A Primer on Poverty and Economic Growth

Both China and India have seen their economies grow at breakneck speeds over the last decades. At the same time, the number of poor people residing in these two countries has been reduced substantially, although somewhat less sourcespectacularly in India compared to China.

Other indicators of wellbeing point in the same direction. Life expectancy in India is now 65 years as opposed to 42 in 1960; in China the numbers are 73 and 42 respectively. The number of Indian children dying before they reach the age of 5 is now about 60 for every 1000, compared to almost 200 in 1970. In China: about 20 for every 1000 now versus more than 100 in 1970.

It’s not outlandish therefore to assume that there’s a link between good economic growth and large reductions in poverty rates. Given the fact that some other potential causes of poverty reduction – such as foreign aid and good governance – have not been prominent in those two countries (to put it mildly), the growth hypothesis is even more persuasive.

Here are number of correlations for a larger set of countries. Here‘s the example of Africa, where growth and poverty are almost absolute mirror images.

However, does this mean that economic growth is a sufficient condition of poverty reduction? I don’t think so. A growing level of GDP per capita in an economy means that the average person is better off, financially as well as on some other dimensions given the strong correlations between GDP and other indicators of wellbeing. But improvements for the average person can go hand in hand with stagnating or even worsening poverty rates. A lot depends how the proceeds of high growth are distributed among the citizens of a country; distributed either

  • intentionally by government policy: through taxation and welfare policies that can be more generous in a richer economy
  • or automatically by some form of trickle down effect: more aggregate national income or production means more jobs, better paid jobs etc., at least in theory.

Trickle down economics has been somewhat discredited of late, so perhaps the causal effect of growth on poverty reduction must pass through government redistribution, at least in part. The anti-poverty efforts of India’s successive governments are well-known. Less well-known is the fact that in China as well governments have implemented a strong although probably insufficient social security system. (Insufficient because inequality has risen dramatically in China, and somewhat in India. Greater inequality dampens the poverty reducing effect of growth).

The crucial role of government led redistribution has been confirmed by this paper in which Lane Kenworthy compared growth and income data for 17 developed countries. Specifically, he looked at the ways in which the incomes of people in low to middle income groups benefit from economic growth. The nature of government transfer systems is the reason why the effect of growth on the incomes of the poor is not the same in all countries.

[W]hen households on low incomes got better off, it was due most often to a rise in net government transfers. Where net transfers increased, incomes tended to increase in concert with economic growth. Norway, the UK, Sweden, Finland, and Denmark illustrate this pattern. Where net transfers were stagnant, income trends were decoupled from growth of the economy. We observe this in the United States, Canada, and Switzerland. This is an important finding. It means that, as a general rule, growth has not trickled down to low income households through wages or employment. And it means that, when government transfers haven’t grown, wages and employment haven’t stepped in to take their place. (source)

So we can conclude that economic growth, although important, is probably not a sufficient condition for poverty reduction, at least not in all cases.

A final remark: it’s interesting to note that poverty reduction is one of the drivers of growth. So the causation goes both ways, as is often the case in correlations.

Policies that are effective in increasing the incomes of the poor–such as investments in primary education, rural infrastructure, health, and nutrition–are also policies that enhance the productive capacity of the economy in aggregate. (source)

Some other interesting studies on the topic are cited here.

Murky Yet Suggestive Evidence That Democracy Promotes Economic Growth

Cross-country analysis often shows only a weakly positive correlation between democracy and economic growth. The correlation is weak because there are some authoritarian countries that have strong growth figures. Most notably China of course. The impressive growth rates of a few oppressive regimes has successfully undermined the once popular theory about democracy’s positive effect on growth, and has even fostered the opposite belief: that authoritarian government is necessary for growth. (The story goes somewhat like this: authoritarian rule means longterm planning, discipline in production and consumption, national harmony and popular respect for often difficult decisions, which in turn means efficiency and productivity, and hence growth).

However, those non-democratic countries that do indeed show high growth rates shouldn’t be viewed as typical: there are just as many authoritarian countries with very weak growth figures. It’s a bit silly therefore to derive a general law about authoritarian economic success when that supposed law can be so easily falsified.

The success of China and a few other authoritarian countries doesn’t warrant a general conclusion about the beneficial effects of autocracy on growth. Bill Easterly in his “Tyranny of Experts” has argued that the prosperity of successful autocracies may not be due to a lack of freedom. Most of those countries experienced a recent move towards relatively more freedom and democracy. It was only after China started to soften its horrific totalitarian rule that prosperity began to rise. It’s not crazy, therefore, to assume that a more rapid liberalization would have resulted in even higher growth rates. Furthermore, most autocracies start from nowhere. It’s relatively easy to produce good growth figures when baseline prosperity is very low, as was China’s some decades ago (not in the least because of authoritarian rule). It’s relatively easy, even – one is tempted to say – for fools and autocrats.

The low baseline from which most autocracies start shows up when we compare not the growth rates but the level of GDP between countries. The correlation between democracy and GDP is stronger when we look at the level rather than the growth of GDP. Richer countries (with the exception of most wealthy Muslim countries) tend to be or become democracies. The data linked to in the previous sentence plot income in 1971 against democracy scores in the following decades, you can see that the causation seems to go from income to democracy. A high level of GDP predicts a flourishing (or at least continuation) of democracy. However, this could again be used by the authoritarian growth crowd. They can use this to argue that poor countries need autocracy in order to kick-start growth, because democracy can only come when the level of GDP is sufficiently high (the “democracy as luxury” argument). It’s probably true that prosperity fosters democracy (for the obvious reasons: democracy requires money, leisure, education etc.). But it’s good to see some evidence of causation in the opposite direction, from democracy to growth – if only to undermine self-congratulatory autocrats. For example, here‘s a study plotting current income against older democracy scores, suggesting that democracy also promotes growth. And here are some more correlations between the levels of GDP and of democracy. (More here).

If we accept that there is indeed a causal effect of democracy on the level of GDP, how exactly does that effect occur? Perhaps transparency, the rule of law, accountability, property rights and other characteristics of democracy are good for growth.

If we want further evidence of a causal effect of democracy on growth, we can do an in-country analysis. This paper examines the effect of democratic transitions on economic growth. The encouraging conclusion is that countries which have experienced a transition to democracy experience higher average growth after the transition.

The paper plots the evolution of real per capita GDP growth in the years surrounding a successful democratization (the year of the democratization being T), compared to the global growth rates in each year. It shows that the transition itself may imply economic costs, but in the longer term democracy pays off.

I should also mention a recent paper by Acemoglu et al that points in the same direction.

Income Inequality (30): A Primer on Inequality and Economic Growth

Countries that are more equal in income terms are also richer. But how about the relationship between inequality and economic growth? The classic causal story, based on work by Simon Kuznets,

maintains that there’s an inverted U-shaped relationship over long periods of economic development. As emerging economies grow they initially become less equal as the few with high financial endowments profit off of their ownership of key productive resources, like land. Then, as industrialization evolves, much more of the population has the chance to participate in higher value-added work which reduces inequality. (source)

In this argument, growth determines inequality: first growth drives inequality up, and then it gradually reduces it.

However, this Kuznetsian view has come under fire recently. Thomas Piketty for instance, in his “Capital in the Twenty-First Century“, has criticized Kuznets’ view that inequality will eventually stabilize and subside on its own given increasing growth. According to Piketty, increasing wealth concentration is a likely outcome for the foreseeable future. Kuznets findings were based on a historical anomaly. And indeed, the lines in this graph do not turn downwards to form an inverted U-shape.

Which is why it’s perhaps better to look at the causation in another way: maybe inequality or equality determine growth rather than vice versa. For example, there’s this study arguing that high income inequality is likely to inhibit growth, especially in developing countries.

Inequality inhibits growth, especially in developing countries, because

high income inequality can discourage the evolution of the economic and political institutions associated with accountable government (which in turn enable a market environment conducive to investment and growth); and … high income inequality can undermine the civic and social life that sustains effective collective decision-making, especially in multi-ethnic settings. (source)

This study comes to a similar conclusion. It argues that, in general, more inequality endangers the sustainability of growth. Long consistent spells of economic growth are correlated with low levels of income inequality.

A growth spell in this study is a period of at least five years that begins with an unusual increase in the growth rate and ends with an unusual drop in growth.

It may seem counterintuitive that inequality is strongly associated with less sustained growth. After all, some inequality is essential to the effective functioning of a market economy and the incentives needed for investment and growth … But too much inequality might be destructive to growth. Beyond the risk that inequality may amplify the potential for financial crisis, it may also bring political instability, which can discourage investment. Inequality may make it harder for governments to make difficult but necessary choices in the face of shocks, such as raising taxes or cutting public spending to avoid a debt crisis. Or inequality may reflect poor people’s lack of access to financial services, which gives them fewer opportunities to invest in education and entrepreneurial activity. … [S]ocieties with more equal income distributions have more durable growth. … [A] 10 percentile decrease in inequality (represented by a change in the Gini coefficient from 40 to 37) increases the expected length of a growth spell by 50 percent. (source)

Some additional support for this view comes from the fact that redistributive policies – which are anti-inequality policies – don’t actually harm growth. Redistribution doesn’t help either, according to this graph, but maybe it counteracts the negative effect of inequality on growth given that it counteracts inequality. In that sense, it does help.

What is Democracy? (67): The Form of Government That Offers the Best Protection Against Human Rights Violations

There is a clear correlation between the presence and quality of democratic government in a country and the level of respect for human rights in that country. That may sound obvious but it’s good to have some measured results. This paper for instance offers some clear evidence:

There is a substantial body of research devoted to understanding the relationship between democracy and government human rights performance. Most research centers on physical integrity rights but does not analyze the broader civil liberties encompassed by the category of “empowerment rights.” The dynamics of the relationship between the degree of democracy in a state and protection of empowerment rights might be different and improvements may take longer to emerge. This study examines the effects of democracy and democratic duration on empowerment rights scores, and it also uncovers time thresholds at which different scores are attained. The results show that regime type is more critical to the protection of empowerment rights than it is to physical integrity rights. Even in the earliest years of democracy there is a positive relationship between democracy and empowerment rights, but empowerment rights strengthen as countries gain democratic experience. …

Thus, countries with more institutionalized democratic regimes, as determined by the quality and longevity of democratic experience, are significantly more likely to respect both fundamental human rights and broader classes of civil liberties. … [A]lthough human rights protection is present in early years, it will usually be even greater after countries have had extended experience with democracy. (source)

Here are some interesting data to back this up.

The interesting thing about all this is not that there is a correlation – anyone following the news could have guessed as much. What we should care about are the reasons why there is a correlation. From the studies cited above we can see that the most important causal link is the one going from democracy to respect for human rights. In other words, there is a correlation because democracy causes respect for human rights. Vice versa may also be possible, although the argument is probably weaker. And then there may also be a hidden variable that can partially explain the correlation. For example, it may well be that prosperity and high GDP promote both democracy and human rights.

But then the next question is: how does democracy cause higher levels of respect for human rights? I guess this can happen in several ways:

  • Democracies are more likely to be systems based on the rule of law and the rule of law is necessary for the protection of human rights.
  • Democratic rulers know that they can’t get away with repression. They’ll be voted out if they try, or, worse, they’ll suffer the consequences of the rule of law, imposed on them by other branches of power in a system of checks and balances and separation of powers.
  • Democracies have systems of judicial review which allow courts to void legislation that contradicts basic constitutional rights.
  • Democracies have powerful non-violent mechanisms for dispute settlement, such as well-functioning courts. People don’t need to take the law into their own hands. Internal peace and limitations on violent behavior have beneficial effects on a number of human rights.
  • Democracy is correlated with high levels of prosperity, and prosperity makes it easier to promote respect for human rights. Rights cost money.
  • Democracies need human rights to function adequately (no democracy without free speech, free assembly, free association etc.), so they have an added incentive to respect them.

None of the above is meant to imply the following:

  1. That we can delay the implementation of human rights norms in non-democratic states. Remember the remark at the beginning that the causal link probably goes in two opposite directions and that human rights can promote democratic government. After all, if people are allowed to express themselves, they will express themselves about the workings of their government, and that is the first step towards democracy.
  2. That rights are never violated in democracies or never respected in non-democracies. It’s merely a matter of probability.
  3. That there are no elements other than democracy that promote human rights. Of course there must be. I mentioned prosperity a moment ago. Democracy is not a sufficient condition, although probably a necessary one, at least in the long run, for the full set of human rights and for the equal enjoyment of all rights by all people.
  4. That the beneficial effect of democracy on human rights is equal for all human rights or for all types of democracy. Well-developed and long-lasting democracies do better, as mentioned above, but perhaps also deep democracies, meaning democracies that provide a wide range of opportunities for democratic say.

More about the link between democracy and human rights here, here, here and here. More posts in this series are here.

What is Democracy? (59): A Money Hole

At least in the US, it seems:

Barack Obama felt that he had to spent $730 million to win the 2008 election. That’s roughly the GDP of Timor-Leste.

The so-called killer argument of those in favor of unlimited election spending is that the cost of a ticket to the White House hasn’t kept up with US GDP, as if it should keep up with US GDP:

I see absolutely no reason why a slower growth of campaign spending compared to the growth of GDP should automatically deflate our worries about campaign spending. After all, it’s not as if a country needs to spend more on elections as it becomes richer. On the contrary. If campaign spending is defended as a means to inform the public, then one could counter with the fact that people in wealthy countries tend to be better educated and to have good access to modern information sources. Hence, they don’t need to be “informed” by political parties or candidates, especially not if this “information” takes the form of a deluge of hatefilled ads and lying propaganda. The absolute level of campaign spending should remain a worry, wether or not it’s higher or lower than GDP or any other unrelated indicator.

And before you ask: yes, money in politics is a problem, and more money means more problems. If you’re not convinced try some older posts here and here.

Also, it goes without saying but I say it anyway: money is an issue in all types of elections, not only presidential ones. A record $6 billion will be spent on the 2012 elections, according to the Center for Responsive Politics. Adjusted for inflation, that’s 60% more than the 2000 elections (source).

More posts in this series are here.

The Causes of Poverty (53): Poor Economic Growth

As an update of this previous post, here’s some more information about the nature of the relationship between economic growth and poverty reduction.

In a recent paper, Lane Kenworthy has compared growth and income data for 17 developed countries. Specifically, he looked at the ways in which the incomes of people in low to middle income groups benefit from economic growth. “Growth” here means increases in the amount of per capita GDP – this caveat is necessary in order to filter out economic growth that is the result of population growth and that doesn’t make the average person better off (although it obviously can make some persons better off, immigrants for instance). “Income” includes both wages and welfare benefits or other government transfers. Another preliminary remark: it’s wrong to think that growth automatically and by definition makes everyone – and hence also the poor – better off. It just makes the average person better off. That means that it can also in some circumstances make some people – e.g. the poor – worse off. Growth numbers are silent about the distribution of the effects of growth.

The question which the paper tries to answer is the following. Given that poor people can benefit from economic growth in two ways:

  1. either growth “trickles down“: more aggregate national income or production means more jobs, better paid jobs etc.
  2. or growth can increase the government’s tax base so that the welfare system can be made more generous,

which of these two mechanisms has been most prominent in the 17 countries examined in the paper?

The answer is “number 2”. Why? Well, in some of the selected countries economic growth was accompanied by a significant rise in low-to-middle household incomes, while in the other countries the effect of economic growth on the incomes of people in low-to-middle income groups was much smaller or zero. If economic growth trickles down (1), then one would assume it trickles down in all or most countries. After all, if growth results in more and better paid jobs for the poor, then there’s no a priori reason why this result would occur in one country but not in another.

The nature of government transfer systems is the reason why the effect of growth on the incomes of the poor is not the same in all countries:

when households on low incomes got better off, it was due most often to a rise in net government transfers. Where net transfers increased, incomes tended to increase in concert with economic growth. Norway, the UK, Sweden, Finland, and Denmark illustrate this pattern. Where net transfers were stagnant, income trends were decoupled from growth of the economy. We observe this in the United States, Canada, and Switzerland. This is an important finding. It means that, as a general rule, growth has not trickled down to low income households through wages or employment. And it means that, when government transfers haven’t grown, wages and employment haven’t stepped in to take their place. (source)

Looking at all this from the perspective of the causes of poverty: it’s clear that poor economic growth in wealthy countries cannot, by itself, explain poverty, because these countries can witness both growth and stagnation of the lowest incomes (as a result of their failure to implement the necessary transfer programs). Hence you can have growth without poverty reduction. If lack of growth is the main cause of poverty, then growth would by itself and automatically reduce poverty. We see that this is not the case.

In poor countries, on the other hand, growth can perhaps be sufficient. Those countries start from a lower base and more can trickle down. A lack of growth can, therefore, explain the persistence of poverty in developing countries, but probably not in developed countries. The latter have a basis of wealth that is large enough to fund welfare programs even if growth is poor. Growth helps to make this funding easier, but it’s not really necessary. A more progressive tax system, coupled with some good legislative will, can also do the trick.

More here.

The Causes of Poverty (44): Bad Institutions

Botswana is a largely tropical, land-locked country with insignificant agriculture in a geo-politically precarious location. When the British granted independence, they left 12 km of roads and a poor educational system. Making headlines for its devastatingly high HIV rate, Botswana suffers from high inequality and unemployment. Officially a democracy, it has yet to have a functioning opposition party. 40% of Botswana’s output is from the diamond industry, a condition that in other countries casts the resource-curse.

Still, Botswana is a growth miracle. Between 1965 and 1998, it had an average annual growth rate of 7.7%, and in 1998 it had an average per capita income four times the African average. Rule of law, property rights, and enforcement of contracts work; the government is efficient, small, and relatively free from corruption. Indigenous institutions, persisting through colonization, encourage broad-based participation, placing constraints on elites. Institutional quality and good policies are responsible for success against the odds. (source)

Of course, high GDP growth rates don’t always imply low poverty rates, but often they do. About a third of the population still lives in poverty, but this rate has been declining sharply, from 59% in 1985 and 47% in 1992 (source).

More posts in this series are here.

Why Do Countries Become/Remain Democracies? Or Don’t? (13): Prosperity

I already mentioned in a previous post how democracy is correlated with prosperity. There’s a much higher proportion of democracies among rich countries than among poor countries. The level of national income is the most important factor explaining inter-country variations in the degree of democracy. If we assume from this correlation that there is a causal link from prosperity to democracy, then low income is the most important barrier to democracy. But the causal link probably goes in both directions. Countries aren’t just democratic – or remain so – because they prosper (among other reasons), but it’s also the case that countries prosper to some extent because they are democratic (disproving the often heard claim that economic development requires authoritarian government).

The correlation between democracy and prosperity is obvious from this paper (at least for non-Muslim countries).

The stronger one of the causal links seems to be the one going from prosperity to democracy rather than vice versa. If you accept that, there’s an additional question (it’s one made famous by Przeworski and Limongi): are there more democracies among rich countries than among poor countries

  • because economic development increases the likelihood that countries will undergo a transition to democracy (this is often called modernization theory), or
  • because economic development makes democracies less likely to fall back into dictatorship?

Przeworski and Limongi found that affluence makes it very unlikely that a shift from democracy to dictatorship occurs, while Boix and Stokes find that there is an effect of affluence on the likelihood of a shift to democracy. Both effects are visible in this study.

It’s likely that the economic effect on transition towards democracy is a bit smaller than the effect halting the opposite transition. The reason is probably the fact that the transition from democracy to authoritarianism is in se much easier than the other way around. Some even say that democracy is inherently suicidal. Whatever the merits of that claim, it’s obvious that an authoritarian leader has the resources and the necessary lack of scruples to cling to power. Especially when his country becomes more prosperous. He can then use this prosperity to bribe the population into submission, and buy the arms and security forces when this doesn’t work.

Again, economic development isn’t a sufficient or even necessary prerequisite for democracy to appear or to survive. Things are more complicated than that and many other factors are in play, including conscious human activity and volition. People can decide to make or destroy a democracy at any level of economic development.

Measuring Poverty (9): Absolute and Relative Poverty Lines

There are many ways you can measure how many people in a country are poor. Quite common is the use of a so-called poverty line. First you decide what you mean by poverty – for instance an income that’s insufficient to buy life’s necessities, or an income that’s less than half the average income etc. Then you calculate your poverty line – for instance the amount of income someone needs in order to buy necessities, or the income that’s half the average income, or the income of the person who has the tenth lowest income if the population was one hundred etc. And then you just select the people who are under this poverty line.

I intentionally chose these examples to make a point about absolute and relative poverty. In the U.S., people mostly use an absolute poverty line, whereas in Europe relative poverty lines are used as well. As is clear from the examples above, an absolute poverty line is a threshold, usually expressed in terms of income that is sufficient for basic needs, that is fixed over time in real terms. In other words, it’s adjusted for inflation only and doesn’t move with economic growth, average income, changes in living standards or needs.

A relative poverty line, on the other hand, varies with income growth or economic growth, usually 1-to-1 since it’s commonly expressed as a fixed percentage of average or median income. (It obviously can have an elasticity of less than 1 since you may want to avoid a disproportionate impact on the poverty line of very high and very volatile incomes. I’ve never heard of an elasticity of more than 1).

Both absolute and relative poverty lines can be criticized. Does an absolute poverty line make sense when we know that expectations change, that basic needs change (in contemporary Western societies, not having a car, a phone or a bank account can lead to poverty), and that the things that you need to fully participate in society are a lot different now than they once were? We know that people’s well-being does not only depend on the avoidance of absolute deprivation but also on comparisons with others. The average standard of living defines people’s expectations and when they are unable to reach the average, they feel excluded, powerless and resentful. Can people who fail to realize their own expectations, who lose their self-esteem, and who feel excluded and marginalized be called “poor”? Probably yes. They are, in a sense, deprived. It all depends which definition of poverty we can agree on.

It seems that people do think about poverty in this relative sense. If you compare the (rarely used) relative poverty line of 50% of median income in the U.S. with the so-called subjective poverty lines that result from regular Gallup polls asking Americans “how much they would need to get along”, you’ll see that the lines correspond quite well.

So if relative poverty corresponds to common sense, it seems to be a good measure. On the other hand, a relative poverty line means moving the goal posts for all eternity. We’ll never vanquish relative poverty since this type of poverty just moves as incomes rise. It’s even the case that relative poverty can increase as absolute poverty decreases, namely when there’s strong economic growth (i.e. strong average income growth) combined with widening income inequality (something we’ve seen for example in the U.S. during the last decades). (Technically, if you use the median earner as the benchmark, relative poverty can disappear if all earners who are below the median earner move towards the median and earn just $1 or so less than the median. But in practice I don’t see that happening).

Why Do Countries Become/Remain Democracies? Or Don’t? (11): The Relative Cost of Freedom and Dictatorship

When dictatorial governments come under international pressure to improve the human rights situation in their countries, they often react by stating that they govern developing countries and don’t have the resources that are necessary to make improvements. Such statements have some plausibility. A judiciary, a well-trained police force, a functioning system of political representation etc. all require funding.

However, to some extent this explanation is no more than an excuse: you don’t need money to stop persecution of dissidents, to lift restrictions on the media, to allow demonstrations etc. On the contrary, you save money by doing so. You don’t need a large police force or paramilitary force; you don’t need strong government controls of every aspect of society and the economy; you don’t need to bride your citizens into acceptance of the state etc. But obviously the goal of dictators isn’t to save money and make the country better off by investing that money in the economy.

On the other hand, it remains true that the adequate defense of freedom, rights and democracy requires money, which is probably why rich countries usually score higher in freedom indexes. And, consequently, governments can save money by limiting freedom and by oppressing people.

So, both oppression and freedom cost money, and both a reduction of oppression and a reduction freedom save money. The question is then: what is, overall, the cheapest? A dictatorship or a democracy? And how can we know? Well, one possible indicator could be government spending as a percentage of GDP. If democracies have a systematically higher percentage, one could say that freedom costs more than oppression (on the condition that there isn’t a third variable explaining why democracies spend more).

However, one look at the data tells you that there isn’t much of a correlation between freedom and government spending, or between oppression and government spending. There are some countries that oppress a lot with not a lot of money – “not a lot” in relative terms compared to GDP. China and Saudi Arabia for example. And there are others that do need a lot of money (a large share of the economy) to keep the bosses in place. Cuba and Zimbabwe for example. But perhaps that is because their GDP is so low, not because they need a lot of money to oppress. In other cases, such as Saudi Arabia we may think they don’t spend a lot on oppression but we are fooled because their GDP is relatively high. And anyway, even dictatorships use some part of their state budget for things that aren’t quite so bad.

Likewise for freedom: freedom comes “cheap” in the U.S., and is “expensive” in Sweden. Between quotation marks because government spending over GDP is a very imprecise measure of the cost of freedom or oppression, for the reasons just given. It’s not because a country’s GDP doubles thanks to higher oil prices that the cost of freedom also doubles. Freedom (like oppression) costs money but not money as a fixed percentage of GDP.

Alternatively, you can also look at the tax burden. Here, the data show that countries that impose the highest taxes are also the ones that are most free (Scandinavia obviously ranks high on both accounts). But is that because freedom costs so much more than oppression? Perhaps the answer is “yes” if you include in “freedom” the things that make freedom possible, such as good healthcare, education etc.

But perhaps a more interesting and useful question would be: what cost considerations or economic incentives would produce a move towards democracy or away from democracy? It’s clear that a crisis of some sort – 9/11, a war, or, more appropriately in the current context, an economic recession or depression (see the Roosevelt cartoon below) – encourages democratic leaders to abridge certain rights, freedoms and democratic procedures. In the case of an economic crisis, the claim is that freedom and proper democratic procedures are just too expensive economically. A swift resolution of the crisis requires strong centralized intervention.

It’s also widely accepted that one of the causes of the demise of the Soviet Union was the unbearable cost of oppression. I think it’s better foreign policy to try to make oppression as costly as possible, rather than trying to make freedom as cheap as possible. Freedom tends not to be very cheap, I guess. And when it is, it’s probably not really freedom.

Why Do We Need Human Rights? (12): The Economic Case against Human Rights and Democracy, Ctd.

After completing my older post on the topic – in which I argued that the case is very weak – I found this quote by Bill Easterly which I thought would illustrate my point:

Democracy doesn’t attract as much love as it deserves in aid and development circles. Many wonder if benevolent autocrats might be better for development than messy elections, even though there is no evidence to support benevolent autocracy. There is a strong positive association between democracy and LEVEL of per capita income, which at least some authors argue is causal. (It’s true there is no robust association between democracy and GROWTH of income, but then there is no robust association between GROWTH and ANYTHING.) But even if there had been SOME material payoff to autocracy, why don’t we care more about democracy as a good thing in itself? (source)

My argument for democracy is usually instrumental (see here) and prosperity is one of the values that can and should be promoted by instrumental democracy. But I’ve also written about democracy as a good thing in itself. Go here if you care about that sort of argument.

Economic Human Rights (32): The Economic Cost of Taxing the Rich

Taxation is linked to human rights in several ways:

I personally belief that a progressive tax is best in light of the last two concerns. In a progressive taxation system, higher earners pay a larger percentage of their income on taxes. Compared to a regressive taxation system (people with higher incomes pay less in percentage of their income, as in the case of a consumption tax or VAT) or a flat tax (the tax percentage is the same for all income groups), a progressive tax reduces income inequality: it makes incomes more equal in a direct way because it reduces the income of higher-earning families by a larger percentage than the income of lower earning ones; but also in an indirect way because this system – under certain conditions – yields more tax revenues which can then be spent on poverty reduction and the safety net. Also, it seems to be a good example of a just and fair system. The strongest shoulders should carry the most heavy burden. Someone earning a low income can end up in poverty after paying a small percentage in taxes; a wealthy person will perhaps not even notice paying a relatively large sum in taxes.

The counter-narrative states that high tax rates discourage people; they are a disincentive to hard work and effort. High tax rates for high incomes discourage people who work relatively hard (they work hard supposedly because they earn a lot). Because high tax rates punish the most productive elements in a society, the whole of society suffers. More productive people will limit their productivity because they don’t want to fall into a higher tax bracket, and the money they pay in taxes can’t be invested in the economy. Taxing the rich therefore has an unacceptable economic cost. Conversely, low tax rates for the rich produce benefits for all (this is trickle down economics, read also about the Laffer curve).

But this narrative doesn’t quite stand the test of data. As is clear from this link, high tax rates don’t slow down economic growth, and low tax rates don’t speed it up. This paper also supports the claim that moderate, as opposed to dramatic, increases in marginal rates don’t have any impact on the willingness of the wealthy to participate in the economy. They won’t go Galt. Atlas won’t shrug, except to signal indifference.

The top income tax rate was 91% (beginning at taxable income of $400,000) … [in] the period from 1951 through 1963. Those were the golden years of the U.S. economy, in which the average annual rate of productivity growth was 3.1% (compared with about 1.5% after 1981). Of course, the growth might have been even faster had the marginal tax rates been lower, but the coincidence of high rates and high productivity raises challenging questions for those who believe that high marginal tax rates carry an unacceptable cost. (source)

To be fair, marginal tax rates are a crude measures of tax burden. There’s a difference between marginal tax rates and effective tax rates.

  • A marginal tax rate is the tax rate that applies to the last dollar of the tax base (taxable income or spending, usually income). It’s not the rate at which all your dollars are taxed. It’s the maximum rate you’re paying on any of your dollars of taxable income.
  • An effective tax rate refers to the actual rate, i.e., the rate existing in fact, for the entire income, after tax deductions and credits and taking into account lower rates for lower income brackets (see here). It’s your total tax obligation (including your income tax and any other additional taxes and/or credits), divided by your total taxable income.

But even if we look at the effective tax rates of the rich, we see that this has steadily decreased over the decades, with little or no positive effect on overall economic performance.

And when there’s no positive effect of decreasing tax rates, there’s probably also no negative effect of increasing tax rates. To the extent that the wealthy (and productive, although those groups obviously don’t overlap completely) respond to changes in the tax system, their responses focus not on increased/decreased labor, productivity or investment, but on tax avoidance (see here).

The Causes of Poverty (30): Lack of Economic Growth

When a country achieves a certain level of economic growth – or, more precisely, rising levels of GDP per capita because economic growth as such can be the result of rising population levels – it is assumed that this reflects a higher average standard of living for its citizens. Economic growth is therefore seen as an important tool in the struggle against poverty. If a country is richer in general, the population will also be richer on average. On average meaning that GDP growth isn’t necessarily equally distributed over every member of the population. That is why GDP growth isn’t sufficient proof of poverty reduction. Separate measurements of poverty and inequality are necessary.

So in theory, you can have GDP growth and increasing levels of poverty, on the condition that GDP growth is concentrated in the hands of a few. However, that’s generally not the case. GDP growth benefits to some extent many of the poor as well as the wealthy, which is shown by the strong correlation between poverty reduction and levels of GDP growth (always per capita of course). It’s no coincidence that a country such as China, which has seen strong GDP growth over the last decades, is also a country that has managed to reduce poverty levels substantially.

Unfortunately, growth isn’t a silver bullet. Poverty is a complex problem, requiring many types of solutions. Promoting economic growth will do a lot of the work, but something more is required. In a new paper, Martin Ravaillon gives the example of China, Brazil and India. The levels of poverty reduction in these three countries, although impressive, do not simply mirror the levels of economic growth. Although half of the world’s poor live in these three countries, in the last 25 years China has reduced its poverty level from 84% of the population in 1981 to just 16% in 2005. China is exceptional, but Brazil also did well, cutting its rate in half over the same period (8% of Brazilians still live on less than $1.25 a day). Regarding India, there are some problems with its statistics, but whichever statistic you use, there’s a clear reduction.

Ravaillon points out that the intensity of poverty reduction was higher in Brazil than in India and China, despite lower GDP growth rates.

Per unit of growth, Brazil reduced its proportional poverty rate five times more than China or India did. How did it do so well? The main explanation has to do with inequality. This (as measured by the Gini index, also marked on the chart) has fallen sharply in Brazil since 1993, while it has soared in China and risen in India. Greater inequality dampens the poverty-reducing effect of growth. (source)

Which is rather obvious: lower levels of income equality means a better distribution of the benefits of growth. So the “pro-growth strategy” against poverty is important but not enough, and should be combined with Brazilian type anti-inequality measures (focus on education, healthcare and redistribution).

Lies, Damned Lies, and Statistics (24): Mistakes in the Direction of Causation

Suppose you find a correlation between two phenomena. And you’re tempted to conclude that there’s a causal relation as well. The problem is that this causal relation – if it exists at all – can go either way. It’s a common mistake – or a case of fraud, as it happens – to choose one direction of causation and forget that the real causal link can go the other way, or both ways at the same time.

An example. We often think that people who play violent video games are more likely to show violent behavior because they are incited by the games to copy the violence in real life. But can it not be that people who are more prone to violence are more fond of violent video games? We choose a direction of causation that fits with our pre-existing beliefs.

Another widely shared belief is that uninformed and uneducated voters will destroy democracy, or at least diminish its value (see here and here). No one seems to ask the question whether it’s not a diminished form of democracy that renders citizens apathetic and uninformed. Maybe a full or deep democracy can encourage citizens to participate and become more knowledgeable through participation.

A classic example is the correlation between education levels and GDP. Do countries with higher education levels experience more economic growth because of the education levels of their citizens? Or is it that richer countries can afford to spend more on education and hence have better educated citizens? Probably both.

Economic Human Rights (29): Unemployment Benefits in the U.S. and Elsewhere

Strange as it may seem to some, unemployment benefits are a human right, and rightly so in my opinion. Poverty makes rights impossible, and unemployment benefits save many from poverty, especially during a recession in which unemployment isn’t just a phase between two jobs. Read for instance art. 22, 23 and 25 of the Universal Declaration:

Article 22: Everyone, as a member of society, has the right to social security.

Article 23: Everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment.

Article 25: Everyone has the right to a standard of living adequate for the health and well-being of himself and of his family, including food, clothing, housing and medical care and necessary social services, and the right to security in the event of unemployment, sickness, disability, widowhood, old age or other lack of livelihood in circumstances beyond his control.

Three times! They must have meant it.

Compared to many other industrialized countries, the U.S. usually adopts a very critical attitude towards social and economic rights in general, and hence also to the right to unemployment benefits. Which is apparent from its relatively stingy system.

At just under $300, the average weekly benefit is less than half the average private-sector wage. Mississippi’s maximum benefit of $230 is not much more than the federal poverty threshold of $200 for an individual. (source)

And it’s not just the total amounts of the benefits:

Compared with the systems in other industrialised countries, the American unemployment-insurance (UI) scheme pays lower benefits for less time and to a smaller share of the unemployed. … States often require beneficiaries to have worked or earned an amount that disqualifies many part-time and low-wage workers. They also disqualify people seeking only part-time work – even though many people now work part-time for family reasons. Benefits typically last for only six months, more than enough time to find a new job in normal times but not in recessions. (source)

This isn’t only a human rights issue. Especially in a recession it can mean making things worse. When people lose their jobs, you don’t want them to lose a large part of their purchasing power since economic recessions are made worse by falling consumer spending.

However, making the system of unemployment benefits more generous would almost certainly require higher taxes. And although the U.S. is a low-tax country (compared to other industrialized countries) that seems pretty utopian right now (given the already hysterical fears about the fiscal consequences of the healthcare proposals).

Economic Human Rights (28): The Health Consequences of the Recession and of Unemployment

The Economist called it the “unsurprising research finding of the day“, but I think it’s a useful confirmation of an existing intuition: this paper finds that the recession can have a beneficial effect on the health of some people who lose their job because of it, namely those people spending their new leisure time in a healthy way. Other people, however, spend their leisure time cultivating some of their pre-existing unhealthy habits, or find themselves depressed and without employer-provided healthcare (especially in the U.S.). Because their healthcare has become more expensive now that they are unemployed, they decide to go without treatment or tests.

Results showed the body mass of the average laid-off food-lover increasing by the equivalent of more than 7 pounds for a 5-foot, 10-inch man weighing 180 pounds during unemployment. Similarly, frequent drinkers on average doubled their daily alcohol intake after losing their jobs and before finding another one. (source)

Elsewhere in the world, and especially sub-Saharan Africa, it seems that the health consequences of the global recession are more dramatic:

The financial crisis will kill between 28,000 and 50,000 babies in sub-Saharan Africa this year, according to this paper. The reasoning here is straightforward. For people on subsistence incomes, a fall in GDP can be fatal. The paper’s authors, Jed Friedman and Norbert Schady, estimate that a one percentage point fall in per GDP across sub-Saharan Africa is associated with a rise in infant (defined as under-ones) mortality of between 0.34 and 0.62 per 1000. If we multiply this increase by the number of births this year and by the 2.4 percentage point difference between GDP growth this year and last (a reasonableish estimate of the effect of the crisis), we get a figure of between 28,000 and 50,000. … Of course, you can quibble with the numbers. But the general story holds. For the poor, income is a matter of life or death. Which brings me to my question. If one-in-seventeen British babies were to die this year because of the financial crisis, it would be the biggest media story for years and there’d be rioting in the streets until the government did something. So, why the silence? Chris Dillow (source)

Why Do Countries Become/Remain Democracies? Or Don’t? (6)

Democracy is a human right. If we want to promote universal respect for this right, we have to know how societies have achieved the transition from authoritarian forms of government to more democratic ones, and how democracies have avoided the opposite transition. Once we know this, we can promote the future emergence of democracies, and we can counteract the breakdown of existing ones.

Unfortunately, this is a very murky area of political science. The only thing that’s clear is that there is no silver bullet. There isn’t one thing we can do to transform societies once and for all into democracies. Things aren’t easy or simple. A huge number of factors have been identified as causes of or obstacles to democratic transitions, and existing democracies need constant nurturing and protection. A few of the factors that have been named as either promoting or inhibiting democracy are:

  • economic growth or GDP per capita
  • protestant culture versus catholic culture (a catholic culture is believed to be more hierarchical)
  • levels of education and literacy
  • income or wealth inequality (in very unequal societies, the wealthy have a lot to lose with democracy)
  • levels of employment in agriculture versus industry (industrial societies are believed to more more urban and less attached to traditional and authoritarian social relationships)
  • the presence/absence of neighboring democracies
  • export diversity (countries with one major export product such as oil tend to be “resource cursed”)
  • is a country a former U.K. colony or not? (former U.K. colonies are believed to be more sympathetic to democracy given their British colonial heritage)
  • is there a large middle class or not?
  • etc.

Statistical analysis to pinpoint which ones of these many variables really determine democracy – and which ones are merely guesses – has yielded contradictory results, not surprisingly given the low numbers of observations (societies or countries don’t change their political systems very often) and the relative lack of long time series (most classifications of regime types haven’t started earlier than a couple of decades ago). One interesting analysis is here.

So don’t expect me to have an opinion here. What I wanted to focus on in this post is the first in the list. There are two radically opposing views on the effect of economic development on democracy. One view is called modernization theory. Basically, the idea is that as countries develop economically, people will switch to other, higher needs, such as self-government, self-control, and political activity in general. Poverty, on the contrary, forces people to focus on survival and makes democracy seem like a luxury.

However, the opposite view is also persuasive. Countries that do well economically are less likely to become democratic because the population is quite pleased with how things are going and will not revolt. The authoritarian rulers can claim that it’s thanks to them that things are going well. It’s not unlikely that economic collapse rather than success causes authoritarian regimes to break down.

So even if you isolate one of dozens of possible factors causing regime transition, things aren’t very clear. Should we starve dictatorships, or help them develop economically? As a result of this lack of clarity, it’s very difficult to frame foreign policy in such a way that it favors the development of democracies around the world. This may go some way to explain the traditional lack of ambition in diplomatic circles.

The Causes of Poverty (19): Does Better Healthcare Lead to More Poverty?

This may look like a stupid – or, more kindly, counterintuitive – question. The answer is obviously “no”. At least when we focus on the level of the individual, better healthcare seems like the best way out of poverty rather than a cause of more poverty. With better health comes better education, better and more productive work, and hence less poverty. Even a society as a whole seems better off if less of its members are unhealthy. Overall productivity and wealth increase when there is less disease. Healthy people produce more, innovate more and contribute in other ways to social wealth.

However, many people believe – wrongly in my view – that the question should be answered in the affirmative, especially when the topic is development aid. When a country drastically improves its healthcare system – thanks to development aid for instance – life expectancy rates will go up and child mortality rates will go down. This results in population growth which often outpaces GDP growth (for example because scarce development resources have been targeted at healthcare rather than GDP). GDP per capita will therefore decrease, which means increasing poverty levels and perhaps even famine.

This type of reasoning is sometimes used to justify limits on development aid in the field of healthcare. However, it’s plainly wrong. Better healthcare doesn’t lead to high population growth, and this non-existing population growth therefore cannot result in more poverty.

Now, why doesn’t better healthcare lead to population growth? With just a few exceptions, it’s the poor countries of the world that have high fertility rates, and when countries become richer, these rates drop dramatically. Poverty leads to high fertility rates for a number of reasons (see also here), but the most important one is that people tend to have more children to offset the risk of high infant mortality rates that are typical for poor countries.

Countries with high infant mortality rates also have high population growth (contrary to intuition). Some other reasons why high fertility rates are correlated with poverty:

  • More developed countries move away from agriculture and towards urban and industrialized economies, reducing the need for children as farmworkers.
  • For the same reason, women become more active in the economy, increasing the cost (in money and time) of raising children.
  • Also for the same reason, contraceptives and family planning become more common.

In this case, it seems that our initial intuitions are correct.

Why Do Countries Become/Remain Democracies? Or Don’t? (5): The Aid Curse, or the Negative Effect of International Development Aid on Democracy

Via Bill Easterly’s blog, I discovered this paper on the so-called “aid curse“: just as dependence on natural resources has a negative effect on the quality of a country’s governance and democracy (a phenomenon called the resource curse), so has international development aid (or official development aid, ODA), especially in countries which depend heavily on aid (and in which aid represents a large percentage of GDP).

This is surprising, because one of the aims of international development aid is to bolster the quality of governance, directly through aid targeted at this objective, or indirectly on the assumption that better education, health care etc. will ultimately lead to better governance.

It seems now that there is a correlation (and perhaps even a causal link) between high levels of aid and low levels of democracy. The explanation is that foreign aid , like the revenue of natural resources, provides an opportunity for governments and leaders to appropriate funds illegitimately. And, because they benefit from aid, they will try to exclude other groups from power. This obviously destroys democratic institutions or makes it more difficult to establish them.

Foreign aid also reduces the need for a system of taxation. And without such a system, it’s a lot more difficult to construct a well-functioning government, and it’s less likely that forces for representation take root (historically, the principle of “no taxation without representation” has promoted democracy). When a government doesn’t depend on taxes for its revenues, then it will have less incentives to seek accountability.

The levels of democracy in countries decrease while the levels of aid (as official development aid – ODA – over GDP) increase.

None of this proves that we should give less aid to developing countries. Probably the opposite is true. What it proves is that aid is more than just sending money. Donors should check what happens to their money, should target the money, and should bypass the “sticky fingers” in government as much as possible. To some extent, donors should also make aid conditional on democratic reform because this reform is the way to avoid aid inefficiency. However, when doing so, they should be careful not to put the cart before the horse: one of the goals of aid is precisely democratization.

The Causes of Poverty (17): Overpopulation

According to Malthus, food and other resources are limited, and a population growth that exceeds a certain pace will inevitably hit a resource ceiling, and will result in decreasing standards of living, poverty, conflict over scarce resources, famine etc. (This is called a Malthusian catastrophe). Ultimately, population growth will halt because if this, and population levels will return to the “normal” equilibrium possible within the limits offered by nature (the so-called “carrying capacity”).

And if these disasters aren’t enough, active population control is necessary, including measures such as the abolition of social security (social security doesn’t incite people to birth control, see here) and even more extreme policies (many of which proposed by Malthus’ more enthusiastic followers rather than by himself).

Malthus agreed that humanity was capable of increasing its productivity, but believed that population growth would necessarily outpace this increase. The facts are, however, different. Standards of living have risen enormously over the last centuries, notwithstanding large increases in population numbers. GDP growth has even been faster than population growth, giving, on average, every human being more resources than ever before in history. Of course, these resources aren’t equally distributed, but that’s a problem of justice, not of population.

Blaming everything on overpopulation is simplistic. All major problems in life are multi-causal, and population isn’t a real or major cause in many cases (bad governance is often a more important cause). And when it is, population control isn’t the answer. Technology, productivity, consumer adaptation, better governance etc. are more promising solutions.

The Causes of Poverty (7c): Globalization

Does globalization erode social safety nets? Economic theory and intuition suggest that as economies become more globalized, the ability of governments to undertake redistributive policies and to engage in social spending erodes. After all, a large part of the tax base – corporations, financial intermediaries, and skilled workers in particular – become internationally mobile and can evade taxes needed to finance those public expenditures.

… the lack of an obvious decline in the overall tax take in major advanced economies, has led many observers to think that the hypothesized decline of the welfare state has not in fact taken place. [However], as technological progress and multilateral trade liberalization have made borders less of a barrier to economic activity, the scope of redistribution policies has become smaller. Dani Rodrik (source)

This doesn’t mean that globalization necessarily leads to more poverty. Redistribution on the basis of taxation is only one way to fight poverty. In this post I discussed some of the ways in which more free trade and hence more globalization can reduce poverty.

The Environment and Human Rights (1): The Environmental Kuznets Curve

It’s not uncommon to hear people worry about the economic development of the developing world: what if these billions of people start to drive cars, use airco, eat meat etc. to the same extent as the people in the West? Would that not spell the end of the earth? Isn’t there a contradiction between the fight against poverty and care for the environment? Are we forced to make some tragic choices? Leave people in poverty and save the earth? Save people and destroy the earth? Radically change our Western lifestyle?

The concept of sustainable development, development and economic growth which takes the environment into account, doesn’t seem to calm the fears. And then people start to discuss overpopulation and all the nastiness that comes with it, or they turn to cultural pessimism about the excesses of the Western consumer society.

A more hopeful sign comes from economics, and in particular the Environmental Kuznets Curve. This curve shows a U-shaped relationship between per capita income (GDP) and the quality of the environment. Measures of the quality of the environment do indeed fall in the initial stages of economic growth, but this trend turns around at about $5.000 per capita GDP, with many measures of environmental damage showing improvement from $8.000 onwards (source).

Why Do Countries Become/Remain Democracies? Or Don’t? (3): The Resource Curse

Why do countries with lots of natural resources tend to do worse than countries with less resource wealth, both in terms of economic growth and in political, social and human rights terms? We see that countries which own lots of natural resources such as diamonds, oil or other valuables that are found in the ground, are often relatively poor, badly governed, violent and suffering from gross violations of human rights.

There are many possible causes of this curse (also called “the paradox of plenty”):

1. Lack of economic diversification

Other economic sectors tend to get neglected by the government because there is a guaranteed income from the natural resources. These sectors therefore cannot develop and cannot become an alternative when the resources are taking hits. The fluctuations of the international prices of the resources can cause extreme highs and lows in national economic growth. This is bad in itself, but also makes it difficult for the government to do long term planning, since the level of revenues cannot be predicted. Dependence on one economic sector means vulnerability.

Another disadvantage of concentrating the economy on one resource sector, is that these sector often provide few jobs, especially for local people. The oil industry for example needs highly specialized workers, who are mostly foreigners. On top of that, these sectors do not require many forward or backward connections in the economy (such as suppliers, local customers, refiners etc.), which again doesn’t help the local job creation.

Even if the government tries to diversify the economy, it may fail to do so because the resource sector is more profitable for local individual economic agents.

Resource dependent countries also see their best talents going to the resource industry which pays better wages than the rest of the economy or the government sector. As a result, the latter are unable to perform adequately. See point 4 below.

2. Corruption

Corruption tends to flourish when governments own almost the entire economy and have their hands on the natural resources. More on corruption in a future post.

3. Social division

Abundance of natural resources can produce or prolong violent conflicts within societies as different groups try to control (parts of) the resources. Separatist groups may emerge, trying to control the part of the territory most rich in resources. This is often aggravated by existing social or cultural division. Division may also appear between parts of the government (e.g. local government vs central government, or between different parts of the central administration).

The resources therefore may cause divisions and conflict, and thereby cause deficiencies in government, economic turmoil, and social unrest. But the resources may also prolong conflicts because groups which manage to take control of (parts of) the resources may use these to arm themselves or otherwise gain influence and power.

4. Government’s unaccoutability and inefficiency

Countries which do not depend on natural resources are often more efficient in taxing their citizens, because they do not have funds which are quasi-automatically generated by resources. As a result, they are forced to develop the government machinery in an efficient way, hence a reduced risk of government break-down. The citizens in return, as they are taxed, will demand accountability, efficient spending etc.

Conversely, the political leaders in resource-dependent countries don’t have to care about their citizens. They create support by allocating money, generated by the resources, to favored interest parties, and thereby increasing the level of corruption. And if citizens object, they have the material means to suppress protest. They don’t appreciate an effective government administration as this carries the risk of control, oversight and other anti-corruption measures (see point 2). So they have an interest in bad government.

It is obvious that bad government, rights violations and economic stagnation have many causes. The resource curse is only one. There are countries which are blessed with resources and which do well at the same time. And there are mismanaged countries that don’t have any resources. As in all correlations, the causation may go in the other way: bad government can create dependence on exports of natural resources.

“When a country’s chaos and economic policies scare off foreign investors and send local entrepreneurs abroad to look for better opportunities, the economy becomes skewed. Factories may close and businesses may flee, but petroleum and precious metals remain for the taking. Resource extraction becomes ‘the default sector’ that still functions after other industries have come to a halt.” (source)

What to do about it?

Leif Wenar has argued that a strict application of property rights could help reduce or correct the resource curse. When dictators or insurgents sell off a country’s resources to foreigners or multi-national companies, while terrorizing the people into submission, they are in fact selling goods that they stole from those people. They have no right to sell what they don’t own. The natural resources of a country belong equally to all the people of that country. Article 1 of the International Covenant on Civil and Political Rights states:

All peoples may, for their own ends, freely dispose of their natural wealth and resources.

And

“the people, whose resources are being sold off, become not the beneficiaries of this wealth but the victim of those who use their own wealth to repress them”. Leif Wenar (source)

One could take legal action in western jurisdictions to try to enforce the property rights of the citizens of resource cursed countries and to charge multinational corporations with the crime of receiving stolen goods.

Western countries, investors and consumers could also boycott companies that invest in resource-cursed countries, or try to pressure campaign them to get out of these countries, or they could stop to invest in these companies.

When people finally get a grip on their resources, they open the path to better government, a better economy and better protection for human rights. Perhaps then they will not have to die trying to recapture a tiny part of the resources that are their lawful property, as happened in many cases in Nigeria, for example, where people often try to tap some oil from the pipelines channeling their property to the west. In doing so, they risk their lives. As a consequence of their actions, the pipelines can explode.

The Causes of Poverty (8): Lack of Economic Freedom

Open markets offer the only realistic hope of pulling billions of people in developing countries out of abject poverty, while sustaining prosperity in the industrialized world. Kofi Annan

Africa must be allowed to trade itself out of poverty. Bob Geldof

Human rights do not include a right to have economic freedom or to have a free market. But one can argue that economic freedom is a necessary consequence of human rights and that the absence of economic freedom is an indication of a country’s disrespect for human rights. The right to do with your property as you like, to move freely and to associate freely are all human rights and are prerequisites and causes of economic freedom.

There’s also a strong case in favor of the theory that economic freedom promotes prosperity and hence also respect for economic rights.

Economic freedom consists of personal choice, the ability to make voluntary transactions, the freedom to compete, and security of privately owned property. This is the definition of the Fraser Institute. This institute tries to measure the degree to which the policies and institutions of countries support economic freedom. Their index measures:

  • size of government
  • legal structure and security of property rights
  • access to sound money
  • freedom to trade internationally and
  • regulation of credit, labor and business.

They conclude that economic freedom has grown considerably in recent decades and that economic freedom is correlated with income.

 

The complete list of countries is here. I don’t want to suggest that economic freedom should be absolute. There has to be regulation of markets (for health reasons, safety reasons, reasons of fair competition etc.) as well as political corrections of the effects of markets on issues of social justice, poverty and equality.

Moreover, when discussing economic freedom we shouldn’t only think of the internal structure of states but also their interaction: import tariffs, quota, subsidies and other protectionist measures also inhibit free trade, often at the expense of poor traders and farmers in developing countries.

Why Do We Need Human Rights? (7): From Democracy to Prosperity

In a previous post I commented on the beneficial influence of prosperity on democracy – democracy being one human right among many. Here are some reasons why democracy is good for prosperity. The squeaky hinge gets the oil. Only in a democratic society in which human rights are protected, can an economic injustice be exposed and can claims for its abolition be heard and implemented. People can use human rights to call on the government or the international community to fulfill its duties and to implement certain economic measures. Most governments, including democratic governments, act only when they are put under pressure. The freedom of expression, the freedom of assembly and association (associations such as pressure groups, labor unions or political parties) and the right to choose your own representatives are instruments in the hands of the economically disadvantaged. They can use their rights and the democratic procedures to influence economic and social policy. Poverty must have a voice.

It is true that without a minimum degree of prosperity, human rights and democracy lose a lot of their value. If you have to struggle to survive, then you do not have the time to form an opinion, let alone express it. “Primum vivere, deinde philosophari”; first you make sure you live, and only then can you philosophize. However, life is more than just living. In a situation of poverty, it is indeed difficult to use rights and democracy, but without rights and democracy it is much more difficult to fight poverty.

If there are no free flows of information, no accountable government that needs to justify its actions in order to be re-elected, and no free press, then you are likely to have more corruption, more embezzlement of public funds and more people who acquire an unfair advantage from the proceeds of natural resources and other sources of prosperity. The rule of law and the openness of government, which are typical of democracy, limit not only corruption but also the ineffective management or outright squandering of natural or other resources by untouchable governments.

Economic development is supported by free flows of information and freedom of movement, both typical of democracies. A free press encourages the economy because it allows entrepreneurs to make informed decisions.

Democracy also guarantees the rule of law, which means legal security and predictability. The number of investments – foreign and local – will grow when investors are certain that their contracts are guaranteed by the law and enforceable by a judge, when oppression does not cause violent revolt and when investors are relatively certain that their property will not be stolen without punishment or will not be nationalized by some new revolutionary government.

The rule of law creates a limited state and a society that is relatively free and independent of the state. This means that economic activity is also relatively independent. A certain limit on state interference in the economy is traditionally considered as beneficial for economic development. In a free civil society, everybody can be economically active. In many authoritarian states, only a handful of privileged persons can be economically active, and these persons are not always the ones most suitable for this kind of activity (for example: large landowners, members of the official “nomenclatura” etc.). A free civil society, guaranteed by the rule of law, which in turn is guaranteed by democracy (although not only by democracy), allows everybody to be creative, to cooperate and to exchange on a relatively level playing field. This increases the chances that the best man is in the best place, which in turn encourages economic development. Furthermore, by pumping in as many people as possible in the economy and by letting them move and communicate freely, the economically most efficient and profitable transactions can take place.

Why Do Countries Become/Remain Democracies? Or Don’t? (2): From Prosperity to Democracy

Prosperity creates time and leisure, which can be used for democratic participation, public life and other uses of human rights. We often see democratic aspirations and claims of rights arising almost automatically in states that do well economically (see for example Taiwan, Korea and many South-American countries in the 1980s). People do not live on bread alone. They want something more.

Economic misfortune, on the contrary, forces people to focus on the struggle to survive and forces them to give up rights in exchange for material progress. If the expression of an opinion can cause the loss of your job and if there are not many jobs available, then the choice is simple. Certain classes of people in particular, will not have the time nor the money to participate in politics and will leave democracy to the rich. Seeing democracy degenerate into a tool for the rich, they will reject it and turn to authoritarian alternatives in despair. Unequal wealth or insufficient wealth for some classes of the population is often a characteristic of a lack of economic development and at the same time it hinders the proper functioning of democracy. Those who are rich will monopolize the democratic procedures not only because of the forced withdrawal of the poor, but also because of their privileged access to the media, education, representative institutions etc. Furthermore, large differences in wealth and bad economic performances are destabilizing for any form of government – democracy included – because they cause revolt.

A higher GDP/capita correlates with democracy and the wealthiest democracies have never been observed to fall into authoritarianism. There is also the general observation that democracy was very rare before the industrial revolution. Empirical research thus lead many to believe that economic development either increases chances for a transition to democracy (modernization theory), or helps newly established democracies consolidate. Some campaigners for democracy even believe that as economic development progresses, democratization will become inevitable. However, the debate about whether democracy is a consequence of wealth, a cause of it, or both processes are unrelated, is far from conclusion. (source)

The key findings are the positive and statistically significant effects on electoral rights from real per capita GDP and primary schooling. These results strongly confirm the idea that a higher standard of living goes along with more democracy. Moreover, the effects are predictive. Robert J. Barro

This post focuses on one side of the causation: growth in wealth and prosperity produces more and more stable democracy. In a future post, I will look at the other side, how democracy is good for wealth.

Children’s Rights (1): Infant Mortality

Infant mortality is the number of deaths of children aged one year or younger, per 1000 live births. This gives the Infant mortality rate (IMR). The rates have significantly declined over the last centuries, mainly due to improvements in basic health care, and in all regions of the world.

However, there’s still a long way to go, especially in developing countries. In several African countries as well as in India, 1 in 10 babies die before they reach the age of 1. That’s horrendous.

Inequalities are extreme: Angola had the highest IMR in 2007: 184. And Sweden the lowest: 2.8. In a country like Bangladesh, 153,000 newborns die each year. Multiply this with the number of non-newborns death before the age of 1, and with a number of similar countries, and with a number of consecutive years, and you have an enormous massacre.

The most common causes in developing countries are pneumonia and dehydration from diarrhea. The latter cause is a real scandal given the ridiculously easy remedy: Oral Rehydration Solution, or ORS, a mixture of salts, sugar, and water. In developed countries the causes are congenital malformation, birth defects, extreme prematurity, disease, and Sudden Infant Death Syndrome (SIDS). Neglect, abuse or outright murder are also important causes.

The infant mortality rate is an indicator of state failure. As the IMR indicates the level of a country’s health, health care system or development, an extremely high IMR can corroborate the statement that a particular state is a “failed state” in the sense that it fails in its basic responsibilities to its citizens. Not surprisingly, wealthy countries – wealthy in the commonly accepted sense of high GDP per capita – have a lower IMR because they have the means to invest in healthcare, sanitation, drugs etc.

I guess it’s obvious why this is a human rights issue: you can hardly say that people can enjoy their human rights when they die before they are 1. Of course, it’s not as if someone is directly violating these children’s right to life. Infant mortality is in most cases not a deliberate act. But rights can be violated by act as well as omission. In many cases, it’s easy to prevent the child from dying, and those who have the power to do something about it also have the responsibility.