straight talk about global poverty that won’t fit into one chart

By now, everyone and their siblings have seen the bye-bye poverty chart. You know, this one:

Now it is undoubtably true that there has been major poverty reduction in the world, especially since the opening of China.  However, this graph paints an overly rosy picture.

The first point is that $1.25 / day is not exactly un-poor, and it is an artificial “bright line”. I am not saying the following is true, but if we lifted every person at $1.24 to $1.26 according to this metric we would have eradicated extreme poverty. And that is obviously silly.

The second point is that the incidence of global poverty reduction is very uneven. A great bulk of it comes from China and to a lesser extent, India. The picture in much of the rest of the world is much less good.

Thirdly, while the share in poverty is falling, the number of people in the world is rising so the absolute number of poor people can be rising.

There is an excellent article by Chen and Ravallion (QJE 2010) that addresses in detail poverty in the developing world from 1981 to 2005. I am quoting from an ungated working paper version available here.

Note that they are only looking at developing nations, and don’t include the rich world in their numbers.

“Our estimates suggest less progress (in absolute and proportionate terms) in getting above the $2 per day line than the $1.25 line. The poverty rate by this higher standard has fallen from 70% in 1981 to 47% in 2005 (Table 4). The trend is about 0.8% per year (a regression coefficient on time of -0.84; standard error=0.08); excluding China, the trend is only 0.3% per year (a regression coefficient of -0.26; standard error=0.05%). This has not been sufficient to bring down the number of people living below $2 per day, which was about 2.5 billion in both 1981 and 2005 (Table 5). Thus the number of people living between $1.25 and $2 a day has risen sharply over these 25 years, from about 600 million to 1.2 billion.”

So, move the line from $1.25 to $2.00 and the absolute number of people below the line (2.5 billion) is unchanged from 1981 to 2005. Thus, much of the decline in the number of poor people at $1.25 / day is marginal, with people “bunching up” just above the $1.25 / day line (600 million more people between $1.25 and $2.00 in 2005 than in 1981).

What about a more ambitious comparison? How many people in the developing world are at or above the US poverty line?

From the same paper,  “In 2005, 95.7% of the population of the developing world lived below the US poverty line; 25 years earlier it was 96.7%.”

The US poverty rate in 2005 was at $13/day.

Again, I am not saying the world hasn’t made a lot of progress. I am not saying things were better in the past. I am saying that global poverty is still a very serious issue, more serious that the “you won’t believe this one amazing chart” type of journalism makes it seem.

Weak governance is not always a bad thing

In a very cool paper,  Mary Hallward-Driemeier and Lant Pritchett show that the WB’s “doing business” rankings (which are derived from surveying experts about legal requirements) are almost uncorrelated with what actual business people report their experiences to be.

The doing business rankings often show very long time periods for things like getting a construction permit, or a business license, or importing materials in poor countries. Call this the De Jure measure based on the regulations on the books.

However, many of these same countries “suffer” from weak governance and low control of corruption, and it turns out that the median time entrepreneurs report to accomplish these activities is often dramatically shorter. Call this the de facto measure, derived from the “enterprise surveys” of actual businesses.

In other words, when laws/regulations are bad, lack of enforcement can be good.

In other other words, The WB rankings on ease of doing business may well be seriously flawed.

Development is hard

Mbale, Uganda.

h/t James M. Orima (@JamoYL)

Markets in everything, cringeworthy development edition

I saw an ad on my FB feed yesterday for a “Compassion Experience” in OKC.  A local church has set up a bunch of trailers to “look like” poor areas of the world, namely Uganda, India and Bolivia. Visitors walk through the exhibit while listening to the voices of real poor people who narrate their lives and explain how Jesus saved them from their grinding poverty.  I kid you not–I couldn’t make this stuff up even if I tried.

Here is the official description of the event:

Through over 3,000 square feet of interactive exhibit space, visitors will step inside daily life in a developing country — visiting homes, markets and schools — without getting on a plane. Through the use of an iPod and headset, each tour is guided by a child whose story starts in poverty but ends in hope. The event is an excellent opportunity to experience another culture and better understand the realities of global poverty. Don’t miss this life-changing event brought to you by Compassion International and Church of the Servant.

and here is the awesomely cringe-worth video.  I think the sentiment behind this is perhaps a good one, but the execution leaves a lot to be desired.  Now you can participate in poverty porn without ever leaving your doublewide in OKC.

The Printing Press and Early Development in Africa

I just ran across an interesting looking working paper called “The Long-Term Effects of the Printing Press in Sub-Saharan Africa” (co-authored by Julia Cage and Valeria Rueda).

Here is a preview of their results:

We find that proximity to the closest location of a mission with a printing press has a positive and statistically significant impact on the probability of reading the news. A one-standard deviation increase in the proximity to a mission with a printing press increases the probability of reading the news on a monthly basis from 3 to 14% of a standard deviation, depending on the specifications. In contrast, proximity to a mission without a printing press has no significant impact on newspaper readership. Moreover, we also find that a one-standard deviation increase in the proximity to a mission with a printing press increases contemporary economic development by around 10% of a standard deviation.

My “to-read” pile has just gotten bigger.

How can something so wrong seem so right?

In a generally righteous post, CGD’s Charles Kenny repeatedly claims that not only are the World Bank’s country groupings arbitrary and not useful, there actual is no “natural grouping” of countries by income.

Of course, I don’t know what Kenny means by “natural”, but there are very strong and detectable country income groupings in the data.

In my research with Norman Maynard (we use Maddison’s income data) where we fit a finite mixture of log-normals model with an endogenous number of components (using reversible jump MCMC), we find that a two component model fits the data best from 1950 – 1970 and a three component model from 1980 – 2008.

Here is a picture of the situation in 1970:

And here is how much things changed in the next 30 years:

 

These models fit the data pretty well:

“It is also worth noting that our sampler does a good job of assigning countries to a particular component density. In 1970 (the last cross section with a posterior mode at k = 2), 113 of our 135 countries can be assigned to one of the components with probability of .66 or above. In 2008, using k = 3, 124 of our 135 countries can be assigned to one of the three components with probability of .66 or above. That is 84% in 1970 and 92% in 2008”

From the perspective of our work, there was no such thing as a middle income trap before 1980 because there was no middle income group!

As of 2008, the mean of the low component (in 1990 ppp adjusted dollars)  is $1,113, the mid-group mean is $6217 and the high group mean is $22,670. The weights are 31% on the low group, 48% on the middle group, and 21% on the high group.

As far as “conjured” poverty traps go, we find 29 countries that are assigned to the lowest income component with a probability of over 0.66 every decade from 1950 to 2008.

And, regarding the “middle income trap” we find extremely limited mobility out of the middle group and into the top group from 1980 – 2008. More countries fall out of the top group than rise into it.

 

 

Will manufacturing ever boom in Sub-Saharan Africa?

We observe that in recent decades, manufacturing jobs have moved around the world looking for spots that minimize costs. From the US to say South Korea, then to China, and now to Vietnam and others.

Will African countries be next? Well, a recent working paper from the Center for Global Development suggests that one factor standing in the way is comparatively high labor costs in SSA.

Here’s the “money shot” from the paper:

Now, those lines might look close to each other, but the chart is in a log scale so the gaps are pretty large. At around $4000 value added per worker, the gap is about 50%!

At this rate, it’s not going to be the lure of cheap labor that will draw global manufacturing to SSA.

PS: the paper uses, 

 “comparable, cross-sectional data from 10,502 manufacturing firms in 12 Sub-Saharan African countries (Angola, Ethiopia, Ghana, Kenya, Mali, Mozambique, Nigeria, Senegal, South Africa, Tanzania, Uganda, Zambia) and 13 comparators from four regions (Indonesia, Philippines, Vietnam, Russia, Turkey, Ukraine, Argentina, Brazil, Chile, Colombia, Mexico, Uruguay, and Bangladesh).”

 

How many Mexicos are there?

According to McKinsey, there are two! One growing and one stagnating:

 

 

The productivity of small firms is falling, while that of large firms is rising. In itself this would not necessarily be terrible, but the size of the large firm sector is not growing much, so around 40% of workers are “stuck” in the falling productivity sector.

Maybe this is just Baumol, and the small firms are all string quartets, but maybe this is a real problem for the country.

Of course, this is just accounting so there’s no guarantee that if the share of workers in the more productive sector doubled, that productivity in that sector would continue to be high. That is to say, there may be a “supply of qualified workers” constraint operating in the country.

How many Mexicos do you think there are?

 

 

Has Cuba sneaked the Washington Consensus past the US Embargo?

Ladies and Gentlemen: Cuba is open for bidness (except to the US who is still embargo-ing them. and why not, it’s worked so well the last 50+ years)!

Among other things, “Investment projects wholly funded by foreign capital would be explicitly allowed in all sectors except health care and education, something that is essentially unheard of today.”

Along with this, the legislature passed tax cuts and cut red tape.

All of these are undoubtably good ideas for Cuba. I guess we have not embargoed them from appropriating the Washington Consensus!

But my favorite bit is how Cuba’s VP and economy czar explained the move:

“Cuba needs from $2 billion to $2.5 billion a year in direct foreign investment to advance its socialist socio-economic model, prosperous and sustainable,”

He kinda pulled a William Westmoreland there, no? “In order to save our socialist model we have to destroy it”.

Of course, the proof will be in the economic pudding. It’s one thing to vote for a freer economy; it’s quite another to actually let it come to pass.

Life among the Econ, part II (Pritchett edition)

“While all economists might share some commonalities from selection and training there are huge differences across the sub-specialties of the discipline. The clan called “open-economy macro-economists” deal with crises in which interventions are dramatic, dependent on decisions of few people, and in which outcomes are measured in days and weeks and two quarters is a long horizon. In contrast the clan called “development economists” typically deal with chronic problems which rarely have discrete interventions, societies (not outsiders) are primarily determinative of outcomes, and in which a decade is the short-run, not the long-run.”

Much more here, including this:

“an obvious “tell” of a development amateur is saying any of the following:

“It’s easy.”
“We can do this quickly.”
“We have a solution for every problem.””