The world's poor are becoming richer

In the past few years, global poverty has been declining throughout the world—especially China:

The best estimates for global poverty come from the World Bank’s Development Research Group, which has just updated from 2005 its figures for those living in absolute poverty (not be confused with the relative measure commonly used in rich countries). The new estimates show that in 2008, the first year of the finance-and-food crisis, both the number and share of the population living on less than $1.25 a day (at 2005 prices, the most commonly accepted poverty line) was falling in every part of the world. This was the first instance of declines across the board since the bank started collecting the figures in 1981.

The estimates for 2010 are partial but, says the bank, they show global poverty that year was half its 1990 level. The world reached the UN’s “millennium development goal” of halving world poverty between 1990 and 2015 five years early. This implies that the long-term rate of poverty reduction—slightly over one percentage point a year—continued unabated in 2008-10...

Progressives at war with the facts

In a recent New York Times column calling the United States a banana republic, Nicholas Kristof writes:

The United States now arguably has a more unequal distribution of wealth than traditional banana republics like Nicaragua, Venezuela and Guyana.

According to the United Nations Development Programme, this is simply false. They rank the United States at #42 out of 133 countries. Nicaragua ranks #93, Venezuela ranks #65, and Guyana ranks #57.

However, Kristof's column reflects something I find quite troubling about the left's concern with "economic inequality." Modern-day progressives appear to be far more concerned with the fact that some people are rich than that some people are poor. You see this throughout Kristof's column. He never once uses the words "poor" or "poverty" in the column, however, he repeatedly complains about the rich:

In my reporting, I regularly travel to banana republics notorious for their inequality. In some of these plutocracies, the richest 1 percent of the population gobbles up 20 percent of the national pie. ...

The richest 1 percent of Americans now take home almost 24 percent of income, up from almost 9 percent in 1976. ...

C.E.O.’s of the largest American companies earned an average of 42 times as much as the average worker in 1980, but 531 times as much in 2001. Perhaps the most astounding statistic is this: From 1980 to 2005, more than four-fifths of the total increase in American incomes went to the richest 1 percent. ...

So we face a choice. Is our economic priority the jobless, or is it zillionaires? ...

To me, we’ve reached a banana republic point where our inequality has become both economically unhealthy and morally repugnant.

So, let's clear up a few facts here. First, rich people don't make poor people poor. That would only occur if there was a only a fixed amount of wealth in a country. The truth is that economies grow over time. The rate at which they grow depends on how much a country invests in creating new businesses, expanding existing businesses, educating the public, building efficient transportation and communication networks, etc.

Second, the prospect of becoming rich is one of the main reasons people give up the security of a salaried job in order to create a new business. Starting a new business is risky. Most businesses fail in the first year. Reduce the financial incentive and you will have fewer new businesses, which in turn will create fewer high-paying jobs.

Third, taking money from the rich and redistributing it to the middle class—the progressive agenda ever since Bill Clinton took office—does nothing to help the poor. It's just a modern way of buying votes.

Fourth, Nicholas Kristof's column is misleading because it only focuses on inequality. The problem with Nicaragua, Venezuela and Guyana is not that a few people are rich, it's that the bulk of the population is poor and undereducated. According to the United Nations Development Programme, the United States ranks 9th in the world in terms of per capita income, beaten only by relatively small countries. By contrast, Nicaragua ranks #135, Venezuela ranks #71, and Guyana ranks #128. In terms of education, the United States ranks #5, compared to Nicaragua at #118, Venezuela at #104, and Guyana at #85.

On the overall United Nations Human Development Index for 2010, the United States ranks 4th in the world, beating all 27 members of the European Union.

Personally, poverty troubles me. Inequality does not.

Data source.

How the poor successfully lift themselves out of poverty

A new paper by Anan Pawasutipaisit and Robert M. Townsend identifies how poor people in Thailand successfully lift themselves out of poverty:

The paper, "Wealth Accumulation and Factors Accounting for Success" appears in the current issue of the Journal of Econometrics. It suggests that poor people who skillfully manage their assets are especially successful in improving their net worth. The authors discovered that the ability of poor families to increase their wealth was strongly related with their rate of saving and, even more so, with their ability to create a high return on assets.

This means that those households who used their existing assets most productively were more successful at pulling themselves out of poverty. Many of the successful households reinvested their money in their small businesses and farms, suggesting that they are well aware of the source of their success. ...

The data also allowed the authors to identify traits that the most successful households tended to share in common: more highly-educated household members, a younger age of the head of household, a higher ratio of debt to assets, and a preference for formal financial markets over informal ones. But the largest source of variation in the rate of return on assets was household-specific and uncorrelated with any of these variables. This suggests there is great persistence among the most successful households.

"The data seem to show pretty conclusively that successful households are not just lucky," observes author Robert M. Townsend. "They are doing something systematic, month after month, year after year. The next step, of course, is to figure out what the associated skills and attitudes really are."

Most of the qualities identified in the research paper can probably benefit the poor anywhere in the world. When the paper cites a higher ratio of debt to assets, I assume it's referring to borrowing for capital investment, not American-style consumer debt.

A strong work ethic, a strong education ethic, a strong frugality ethic, and a strong entrepreneurial ethic are essential to improving one's economic well-being. Ethic is a key word here. Parents need to teach their children that these qualities are important, and they need to live it themselves as well.

The full paper can be found here.

Democrats are hurting the poor

The public school monopoly keeps millions of the inner-city poor trapped in inter-generational poverty, because they can't get a decent education. The Democratic Party opposes systemic changes to this failing system.

Income-based affirmative action

Former U.S. Labor Secretary Robert Reich advocates income-based affirmative action. I agree with his suggestion:

Here's an idea Democrats probably won't endorse but should: Affirmative action based on family income.

The latest data from the Census tell us that inequality keeps growing. Most American families are now earning less in real terms than they did in 2000. More are in poverty. Meanwhile, the super-rich are taking home a larger slice of the economic pie than they have in 80 years.

At the same time, it's become harder for lower-income people to move upward. With wider inequality, the distance poor kids — whatever their color — has to climb to reach the upper-middle class is much longer. And the loss of millions of manufacturing jobs has removed many rungs in the middle of the income ladder, making that climb even harder.

In the new economy, education and connections mean more. Increasingly, lower-income people without adequate education and connections are competing for a smaller and smaller slice of the economic pie.

If there was ever a good time to offer affirmative action based on family income — giving kids from lower income families extra consideration in college admissions, for example — it's now.

Despite the fact that one of the great social achievements of the last quarter century is the emergence of a black middle and professional class, people of color are still over-represented among the poor and working class. The advantage of income-based affirmative action is it would address many of the same issues as race-based affirmative action, but it would also address the needs of low-income whites.

And income-based affirmative action would not create tensions between lower-income whites who don't benefit from race-based affirmative action and blacks who do. Demagogues would have a harder time using race to stoke the fires of economic resentment.

Finally, income-based affirmative action would lead to more economic diversity on our college campuses. And more economic diversity is a key to reversing America's trend toward widening inequality.

Income-based affirmative action makes sense. Democrats, as well as Republicans, should consider it.

Obama on aid to the world's poor

Via Chris Blattman's Blog:

Obama speaks today on development:

We will have to provide meaningful resources to meet critical priorities. I know development assistance is not the most popular program, but as President, I will make the case to the American people that it can be our best investment in increasing the common security of the entire world. That was true with the Marshall Plan, and that must be true today.

That's why I'll double our foreign assistance to $50 billion by 2012, and use it to support a stable future in failing states, and sustainable growth in Africa; to halve global poverty and to roll back disease. To send once more a message to those yearning faces beyond our shores that says, "You matter to us. Your future is our future. And our moment is now."

Aiding the poorest people of the world is always a noble cause. I just hope the money is used effectively. Aid is most likely to be helpful if it is used to fight disease and educate the people. The old saw is true: give a man a fish and you feed him for a day. Teach a man to fish and you feed him for a lifetime.

Let me also point out that profit-seeking global corporations have done much more to lift people out of poverty in southeast Asia than charitable organizations have done to lift people out of poverty in Africa. The reason is simple: what the world's poor really need are jobs, not handouts.

Gentrification of inner-city neighborhoods not harmful to the poor

Time reports that, despite the conventional wisdom, gentrification of inner-city neighborhoods does not hurt the poor.

People tend to think gentrification goes like this: rich, educated white people move into a low-income minority neighborhood and drive out its original residents, who can no longer afford to live there. As it turns out, that's not typically true.

A new study by researchers at the University of Colorado at Boulder, University of Pittsburgh and Duke University, examined Census data from more than 15,000 neighborhoods across the U.S. in 1990 and 2000, and found that low-income non-white households did not disproportionately leave gentrifying areas. In fact, researchers found that at least one group of residents, high school–educated blacks, were actually more likely to remain in gentrifying neighborhoods than in similar neighborhoods that didn't gentrify — even increasing as a fraction of the neighborhood population, and seeing larger-than-expected gains in income.

Those findings may seem counterintuitive, given that the term "gentrification," particularly in cities like New York and San Francisco, has become synonymous with soaring rents, wealthier neighbors and the dislocation of low-income residents. But overall, the new study suggests, the popular notion of the yuppie invasion is exaggerated. "We're not saying there aren't communities where displacement isn't happening," says Randall Walsh, an associate professor of economics at the University of Pittsburgh and one of the study's authors. "But in general, across all neighborhoods in the urbanized parts of the U.S., it looks like gentrification is a pretty good thing."

The researchers found, for example, that income gains in gentrifying neighborhoods — usually defined as low-income urban areas that undergo rises in income and housing prices — were more widely dispersed than one might expect. Though college-educated whites accounted for 20% of the total income gain in gentrifying neighborhoods, black householders with high school degrees contributed even more: 33% of the neighborhood's total rise. In other words, a broad demographic of people in the neighborhood benefited financially. According to the study's findings, only one group — black residents who never finished high school — saw their income grow at a slower rate than predicted. But the study also suggests that these residents weren't moving out of their neighborhoods at a disproportionately higher rate than from similar neighborhoods that didn't gentrify.