absolute poverty, no?
      Equally, you seem to elide income elasticity, with perfect income elasticity. Sure, people spend more in absolute terms on food and healthcare when their income rises, but not proportional to their income rise. Furthermore, there is a marginal utility question to bear in mind. People do spend more on food, but they spend more on more expensive food, such that basic food products tend to experience price falls in such a context, not rises. People eat less cheap food as they become richer. And you must also assume a high degree of supply inelasticity for prices to actually rise, something that my Economics 101 teacher would have found puzzling.

      Anyway, I wouldn’t wish to draw this out. I actually think all meaning is relational, even economic meaning, I just think being clever about refuting even the possibility of an absolute conception of poverty evades the importance of the debate between absolute and relative conceptions of poverty.

      • Meera October 13, 2010 at 3:58 pm #

        Fair point that when we start looking at situations, things might not be all equal, e.g. there may be good harvests etc. For the purposes of this argument, the ‘all things being equal’ assumption was necessary to start the conversation and to make the point that even conceptually poverty is not only relationally constructed but in a substantive sense related to the gap between rich and poor. Actually, in terms of the current state of the global economy and the economic status of the poorest in the poorest countries, the case is much, much worse (currency devaluations and fluctuations; supply not only being highly inelastic but actively restricted etc). You can look forward to future blog posts on this :-)

  3. Joe October 13, 2010 at 3:11 pm #

    Meera, I think you hit upon a key distinction, but then back away from it to some degree. Poverty is relational, which is distinct from talking about either absolute or relative poverty. My primary point is pedantic: relational = relative.

    Given that resources are scarce (in the most basic/abstract sense of both terms) both poverty and wealth are relational in the way you describe. The discussion of poverty as relative or absolute, I think, arises once we become concerned with poverty as a condition to be alleviated, which requires more specific concepts for thinking about the economic relations of wealth and poverty.

    • Meera October 13, 2010 at 3:37 pm #

      My point is that this logic about relational poverty must carry over into issues about the alleviation – pursuing a poverty reduction policy that does not address the distribution of income or consider it relevant is logically and empirically vacuous, which is explicitly what the proposed policy does. So, even if we think that poverty is defined by the affordability of a basket of goods, which is typically understood to be an ‘absolute’ and not a ‘relative’ measure of poverty, this is still constituted by the relations between incomes and prices in the economy. All ‘absolute’ poverty indicators express factors which are necessarily determined by the gap between rich and poor.

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